Mobile Payments Using Smartphones Is The Growth Engine Of The Future

by: Greg Group

As Apple (NASDAQ:AAPL) doubles its income in the second quarter, Apple sold 35.1 million iPhones, accounting for about half its revenue. Based on the "remarkable" iPhone sales, Apple's share of the smartphone market likely increased to 24 percent in the first quarter from 23 percent in the fourth quarter of 2011, said analysts at Canaccord Genuity. As the growth of smartphone adoption increases across the globe, this is lending more relevance to smartphones as a mobile payment device. The volume of all types of mobile payments will top $200 billion by 2015, up from $16 billion in 2010, according to research and advisory firm Aite Group. The market for mobile card acceptance by small businesses and individual merchants is probably about $4 billion currently, but it is growing fast.

A few players operate in this field. Square Inc., begun in 2010 by Jack Dorsey, a Twitter co-founder, is one. eBay (NASDAQ:EBAY) introduced its PayPal Here device in March. Intuit (NASDAQ:INTU), the tax and accounting software company, offers a similar device called GoPayment. In addition, the payment processors seek to grow transaction volume through introducing mobile payments in developed and emerging markets.

Square is known for its own square-shaped card reader that attaches to the top of iPhones and other mobile devices. It has been a hit among small merchants, such as cab drivers. The company is now processing more than $4 billion in payments a year and over 1 million people accept credit cards through its dongle. Visa Inc (NYSE:V) bought a stake in Square last year. Intuit Inc, known for its accounting software, launched a mobile payment service for small businesses called GoPayment in May 2009 and unveiled a free version in early 2011 that came with a free card reading device.

PayPal, the payments service owned by eBay Inc, unveiled a new device that helps small businesses accept credit and debit cards through mobile devices, entering a fast-growing market now led by start-up Square Inc. PayPal Here, as the service is called, will provide a free, triangle-shaped card reader and mobile application to small merchants. That gadget, sometimes referred to as a dongle, plugs into the top of mobile devices like Apple Inc iPhones and, soon, Google (NASDAQ:GOOG) Android smartphones, allowing merchants to take payments through these gadgets on the go. PayPal charges a fee of 2.7 percent of the purchase price for all types of credit and debit cards including those issued by American Express Co (NYSE:AXP); transaction fees for processing AmEx cards are often higher on other services. That compares with the 2.75 percent charged by Square.

Not to be left behind is NCR Corp. (NYSE:NCR), the developer of the first mechanical cash register as the National Cash Register Co. NCR is rolling out NCR Silver, a "cloud-based retail system," which will let independent retailers accept payments via iPhone or the iPad tablet.

Vodafone Group PLC (NASDAQ:VOD) agreed to a deal with Visa to launch mobile payment services that will let customers pay for goods and services with their phone. VOD and V will work together to market the new offering to the company's base of 398 million customers in more than 30 countries. The service will be launched late this year.

Visa announced a new service that provides financial institutions and mobile network operators with a one-stop solution to securely download payment account information to smartphones enabled with Near Field Communication (NFC) technology. The new service was developed in collaboration with Oberthur Technologies, a leading Trusted Service Management (TSM) company whose software and platforms are used to manage the provisioning and activation of payment accounts on cards and mobile devices. Working with Oberthur Technologies gives Visa access to technology that delivers Visa payWave, Visa's contactless payment technology, and other payment applications "over the air" to a consumer's NFC-equipped smartphone, along with the secure credentials needed to authenticate the consumer.

Visa Inc. and Intel Corporation (NASDAQ:INTC) announced a strategic agreement to develop mobile commerce solutions tailored to consumers in developed and developing countries. Visa's agreement with Intel paves the way for financial institutions around the globe to offer their account holders mobile payments and financial services using innovative mobile devices and technologies designed by Intel. The Intel Smartphone Reference Device will host the Visa payWave payment application and features NFC (Near Field Communication) technology, the short-range communications standard that enables mobile phones to securely transmit payment information to a payment terminal.

Visa, which processed 50.9 billion transactions in fiscal 2011, has been particularly aggressive in tapping mobile technology to reach some of these markets, where cash is predominant and plastic cards haven't gained adoption because of technical and cultural barriers. The expectation is consumers in these markets will bypass plastic and adopt mobile-payments services because many of them have basic cell phones but don't have bank accounts. Visa's goal is to generate at least 50% of its revenue from international markets by 2015.

MasterCard (NYSE:MA), which is fighting to convert cash transactions to electronic payments in developing countries, is partnering with several software companies to offer services allowing underbanked consumers to transfer money using their cellphones. MA said its MasterCard Mobile Money Partnership Program will be offered in countries where few consumers have bank accounts but most use mobile phones. Its first partners are Comviva Technologies Ltd., SAP AG (NYSE:SAP) subsidiary Sybase 365 and Utiba Mobility Inc., which already offers closed-loop payment services through wireless carriers.

J.P. Morgan Chase & Co. (NYSE:JPM), Capital One Financial Corp. (NYSE:COF) and Barclays PLC BCS) will enable their customers to use a mobile-payments service being developed by several wireless carriers starting this summer. The service, called Isis, will allow consumers to pay for goods at stores by tapping their mobile phones against a merchant's payment terminal rather than swiping a plastic card. Their phones must be equipped with a technology called near-field communication, or NFC, and a merchant must also have special readers to handle the technology. Isis is a joint venture of AT&T (NYSE:T), T-Mobile USA and Verizon Wireless (NYSE:VZ), which announced plans for the service in fall 2010. The technology is one of several services aimed at converting consumers' smartphones into payment devices, an effort that analysts say could help banks and merchants find new ways to push promotions to customers but has been slow to catch on because of questions about costs and security. The software used to power Isis will be compatible with cards bearing the logos of Visa, MasterCard , American Express Co. and Discover Financial Services (NYSE:DFS).

As the competition starts to heat up, it's way too early to declare any winners or losers in this nascent mobile payments arena or how the future of money will shake out. Here is how the stocks stack up using the equity summary scores (with 10 being the most bullish rating):

Apple is rated a 10 (Best Rating)

Intel is rated 9.7 (Very Bullish)

DFS is rated 9.7 (Very Bullish)

VOD is rated 9.4 (Very Bullish)

T is rated 9.3 (Very Bullish)

Intuit is rated 8.1 (Bullish)

Mastercard is rated 8.0 (Bullish)

Google is rated 7.5 (Bullish)

Visa is rated 6.6 (Neutral)

NCR is rated 6.4 (Neutral)

EBAY is rated 5.7 (Neutral)

AmEx is rated 5.7 (Neutral)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.