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As the more tech savvy investors among us might already know, the payment card that we all are familiar with has a gold square on the front with a microprocessor chip embedded at its back. This is the card's contact, which allows the chip to connect with a reader. The other type of payment card is a contactless card that connects to a contactless-enabled reader when held within a few inches from it. Read more about it here.

This new technology - Near Field Communication (NYSEMKT:NFC) - has all the makings of a potential threat to online payment service providers such as Visa (NYSE:V), Google (NASDAQ:GOOG) and eBay (NASDAQ:EBAY).

There is a lot of information about NFC here and what I read set me thinking about the future of the multi-billion dollar credit card industry and to some extent, the online payment companies. Let me quote from the reference above:

"The technology behind NFC allows a device, known as a reader, interrogator, or active device, to create a radio frequency current that communicates with another NFC compatible device or a small NFC tag holding the information the reader wants.

By credit cards, subway tickets, and paper coupons all into one device, a customer can board a train, pay for groceries, redeem coupons or store loyalty points, and even exchange contact information all with the wave of a smartphone."

The NFC chip, in short, is a digital 'contactless' card that works between devices. It only makes sense that it will be used in smartphones and other mobile devices. Mobile devices are arguably the future of ecommerce and with online sales forecast to grow from the current 7% to 9% of total retail sales by 2016 online payment companies may have something to worry about. Do they really?

Today we look at three online payment providers, Visa's V.me, Google's Checkout and eBay's PayPal and see if the threat from contactless digital cards is for real.

First, A Little Bit of Background

Card companies have been the biggest beneficiaries of the global shift from cash and paper money to plastic money. Companies like Visa and MasterCard Inc. (NYSE:MA) have rewarded their shareholders with more than 50% appreciation in one year.

NFC is not the first challenge to credit card companies. The first threat came in the shape of direct payment providers such as PayPal (a wholly owned subsidiary of eBay since October 2002). After giving a run for its money to Visa, MasterCard and other credit card companies in the field of online payments, PayPal ceased to be a threat after a while.

However, the process of opening an account with PayPal was very simple. Merchants too small to approach companies like Visa and MasterCard for a merchant account found this very convenient. Visa, on the other hand, had a firm that facilitated payments for small merchants, which PayPal used (and paid for it) for channeling traffic from small merchants straight to Visa. PayPal became a popular payment gateway but ceased to be a threat.

Google Checkout provides services similar to PayPal. It became available in the U.S. in June end 2006 and was free till January 2008.

NFC -Is the Challenge to Credit Cards or to Online Payments?

NFC helps in making transactions faster and more secure over encrypted channels. Shoppers at a store or a ticket counter have still to take out their mobile device and wave it near a compatible reader device for paying. The problem, however, is that it will bring in new players in the ecosystem. There is a possibility that the technology may evolve and the new entrants pose a challenge to online payments as well.

Payment technology is a lucrative business as it is more or less immune from global slowdown because of their lack of exposure to risks associated with lending companies. That is motivation enough for new players to enter, and adequate incentive for existing players to prevent the entry of new middlemen. NFC has the potential of influencing shoppers. If the technology develops in a way that it poses a threat to online payment providers, they will go all the way to control its use.

We are talking about large companies here - companies with immense financial clout and the ability to take on any challenge. They will resort to every trick in the trade until they are able to dictate their terms.

Key Financial Data: (for the most recent quarter)

(click to enlarge)

Source: finance.yahoo.com

Forecast earnings growth for the next five years:

(click to enlarge)

Source: nasdaq.com

These are astounding growth figures. Both Visa and eBay have beaten analyst forecast in last 3-4 quarters. Google, however, failed to do so in quarters ending December 2011 and September 2012.

Investor need not worry about the challenge from NFC and introduction of new middlemen in the online payment space. Already, Google Wallet supports MasterCard PayPass and eBay's PayPal offers payments between smartphones.

Visa, the only company out of the three in the credit card space as well, has launched V.me, which according to the company is more than a mobile digital wallet as shoppers will be able to use it for making online payments as well. The card remembers details from multiple cards, including MasterCard, Discover and American Express cards, and shoppers will be able to access the card they want to use simply by entering their email address and password during the checkout process.

Other companies are expected to follow suit and any new entrant will find it difficult to compete with these three and the other credit card and online payment giants. Although, NFC has a big appeal, going forward, issues such as security are likely to crop up. That will be the time when the big players will move in with their resources and financial clout the way they did with PayPal.

Eventually, it is expected to be business as usual and the competition for market share in the online payment space will probably continue to be between the existing players as before. All three, Visa, MasterCard and eBay are top performers and provided excellent return on investment in the past year. NFC or no NFC, there is no reason to believe that they will not continue doing so.

Source: Online Payment Companies - Is The Threat From NFC Real?