Mobile Payment Technology Set for Liftoff

Submitted by Wall St. Daily as part of our contributors program

Mobile Payment Technology Set for Liftoff

By Louis Basenese, Chief Technology Analyst

It’s a market worth $210 billion . . .  but like many modern-day conveniences, it’s one that we’re increasingly taking for granted.

I’m talking about mobile payments – the ability to do all your banking and buying directly from a mobile device.

And the critical technology that underpins this market – near-field communication (NFC) – might be finally approaching a tipping point.

The reason?

Well, many people might understandably point to Apple Inc.’s (AAPL) mobile payment solution, Apple Pay, which is powered by NFC technology. It’s gaining traction pretty quickly.

But the truth is, only 20% of iPhone users with Apple Pay actually use it, according to Trustev.

Instead, we can attribute the imminent boom to an unlikely turn of events involving the current payment technology that mobile wallets aim to replace.

A Solution No Longer Searching for a Problem

NFC technology has been around for over a decade, which seems like forever in the tech world.

Heck, we’ve been actively covering it since 2011, anxiously awaiting a breakout.

But before we share why it’s finally upon us, here’s a quick refresher on the technology in case you’re unfamiliar with it.

As the name suggests, NFC technology involves establishing radio communication between two devices in close proximity (approximately five centimeters) in order to exchange vital information.

In mobile payment applications, the devices are traditionally a smartphone and a point-of-sale (POS) terminal at the register.

Recently, wearables, including the Apple Watch, are being equipped with these capabilities, too.

Once a consumer stores their credit card information on their device, all they have to do is wave it close to an NFC-enabled terminal to pay. Or tap and go.

It doesn’t get much more convenient than that, right? So what’s been holding back large-scale adoption of the technology?

Sadly, the status quo…

But What’s Wrong With My Card?

That status quo is something we’re all familiar with – swiping our bank cards on payment machines.

That’s pretty convenient, too, so there’s been little motivation for consumers to make the switch to mobile payments en masse.

Or as PayPal Holdings Inc. (PYPL) Co-Founder Peter Thiel says, “When you have something that’s pretty good and you go to something that’s perfect, sometimes it’s very hard to drive adoption because the delta is not that big.”

Thankfully, that’s about to change . . .

The Imminent Death of Traditional Credit Cards

In recent months, your bank has most likely sent you a new debit card and/or credit card.

The difference is, these new ones are embedded with a microchip, known as EMV technology.

The literature I received with my new card (see below) swears that the replacement is all in the name of increasing security, as the terminal reads the chip, with the customer then entering his/her PIN to complete the transaction. This so-called “chip-and-PIN” system is commonplace in Europe.

The Accidental Tipping Point for NFC Is Here

Now, if you think the idea of banks looking out for us is laughable, you’re right.

Financial institutions are looking out for themselves. Always.

As of October 1, retailers that don’t use POS terminals that support EMV cards will assume liability for any fraudulent transactions. Previously, banks and credit card companies were on the hook.

So the sooner financial institutions give consumers these EMV cards, the sooner they can shed their fraud liability.

Here’s the rub for consumers, though: This chip-and-PIN routine is much slower than both traditional card-swiping and mobile payment technology.

The process of inserting the card, reading it, and entering the PIN can take up to 15 seconds to complete a transaction. Sometimes, you may even have to sign for it, too.

Yet this is about to become the new normal.

My point?

Suddenly, the couple of seconds it takes to process an NFC-powered payment represents a major “delta” and benefit for consumers.

And wouldn’t you know it? The readers required for the new microchip cards come with NFC capabilities already baked in.

At Last . . . NFC Technology Poised for Real Adoption

At the end of 2014, around 28% of merchants worldwide used NFC-enabled POS terminals. But by 2020, Berg Insight estimates that the number will hit 70%.

Result? “Watch for mobile payments to take off as retailers turn on NFC to enable mobile wallet payments and encourage you to use your phone to pay,” say Morgan Stanley (MS) analysts.

I wholeheartedly agree.

However, we need to quantify the term “take off” to fully appreciate the opportunity here.

According to a new forecast from eMarketer, mobile payments at POS terminals are set to explode from $9 billion this year to more than $27 billion in 2016. That’s a 200% year-over-year increase and represents an acceleration of the 125% growth rate expected this year.

By 2019, mobile payment volumes are expected to eclipse the $210 billion mark – a 2,233% over current levels. And that’s just in the United States.

Of course, you’re probably wondering how to invest in this upcoming boom.

We’ve got you covered…

Three Ways to Invest

If the stage is truly set for NFC-powered mobile payments to take off (and it is), shares of companies that provide the critical hardware and services behind the technology should run higher, too.

With that in mind, here are three ways to capitalize on the boom:

Investment Option #1: Best of Breed Mobile Payment Platform Play

I’ve long viewed Apple as a strong play on mobile payments. In fact, I predicted that the company would enter the market on CNBC’s Closing Bell in January 2014 – well ahead of the official October 2014 announcement.

The company gets 0.15% of all credit card transactions and $0.05 per debit transaction in the United States. And more blue-chip companies, including Starbucks Corp. (SBUX), KFC, and Chili’s, are preparing to support Apple Pay.

If we assume similar terms in foreign markets – and the company is preparing to roll out Apple Pay in China in early 2016 – Apple stands to skim even more off the top, as mobile payments grow.

To be clear, investing in Apple is a bet on Apple Pay becoming the dominant mobile payment platform. Which I believe will be the case.

As I’ve said before, Apple Pay possesses the three main ingredients to captivate the masses – familiarity (i.e., brand recognition), simplicity, and security.

Investment Option #2: Platform Agnostic, Hardware Play

VeriFone Systems Inc. (PAY) is the global leader in secure electronic payment solutions. It makes the POS terminals, which support the new credit cards with chips, as well as NFC.

So whether consumers opt for Apple Pay, Android Pay, or some other NFC-powered mobile payment platform, it doesn’t matter. VeriFone’s equipment accepts them all.

Put simply, the company represents a pure-play on the hardware side of the mobile payment boom. And as I noted before, merchants worldwide are embarking on a massive upgrade cycle.

But vaulting from 28% to 70% market penetration for NFC-enabled terminals won’t happen without VeriFone experiencing a similarly strong increase in sales.

Investment Option #3: “Intel-Inside” Chip-Based Play

Betting on Apple is a bet on the consumer side of the mobile payment boom. Betting on VeriFone is a bet on the retailer side. So how do you play both?

By betting on a company that makes chips for devices on both sides – NXP Semiconductors NV (NXPI).

The Netherlands-based company actually co-invented NFC-technology in 2002 with Sony Corp. (SNE). It supplies the NFC module and secure element NFC booster chips to mobile payment applications.

Its NFC chips can also be found in other major applications, including automotive, identification management, and the smart home. So NXP represents a way to gain exposure to all uses of NFC technology, not merely the mobile payment boom.

Ahead of the tape,

Louis Basenese

The post Mobile Payment Technology Set for Liftoff appeared first on Wall Street Daily.
By Louis Basenese