Mobile payments are expected to grow at 154% compounded annual growth rate into 2018 and are projected to be a multi-decade trend. The technology will only accelerate thanks to Apple Pay (AAPL) and the spin-off of PayPal (NASDAQ:EBAY). Mobile payments allow for in-store purchases through mobile devices using various methods. This form of payment is being heralded as a way to better engage customers and provide more security. This article will go into more detail about what the mobile payments process looks like now and then we will explore what the future will look like via the Starbucks (NASDAQ:SBUX) model. And then how Visa (V), American Express (AXP), Green Dot (NYSE:GDOT), BlackHawk (NASDAQ:HAWK), and PayPal are the best ways to play this growing trend.
The Present State of the Industry
So what does the mobile payments space look like now? Mobile payments encompass the transfer of funds from one party to another using a mobile device. This is made possible in several ways.
NFC technology: This allows users to pay using their phone thanks to a microchip in the back of the phone. When the phone is close to a kiosk, the two devices communicate and allow for the user to pay for goods or services.
QR codes: Currently, this is what PayPal uses and it allows for a unique code to be scanned from the screen of a user's phone. From experience, this method can be tedious and not very user friendly. I find paying with my card much more efficient as compared to this method.
Merchant Systems: Systems such as Square allow merchants to use mobile phones and tablets to take payments from customers. This allows for different customer experiences and more efficient shopping. Also businesses can become more mobile and accept payments on the spot. All they need is the plug-in card swipe technology and an Internet connection.
The Future of Mobile Payments
What does the future of mobile payments look like? Simply put, mobile payments will allow for more personalized customer experiences, more focused advertising, and more security. Currently many companies are looking at using mobile payments to send push notifications to customers. These advertisements would encourage customers to spend more money tailoring offers based on that user's history of spending with company. This would be facilitated by either checking into the store through social media or using the NFC technology discussed earlier. This allows for constant communication with customers. The hope is that this technology will increase customer interest and customer loyalty.
A great example of how mobile payments can affect customer loyalty is looking at Starbucks current rewards system. This customer loyalty program may be the most ingenious program I have ever seen. Customers can pay from their phone using reloadable gift cards. The user enters the gift card code into the Starbucks application. Multiple gift cards can be stored and reloaded inside the app. When a customer is ready to pay, they pull up the app and it displays a code that is scanned by the barista. For purchases made with the app, customers are given stars. The more stars you have the more perks and rewards you get. All of this is done within the app. Starbucks reward is an example of the future of mobile payments and the power of combining mobile apps with mobile payments
But what about security? Apple Pay's tokenization model may make mobile payments more secure than using a credit card. Here's how: instead of storing credit cards numbers, a token is created for each card. This token is only good for a transaction between the merchant and card suppliers. So if a hacker gains access into a system, they do not have access to the credit card number, they have access to that unique token number. If the hacker tries to use that number anywhere but at the specific store with specific device, the transaction will not be considered valid. Also, by moving payments to mobile, Apple and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) will be able to look at apps and make sure that they do not have serious security vulnerabilities. The way the current system works is that when you go through a transaction with a vendor, your credit card number is stored. This is how companies such as Target (NYSE:TGT) and Home Depot (NYSE:HD) were hacked and put millions of customers at risk. With tokenization, all those numbers would have been useless to the hackers.
Companies Bound to Profit
So who benefits from the new mobile payments system? We have to look at what is going on as a whole and take advantage of certain segments in the space
Visa is the undisputed debit card king. That means they stand to benefit as more and more people decide to connect their debit cards to the mobile payments platform of their choice. This will lead to increased fees for the company.
Also new products and services will be introduced by the banking sector that will seek to have customers swipe their debit cards even more. All this is good for Visa. These and visas current business make it a great way to play this trend
Visa is currents trading at 23.14 times earnings and has a PEG ratio of less than 2 at 1.25. This means it has room for growth and is not too pricey yet. Visa would need to reach $331.73 in order for the valuation to look a little too rich.
While most would put MasterCard (NYSE:MC) here (and they would not be wrong), I'm going in a different direction. American Express users tend to be affluent and I believe will be early adopters of the mobile payments technology. They will be some of the first to have new iPhones and will be willing to make purchases using the technology.
Also American Express may see many businesses begin to incorporate the technology into what they do, day to day. This is purely a demographics play and I'm considering who will have the money and opportunities to use the technology first and often.
American Express is currently trading at 15.49 times earnings and has a PEG ratio of 1.20. Keep an eye out for what they say the effect of mobile is on their business growth.
While American Express is the way to play wealthier consumers, Green Dot is the play for the young and lower income consumers. It acquired Santa Barbara Tax Product Group who is the largest processor of tax refunds. This combined with their partnership with Wal-Mart (NYSE:WMT), could lead to synergies that will allow them to dominate the part of the financial sector that serves the "unbanked".
Green Dot is currently trading at 15.67 times earnings and is expected to grow earnings by 14% this year. I will be interested to see how the partnership with Wal-Mart will impact the growth rate considering Wal-Mart's habit of really negotiating prices down. If mobile payments begin to be widely adopted, look for Green Dot to be a potential winner.
Blackhawk dominates the gift card and prepaid card space. Prepaid cards make up 5% of all retail spending. If companies begin to adopt an approach like Starbucks, the company could see their business grow even faster as more people put their reloadable gift cards in their mobile wallets.
Currently the company is a little pricey with a PEG ratio of 1.99. I would encourage investors to wait for a pull back to more reasonable levels.
Soon to be PayPal
eBay announced that it will be spinning off PayPal by 2015. The spin-off of PayPal is huge news and really good for investors. This will allow PayPal to really focus on its core businesses and try to leverage them. PayPal has seen 19% annual revenue growth under the eBay umbrella. I'm excited to see what will happen once it is on its own.
With the interest in mobile payments growing quickly, investors would be wise to position themselves to profit from this trend. These five companies should allow you to profit no matter what new phone or device is used to make the technology popular.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.