The mobile payment industry is still in its infancy. I believe the mobile payment industry is a multi-billion dollar, multi-year secular growth market which will have a huge impact to the bottom line of key mobile payment players. Aite Group states the volume of mobile payments will grow to over $200 billion by 2015. In 2010 mobile payment revenue was approximately $16 billion. That is an over 12-fold increase in just five years.
Apple (AAPL) is a dominant leader in the smart phone market with over 35 million in smart phone sales last quarter alone. They have not entered the mobile payment market yet, but I expect them to arrive on the scene very soon and disrupt the current mobile payment landscape. I speculate the iPhone5 will be mobile payment enabled. With 200 million existing customers and credit card numbers on file with Apple's iTunes service, this makes Apple the sleeping giant of mobile payments.
The use of smart phones as a mobile payment device is inevitable and underway. Please review the following discussion of the current mobile payments landscape followed by an in-depth review of Apple's current state and future prospects.
Current Mobile Payments Backdrop
There are many competing technologies at this early stage of the mobile payments industry. The leading technology is Near Field Communications, otherwise known as NFC utilized by ISIS, Google Wallet and PayPal. Additionally, you have proprietary systems like Starbucks Card Mobile. NFC emits a short range, high frequency signal to communicate data. NFC's technology enables smart phones and other devices to establish a radio connection by touching them together or coming in close proximity.
NFC technology has not been heavily adopted in the U.S. yet, but according to some analysts' estimates there will be a greater push for mobile users to adopt the technology in the next few years. John Devlin, a NFC analyst at ABI Research, said that he expects the number of NFC handsets to increase from about 34 million this year to about 80 million next year. Mark Hung, an analyst for Gartner, sees the growth in handsets exceeding 100 million in 2012.
eBay's Market Leading Position
eBay's (EBAY) mobile payment business has exploded from a few hundred million dollar business in 2009 to a $7 billion business in 2012. Only a small percentage of smart phone users currently use the service today, I predict that will soon change and eBay's mobile payments exponential growth rate support my thesis. eBay's PayPal exemplifies the exponential growth potential for mobile payments. eBay recently reported revenue for the first quarter ended March 31, 2012, which increased 29% to $3.3 billion, compared to the same period of 2011. eBay President and CEO John Donahoe stated,
The first quarter was a strong start to the year for us with momentum continuing in our Marketplaces, PayPal and GSI Commerce businesses. We believe that innovation in retail today is technology driven, and consumers are embracing smarter, easier, better ways to shop. We are enabling commerce in this new retail environment, supporting and partnering with sellers of all sizes and giving consumers worldwide the ability to shop anytime, anywhere, for whatever they want.
The company's PayPal business delivered strong first quarter performance. PayPal ended the quarter with 109.8 million active registered accounts, a 12% increase over the first quarter of 2011. Please review this short excerpt from the press release:
PayPal revenue increased 32% year over year, driven primarily by increased penetration on eBay as well as continued merchant and consumer adoption. PayPal's net total payment volume (TPV) grew 24% year over year to $34 billion. PayPal expects to process $7 billion in mobile TPV in 2012. PayPal launched an expansion of its payment services to offline merchants in the first quarter.
The Home Depot has launched PayPal payments in all of its nearly 2,000 U.S. stores, giving shoppers the opportunity to pay using just their mobile phone number or PayPal payment card and PIN. Users can switch between paying with their phone or payment card at any time. The company also launched PayPal Here in the U.S., Australia, Canada and Hong Kong. With PayPal Here, small businesses can now process almost any form of payment online or offline, including credit and debit cards, checks and PayPal using only a smart phone.
Regardless of what happens with Apple's mobile payments endeavor, I don't think eBay's PayPal market share is going to do anything but go up. There is plenty of room for both these players and eBay has a big leg up on the competition. I like eBay here.
Google (GOOG) has a horse in the race with a service called Google Wallet. Google Wallet is a service that allows users pay for goods and services with Android phones. It works by using near field communications (NFC) technology. An NFC chip inside Android phones is recognized by a scanning device used by merchants to complete a sale.
The wallet functions by letting users link a credit card to a Google Wallet to provide funds. Utilizing a Google Wallet app, users can upload virtual credit cards to facilitate the ability to pay with their phone from a bank or credit company. Citi (C) and MasterCard (MA) back the service, and those companies that are heavily promoting Google Wallet to encourage adoption by users and businesses alike. Just ask Google Wallet, which is currently trying to build this from scratch.
I predict the big winner here will be Citigroup (C). Citigroup has always been at the forefront of technological innovation regarding banking. I expect the mobile payments revolution will be no different.
Apple's Current Status
Apple is not known for following the crowd. Apple is more apt to disrupt the current state of affairs with a proprietary competing technology. Apple was recently awarded a patent that covers mobile payment controls. Apple was granted a patent by the U.S. Patent and Trademark Office for a method that sets financial transaction rules to govern subsidiary financial accounts. The patent description suggests the technology may be used by a parent to set up a prepaid subsidiary account for a child or a by an employer setting up rules for an employee's payment account on a mobile device. Gary Schwartz, CEO of Impact Mobile, Toronto stated,
Apple has many patents related to mcommerce, NFC and payment. Their IP wars and in-market trials with EasyPay are all clear testaments to their plans to leverage iCloud, iTunes and some iWallet to transact an expanded form of commerce in 2012. While Google and PayPal are in a draw out battle in bricks-and-mortar, Apple will most likely use their strength in cloud checkout to compete with Visa's V.me.
I expect Apple to leverage its 200 million existing customers and credit card numbers on file with Apple's iTunes service to jump into the mobile payments market in a big way. Apple transformed retail by implementing the roving transactions process, doing away with the traditional checkout counter. I expect them to do the same with mobile payments. There is no way Apple will not enter this market. The mobile payments revenue stream will be just one more major catalyst for Apple's stock. I would buy the stock here. My 12-month price target for Apple is $850.
It seems inevitable that the mobile payment industry will experience exponential growth. EBay is definitely in the lead with its PayPal service today. Nevertheless, with so much at stake, you can be sure Apple will gain its fair share of the mobile payment pie. Apple seems to be behind the curve as it were now, but is known for its disruptive tendencies. Citigroup is the bank I posit is best positioned to benefit from the growth in mobile payments transactions. Regardless, the mobile payment industry is here to stay and may soon become the norm rather than the exception.
Perform a review of each of these stocks to ensure their suitability regarding your current situation. Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses.