Profiting in A New Era of Payment Services

by Hilary Kramer | April 26, 2012 1:00 pm

Whenever I used to hear the term “cashless society,” I thought it belonged in one of those far into the future Orwellian-like science-fiction novels. I knew, of course, that we were relying less and less on cash, but the thought of no money to hold in your hand just didn’t make sense. We’re a still a ways from going completely cashless, but the times they are a changing, and the idea doesn’t seem so far off anymore.

A survey just done by Rasmussen Reports found that 43% of American adults have gone a full week without using cash to pay for anything. I don’t think it will take long for that number to reach 50% – and ultimately much higher – as technology and finance are coming together to change the way we pay for things. That’s certainly true in the U.S., but we’re a little further along the path, so the change is even more dramatic in other parts of the world.

We just don’t need cash like we used to. In most cases, all a merchant has to do is swipe the card through a machine, and the transaction takes place electronically. Or we order something online and just type in our card number. Even things like parking meters and taxi cabs, which used to cash only, are moving toward electronic payment.

It’s a plastic world that is fast becoming a mobile world as the number of smartphones in use continues to explode and new technological capabilities are added. From established heavyweights to young start-ups, the competition is fierce as companies try to get an early lead in this game-changing trend of mobile commerce. After all, they know it’s about more than just processing a transaction; it’s a whole new way to reach consumers with targeted marketing, coupons, sales, promotions, and so on.

The Race Is On

One of the technologies you may have heard about is called NFC, which is short for “near field communication.” It basically allows you to swipe your phone instead of a card.

Some of the big boys are pushing NFC hard through a joint venture named Isis, which was started in 2010 by Verizon (NYSE:VZ[1]), AT&T (NYSE:T[2]) and T-Mobile.

In 2011, Visa (NYSE:V[3]), MasterCard (NYSE:MA[4]), Discover (NYSE:DFS[5]) and American Express (NYSE:AXP[6]) said they would join forces, and phone makers HTC, LG, Motorola Mobility, Research in Motion (NASDAQ:RIMM[7]), Samsung and Sony Ericsson (NYSE:SNE[8]) announced they would make mobile devices using Isis’ technology standards.

Google (NASDAQ:GOOG[9]) is also hot on the trail of NFC with its Google Wallet, which it launched last year with Sprint (NYSE:S[10]), MasterCard and Citibank (NYSE:C[11]) among its early partners.

There are also some pretty cool apps available for smartphones, mostly from smaller start-up companies. Bump and Venmo, for example, allow individuals to pay each other through their phones – one by simply “bumping” phones and the other through text messages. Venmo is looking to expand to small businesses.

The start-up that intrigues me the most is Square, which pioneered mobile payment on the iPhone with a credit card reader that plugs into the headphone jack. Square also has an app that used to be called Card Case but was recently renamed Pay With Square.

Consumers with an account can go to a participating merchant and pay for something just by stating your name, which is matched with your picture on the register display at the store. Square is one of the early innovators in this sector, and it’s a company I will watch and strongly consider for us if it goes public.

Some of the company’s leaders are noteworthy as well, including founder Jack Dorsey, who co-founded Twitter, and one of lead engineers behind Google Wallet just recently moved over to Square.

Profiting From Growth

The increasing proliferation of wireless devices and mobile solutions is just one trend driving growth in the electronic payments industry. Others include the overall shift around the world away from cash and checks toward electronic transactions, the rapid penetration of electronic payments in emerging markets as those economies modernize, and the increasing focus on security to combat fraud and identity theft.

You can see the growth in the numbers. The total number of transactions completed by Visa on its networks has risen from 29.2 billion five years ago to 50.9 billion in the fiscal year that ended last September 30. That’s an average increase of 11.75% per year.

Even more impressive growth has come in online cash payment systems, the largest being PayPal, a subsidiary of eBay (NASDAQ:EBAY[12]), which is one of the stocks I’m recommending to you this month.

The total dollars processed through eBay’s payment business increased from $12.2 billion in 2003 to $118.75 billion in 2011, a huge 873% jump overall that averages out to 28.7% per year. Growth remains strong. In their first-quarter earnings released last week, eBay reported that the payments division processed orders of $33.86 billion in the first quarter, up nearly 24% from the year before. We’ll talk much more about PayPal and EBAY in just a moment.

Jack Henry (NASDAQ:JKHY[13]) also benefits nicely from electronic payment services. JKHY derived $93.8 million in revenues last fiscal year from such services, which include processing ATM, debit and credit card transactions. That was solid growth of 12% and comprised nearly 10% of overall revenues, so it’s an excellent complement to the company’s traditional data processing services for banks. The company also has its own little version of PayPal called iPay Technologies, which provides online bill-pay services.

There are a couple of other companies on our Buy List I should also mention because, even though they are not directly involved in electronic transactions, they are certainly riding some of the related trends.

First, the data created by more electronic transactions helps EMC (NYSE:EMC[14]) A key driver of EMC’s growth is “Big Data,” as additional information to be processed and analyzed is overflowing the data centers of major corporations. EMC’s storage software and hardware help corporations manage this data explosion, much of which comes from ecommerce.

The other company is Synchronoss Technologies (NASDAQ:SNCR[15]), which benefits from the explosion in mobile phones through activations and content.

It’s also time for us to buy the best and most direct play on electronic payment processing, a company with a good history and an even more promising future. Let’s talk about that now and then look more closely at EBAY.


  1. VZ:
  2. T:
  3. V:
  4. MA:
  5. DFS:
  6. AXP:
  7. RIMM:
  8. SNE:
  9. GOOG:
  10. S:
  11. C:
  12. EBAY:
  13. JKHY:
  14. EMC:
  15. SNCR:

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