The Future Is Mobile Payment And NXP Semi Has A Head Start

| About: NXP Semiconductors (NXPI)

It wasn't that long ago when PC ownership in homes was an expanding phenomenon that lead our society from the Industrial Age into the Information Age we are in today. I remember my first Apple II+ computer and learning programming in Basic Language. The PC revolution was driven by large corporations such as Dell, Intel, and IBM, to name a few. For many years we lived in a PC-centric world. It was through the PC that we were "connected" via the Internet and immersed ourselves in the Information Age.

These days seem different. A new trend is developing that threatens to leave the home PC behind; these days we are still "connected," but are no longer required to sit at a desk in front of our computer to do so. Mobile connectivity is the developing phenomenon, driven mainly by smartphones and now tablets.

We are connected 24/7. With our smartphones we currently check emails, send texts, add events to our virtual calendars, browse the web, and trade our stocks. We can even count calories with the appropriate app. Smartphones and tablets have become some of the fastest growing products in our history. Combining 3G and 4G devices, there are projected to be 880 million smartphones purchased by the end of 2012 (650 million in 2011). Tablet ownership is just beginning to grow at an astounding pace.

Since we currently do almost everything with our smartphones, one of the next advances in mobile technology (in my opinion) is to move into mobile commerce, which is the ability to use our smartphones to conduct financial transactions -- buying a product at the point of sale. Over time, physical credit cards (and eventually cash) may be a thing of the past as we "swipe" our smartphones at the mall or grocery store to buy products and complete transactions with companies such as Visa (V) or MasterCard (MA), without ever using our credit card.

The technology for mobile payments is already in existence, and simply needs to be installed into our smartphones. This technology is called near field communication (NFC). It enables financial transactions (without physical contact) between two devices in close proximity -- i.e., the smartphone and payment terminal.

Only a very small percentage of smartphones have NFC currently. A research report by Berg Insight indicates that global sales of smartphones featuring NFC increased tenfold in 2011 to 30 million units, growing at a compound annual rate of 87%. NFC smartphone shipments are forecast to reach 700 million units in 2016. As the number of phones with NFC technology increases, so will the number of retailers accepting mobile financial transactions from consumers.

ChangeWave Research asked smartphone owners what they think about making actual purchases with their device and how likely would they be to engage in mobile purchasing. A total of 21% say they're "very likely" to use mobile purchasing functionality with their smartphone instead of a traditional credit card, and 34% say they're "somewhat likely." Not bad for a technology still in its infancy.

So how would an investor take advantage of mobile commerce and payments? The answer is found in who is the leader in NFC chips.

NXP Semiconductor (NXPI) has a running start in NFC chips. NXP makes chips used in mobile and wireless infrastructure among a number of industries. It has operations in 25 countries with a revenue of $4.2 billion in 2011. NXP's five-largest direct customers include Apple, Continental, Delphi, Nokia, and Samsung. NXP has the largest patent portfolio in the sector -- OEMs have selected NXP's NFC technology for more than 130 mobile devices.

Who's leading the charge for NFC adoption? Visa. Visa is making retailers accountable for counterfeit/fraud if they don't have hardware in place by 2015 that can accept NFC transactions.

Visa's plan to encourage the U.S. adoption of dynamic chip authentication technology includes the following three initiatives:

  • Expand the Technology Innovation Program to Merchants in the U.S.
    Effective Oct. 1, 2012, Visa will expand its Technology Innovation Program ((NYSEARCA:TIP)) to the U.S. TIP will eliminate the requirement for eligible merchants to annually validate their compliance with the PCI Data Security Standard for any year in which at least 75% of the merchant's Visa transactions originate from chip-enabled terminals. To qualify, terminals must be enabled to support both contact and contactless chip acceptance, including mobile contactless payments based on NFC technology. Contact chip-only or contactless-only terminals will not qualify for the U.S. program. Qualifying merchants must continue to protect sensitive data in their care by ensuring their systems do not store or track data, security codes, or PINs, and that they continue to adhere to the PCI DSS standards as applicable.
  • Build Processing Infrastructure for Chip Acceptance
    Visa will require U.S. acquirer processors and sub-processor service providers to be able to support merchant acceptance of chip transactions no later than April 1, 2013. Chip acceptance will require service providers to be able to carry and process additional data that is included in chip transactions, including the cryptographic message that makes each transaction unique. Visa will provide additional guidance as part of its biannual Business Enhancements Release for acquirer processors to certify that their systems can support EMV contact and contactless chip transactions.
  • Establish a Counterfeit Fraud Liability Shift
    Visa intends to institute a U.S. liability shift for domestic and cross-border counterfeit card-present point-of-sale (POS) transactions, effective Oct. 1, 2015. Fuel-selling merchants will have an additional two years, until Oct. 1, 2017, before a liability shift takes effect for transactions generated from automated fuel dispensers. Currently, POS counterfeit fraud is largely absorbed by card issuers. With the liability shift, if a contact chip card is presented to a merchant that has not adopted, at minimum, contact chip terminals, liability for counterfeit fraud may shift to the merchant's acquirer. The liability shift encourages chip adoption since any chip-on-chip transaction (chip card read by a chip terminal) provides the dynamic authentication data that helps to better protect all parties. The U.S. is the only country in the world that has not committed to either a domestic or cross-border liability shift associated with chip payments.

There are three catalysts that will propel NXP Semiconductor into continued profitability:

  1. Growing international smartphone ownership trend that overtakes the traditional home PCs.
  2. Industry adoption of NFC Technology.
  3. Consumer demand for the ability to use mobile payment.

The PC and chip industry recognizes this. In its recent quarterly earnings report, Intel (INTC) said it plans on entering the smartphone arena by introducing devices that will run on Intel-based chip technology. Qualcomm (QCOM) introduced Snapdragon chips last year that will support NFC technology, and Broadcom (BRCM) announced production of 40 nanometer-NFC chips.

The industry is heating up quickly to embrace smartphone payments, but NXP Semiconductor already has a head start.

Disclosure: I am long NXPI.