Mobile phones have come a long way from the (9 inches long, 5 inches deep and 1.75 inches wide) initial prototype first developed by Motorola. The modern day smartphone has had a big impact on most of our lives, with applications developed for nearly all our daily needs and wants. Mobile phones have now become as indispensable as wallets, which leads to the idea – what if mobile phones could replace wallets? What if mobile phones could not only facilitate online payments (which they have for quite some time), but also allow you to make payments at the point of sale, essentially replacing the cash you currently carry in your wallet?
The idea is not recent. Technology companies have been making promises about mobile wallets for years, but have failed to deliver anything substantial. The advent or rather the adaption of near-field communication (NFC) technology by popular manufacturers like Samsung seems to have given the idea a much needed impetus. The much anticipated ISIS mobile wallet developed by Verizon, T-Mobile and AT&T was launched in Salt Lake City, Utah, and Austin, Texas, earlier this year. The Google wallet has payment partnership with Visa (NYSE:V), MasterCard (NYSE:MA) and Discover Financial (NYSE:DFS), but received a lukewarm reception at launch last year, possibly due to the fact that it only only limited to users with Citibank-issued cards.
Let’s look at the effect of the developing mobile payment technology on payment solutions providers like Visa and MasterCard. We will discuss the market size, the potential for development and the impact that mobile payments could have on these payment giants.
Visa estimates that over 30% of consumer spending across the globe is still carried out through cash and checks, accounting for over $10 trillion in gross dollar volume. Taking a look at some more statistics available from Statista, we see that mobile phone payment accounts actually outnumber credit and debit card accounts. There are about 1.3 billion active credit and debit accounts worldwide with more than 5 billion mobile phone accounts.
This trend is particularly evident in developing nations in Asia (85 million mobile accounts) and Africa (58 million mobile accounts), where mobile phones have emerged as a means of extending financial services in lieu of an underdeveloped banking system. Most of these transactions involve SMS based payments, direct mobile billing using PIN and one time password (OTP) authentication and mobile web payments.
The global volume of money spent using mobile phones was around $106 billion in 2011, rising to $171 billion in the current year, and is expected to grow to about $617 billion by 2016. About one third of these payments are through credit, debit or prepaid cards already owned by customers, followed by payments directly from customers bank accounts.
In the U.S., which accounts for about half of Visa’s revenue, smartphone adaption is low, only 2.7 million Americans used mobile payments at the point-of-sale in 2011 and the average spending per proximity mobile payment user was around $61. This figure is expected to grow. Berg Insight reports that the number of point of sales terminals will grow from 4 million at the end of 2011 to 43 million by 2017, with 86% of U.S. merchants accepting NFC based payments. Almost 50 million Americans are expected to use NFC technology by 2016 with an average spend of $1,300 per mobile payment user.
I Can Understand The Growth In Developing Countries But Won’t Mobile Phones Just Be Replacing Cards In The U.S.?
The growth of mobile phone payments will have a cannibalization effect on credit and debit card payment, but both Visa and MasterCard are gearing up for this paradigm shift. Along with the aforementioned partnerships with other wallet service providers, both card giants have launched their own mobile wallets: V.me and PayPass.
In addition, studies by Deloitte have shown that smartphones might actually lead to an increase in spending. A recent survey by the company revealed smartphone users are 14% more likely to complete a purchase at the point of sale than non-smartphone users. Mobile phone transactions accounted for 5% of retail store sales in 2011, this percentage is expected to grow to 19% by 2016.
Based on the growth in U.S. markets, influenced by an eventual economic recovery and increased penetration in developing markets, helped by improvements in mobile payments technology, we expect a steady growth in Visa’s payments volume over the coming years.
Our price estimate of Visa’s stock is $151, in-line with the current market price.
Disclosure: No positions