VeriFone (NYSE:PAY) is one of the key players in a growing movement to replace credit cards with smartphone payment applications. As a result, the San Jose company has seen its stock nearly triple in the past year.
VeriFone is among the top five holdings of my Silicon Valley 2.0 portfolio, which has outperformed the S&P by some 29 percent annually.
In October, VeriFone announced an important partnership with PayPal, the online payment service owned by eBay (NASDAQ:EBAY). Veriphone has a PAYware Mobile Apple (NASDAQ:AAPL) iPhone app that targets small merchants. The PAYware hardware add-on and iPhone app turn a smartphone into a credit card reader. With the new partnership, PAYware will accept PayPal payments in addition to traditional credit card transactions. In addition, PAYware now has potentially lucrative ties to PayPal and Ebay merchants.
The PAYware iPhone app has added the enhanced "bump" feature that allows transactions by tapping two compatible mobile phones together. The technology is licensed from Bump Technologies and was already available on the PayPal iPhone app. PayPal also has an Android mobile app.
Mobile phone payments are growing rapidly. In a six-month period earlier this year, PayPal has said it generated nearly twice as much mobile revenue as it did in all of 2009.
Google (NASDAQ:GOOG) wants the next generation of Android phones to replace credit cards. Google CEO Eric Schmidt recently demonstrated a mobile phone with Android's new operating system, code-named Gingerbread. The upgraded mobile platform includes near-field communication chip technology, which has a "tap to pay" feature similar to the bump technology.
Near-field communications reduces the risk of fraud, said Schmidt. "This could replace your credit card," he said. "The reason this N.F.C. chip is so interesting is because the credit card industry thinks the loss rate is going to be much better, they're just more secure."
Visa (NYSE:V) and MasterCard (NYSE:MA) are the world's biggest card networks. The two companies handled 82% of U.S. consumer spending with all-purpose cards last year, according to the Nilson Report, an industry newsletter. AT&T (NYSE:T) and Verizon (NYSE:VZ), the two largest U.S. mobile carriers, will test a smartphone payment system next year that they hope will one day replace plastic debit and credit cards, according to a Bloomberg report. T-Mobile is also a minor partner in the pilot project, which is code-named Mercury.
Transactions will reportedly be handled by Discover (NYSE:DFS), the fourth largest payment network. Barclays (NYSE:BCS) would be the bank managing the accounts. The telco plan envisions consumers making mobile payments to their cell phone account, bypassing traditional card companies.
Visa understands the importance of developing a mobile payment system. Earlier this year, they teamed up with La Caixa and Telefonica to launch a mobile payment pilot program in Sitges, Spain. The system uses near-field communication technology in Samsung phones.
Disclosure: I am long PAY.