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Mobile Payment – Near Field Communications (NFC) Analysis

|Includes: AAPL, C, EBAY, GOOG, JPM, MA, NFC-OLD, NXP Semiconductors (NXPI), PAY, V
The traditional method of payment of cash and checks are moving aside based on a recent major consumer trend -- mobile payments.    As smart-phones have become popular, people have become more comfortable using digital currencies and mobile payment both to shop for goods online and at traditional brick-and-mortar retail stores. Stores as varied as CVS (NYSE:CVS), McDonalds (NYSE:MCD) and New York ‘s taxis are currently accepting mobile payments.

Smart-phone providers Apple iPhone (NASDAQ:AAPL), Google Android (NASDAQ:GOOG) and others are gearing up to battle for the customer wallet.   Mobile payment could be a simple process of holding a phone near a point-of-sale terminal with payment made electronically. The technology behind this process is called Near Field Communication (NFC). NFC is a short-range, wireless technology that allows secure communications between two proximate devices.   
Payment processing companies such as Visa (NYSE:V) and MasterCard (NYSE:MA) collect fees for each transaction and this is a very lucrative revenue source. Competing companies recognize this near monopoly technology and are rushing to cash in on this area. Currently, there are two dominant smart-phone players in this area. Google ‘s Wallet  and Apple iPhone. Google’s Wallet NFC payment program has lined up major players such as Citi Bank (NYSE:C), First Data, MasterCard and Sprint (NYSE:S). Google ‘s wallet is preparing to launch this summer in San Francisco and New York City.  
iPhone captures major market share in smartphones and has successfully dominated high volume businesses such iTunes and Apple TV.  With NFC, a fee is collected for each transaction, it is certain that Apple will want to capture this huge market.
To date, Apple has not announced an NFC capable-phone.   iPhone 3 and iPhone 4 currently do not have NFC-capability.  Experts are certain that the iPhone 5 will be NFC capable.  To enable mobile payment, a chip with NFC capability is included in a smart-phone and at point-of-sale terminal.  As an interim solution, for devices without NFC capability an SD card is an approach that implements all NFC-related functionality. With mobile devices that currently have an SD card slot, users can plug in the card to get immediate NFC capabilities.  
To protect its dominance, Visa and MasterCard are using micro-card type to be NFC-enabled.  Visa is using a payWave technology, NFC-enable like chip (micro-SD card) to insert into a phone.   Users then download an app to make a transaction. To date, there are eleven banks that have signed up including JP Morgan(NYSE:JPM), Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC).
On August 9, 2011, Visa announced plans to accelerate chip migration and adoption of mobile payments.
“Visa will require US acquirer processors and sub-processor service providers to be able to support merchant chip transactions no later than April 1, 2013”.
MasterCard developed a competing technology called PayPass and American Express has created a similar technology called ExpressPay. 
  • NXP Semiconductors (NASDAQ:NXPI) – a Dutch company that makes chips that run Google ‘s Wallet.   The market expects 472 million smart-phones to be shipped in 2011.   On Aug 2, 2011, via BusinessWire, NXPI announced a complete fingerprint-enabled payment in the US via a Motorola Android (NYSE:MMI) phone using technology from NXPI, AuthenTec and DeviceFidelity.  NXPI chart via as of Sept 15, 2011.

  • VeriFone (NYSE:PAY) – makes the terminals that read credit cards; The company announced that it will enable all of its devices with NFC technology by the end of 2012.  PAY chart via as of Sept 13, 2011.

Technology Partnerships:
Joint ventures with credit card companies, cellular providers and internet companies:
  • Isis – joint venture with American Express, Mastercard, Visa and AT&T (NYSE:T), T-Mobile, Verizon (NYSE:VZ) and Discover Card (NYSE:DFS).   Payment is made by waving their phone at the point-of-sale terminals.
  • Google Wallet – partnership with Citigroup, Mastercard, First Data and Samsung. 
 Competing Technologies:
  • Ebay’s paypal (NASDAQ:EBAY) and prepaid credit cards from Netspend (NASDAQ:NTSP) and GreenDot (NYSE:GDOT).
  • Social Networking ‘s Facebook – BitCoin (virtual currency) – digital currency developed by MIT.
  • Federal Regulation – Durbin Amendment stated that the Federal Reserve can have a say on interchange fees proposed by Visa and MasterCard.
  • Security of financial data
 HedgeFunds Holdings:
  • Third Points, LLC – Dan Loeb, a New York based hedge fund managing over $5.5 billion in assets.   As of March 31 2011, the fund holds approximately 4.7 million shares and comprises 1.42% of the companies portfolio as reported in GuruFocus.
$20.93 - $31.95
$ 17.09
Add 50.78%

 In summary, mobile payment NFC technology’s penetration rate will be enormous over the next several years. The US market is currently in its infancy in adopting this technology. Japan and Korea are currently using NFC-enabled mobile payment technology. Emerging markets such as Brazil, India and China represent a huge un-tapped market. Recent research from Juniper indicates the mobile payments market will triple to $670 billion worldwide by 2015.
In the near term, the major markets are in correction mode. Investors with a short-term outlook would be wise to wait for the market upturn prior to making an investment. Those with a longer term horizon might want to initiate a position in this growing industry as these stocks have corrected anywhere from 20% to 40% from their 52-week highs.

Disclosure: I am long NXPI.