With the emergence of handset-driven e-commerce technology, banks, mobile-phone sellers and telecom-service providers are working feverishly to cook up a profitable recipe for the fast-growing mobile-banking business.
But with so many players setting up shop – and so many potential new mobile-payment services on the menu – the safest profit play for investors may be the one that's able to deliver all these services to end -users.
And we've identified a clear early leader.
Whenever new technologies are applied to an old-line business, you can expect several things to happen. The sector incumbents – most of them hulking giants with a long history – will do everything they can to protect their market position. And some "giant killers" will emerge and make a bid to grab a slice of the business for themselves.
That's just what we're seeing in the mobile-payments business. And there will be giant killers coming out of cracks in the pavement.
This is an exciting paradigm shift.
Almost everyone has a mobile device of some sort, these days, and a consumer would feel almost naked if they were to leave home without it. Embed a special chip and a "killer app" (a super-cool software application) in that phone or device, and a lot of new things become possible.
Point it at a cash-dispensing machine to grab a few bucks for a night out on the town. Do the same to pay your bill in the grocery-store checkout line, at Target or Home Depot, or for that tank of gas at Royal Farms.
Catalysts For Change
That's how the paradigm shift is moving. To capitalize, however, investors need to understand some of the dynamics, and to be able to answer such key questions as:
- How is this shift progressing?
- What really is the end game here?
- Who is poised to survive – and who will actually thrive – in this fast-evolving high-tech clash?
The paradigm shift we're talking about is one where consumers and businesses are using handheld, mobile devices to make electronic payments for products and services, as well as for banking transactions.
Electronic payments aren't new. Neither is e-commerce or Internet banking. The technology, know-how and interest have been around for a number of years.
But several catalysts are serving as rocket fuel for this shift. On the technology side, there's been a major proliferation of so-called "smartphones" in the past couple years – and anticipated new models will only add to their popularity. And consumers are beginning to show real preference for – and comfort with – online transactions. Add to that the plethora of those new "apps" that are appearing all the time and you have a trifecta of powerful catalysts that should push this paradigm shift.
But technology isn't the only catalyst: This sector transformation is also being aided by the fact that banks are no longer stonewalling progress. Legislation emanating from a push for Wall Street reform is providing a nice tailwind, too.
We can thank the Dodd-Frank Wall Street Reform and Consumer Protection Act for that.
Banks have long enjoyed some immensely profitable businesses. They push credit cards with high interest rates (relative to the historic, low-interest-rate environment in which they operate), high fees – and high penalty payments. They slap merchants with "interchange fees" when customers pay a bill by swiping debit cards to extract money from their checking accounts.
In one way or another, those interchange fees get passed along to consumers.
All these banking practices – and others – were attacked for being just what they are – consumer rip-offs.
Dodd-Frank cleaned up a lot of the credit-card tyranny and also directs the U.S. Federal Reserve to lower the high interchange fees that banks charge merchants.
Banks are actually getting squeezed from both sides. Even as these reforms are taking place, banks must also find a way to deal with the fact that consumers are working to slash personal debt, which includes cutting back on credit-card use.
For banks, that "de-leveraging" by consumers translates into a decrease in fee revenue. The upshot: Banks must embrace the paradigm shift toward mobile banking and electronic payments as part of their fee-replacement efforts.
Conceptually, the shift is straightforward. And sure, issuers can and will still push credit and debit cards and make their use easier with near-field communications (NFC) technology, which means tapping your card or waving it at a payment terminal as opposed to "swiping" it through a machine.
A View of the Future
The endgame, as it always is, is about making money. And it's the embedded-chip/new app technology that's creating the new pathways to profit.
It's not just the fact that most of us have a mobile-phone device, either. Worldwide, there's an emerging middle class – billions strong – that will have plenty of disposable income. And those emergent consumers don't have bank credit or debit cards. And they don't use traditional banking services. And that's not likely to change.
This new category of consumers will skip that step, meaning that these new smart-banking technologies will represent their introduction to the banking system. That means that mobile-payment systems will become the "connective tissue" for local – as well as global – commerce.
By making it easier to bank, shop, spend and pay bills, fees can be generated at every intersection of every transaction.
Application developers – those whose "apps" help make all this happen – can collect a piece of that fee each time one of their apps is used.
With a mere wave of a consumer smartphone, merchants of all types – an operator of a cash-dispensing machine, a luxury "bricks-and-mortar" retail store, an online discounter, or even a soda-vending-machine outfit – can collect payments for their goods and services.
Banks will still provide traditional banking services. But a bank will also benefit from this new technologic reality by collecting fees from anyone who conducts commerce through its automated-clearing-house (ACH) facility, or through the private networks it establishes with retailers and commercial businesses.
It's all coming. But a couple of challenges remain.
Banks, smartphone makers, telecom-service providers, terminal vendors, apps creators and the rest of the "bits" makers have been hard at work to remove any obstacles.
As a result, 2011 will be a "bridging" year. There isn't likely to be any huge breakthrough in 2011, because there are a lot of players – which translates to a lack of standards.
Partnerships are already springing up, including:
- Still-private CashEdge Inc., an electronic payments provider, is working with PNC Financial Services Group (NYSE: PNC) and Bank of the West, who says they signed up but aren't talking about where they're going with CashEdge.
- Citigroup Inc. (NYSE: C) is reportedly working on using a white label version of CashEdge's "Popmoney" service applications.
- AT&T Inc. (NYSE: T), T-Mobile USA and Verizon Wireless (NYSE: VZ) are developing their own mobile payments system called Isis, which they are routing through Discover Financial Services network.
- Visa Inc. (NYSE: V) has its own "payWave" contactless payment system that it's testing with Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM) and U.S. Bancorp (NYSE: USB). Meanwhile, MasterCard Inc. (NYSE: MA) says it's planning on first-quarter 2011 trials with its own system offered through an as-yet-unnamed large U.S. bank.
Some of the other giants in the game are eBay Inc.'s (Nasdaq: EBAY) PayPal unit, Samsung, and, of course, Google Inc. (Nasdaq: GOOG). There are others, and there will be many more potential giant killers working the periphery to develop the apps and technology to challenge whoever gains traction.
But, that's going to be the problem in 2011. Without unified standards, comprehensive security resolutions, widespread merchant participation and sensible and simple consumer education, the fragmentation, or "inoperability" of disparate technologies and platforms will make adoption and profitability more likely to occur in 2012, or even later.
An Early Winner
However, there may well be an exception to the investing conundrum "who wins this war?"
Not unlike the blokes selling the picks and shovels to those old gold-rush-millionaire wannabes, terminal makers who have and continue to develop the technology that connect consumers, merchants and actual payment-systems providers look like the early and future safest bets.
And right now, for my money, the light in the tunnel is VeriFone Systems Inc. (NYSE: PAY).
VeriFone is the world's premiere maker of transactions terminals. Whether you swipe, tap, wave or bump your mobile device to connect with a terminal reader, it's likely to be one of VeriFone's receivers that you're communicating with.
While banks, device makers and telecoms eye each other as potential partners, VeriFone is out doing its own thing, and is consolidating market share by buying competitor Hypercom Corp. (NYSE: HYC) of Scottsdale, Ariz., and negotiating to buy the terminal business of Dutch cardmaker Gemalto NV (PINK ADR: GTOMY). Both of these deals expand VeriFone's footprint in Europe and into other important markets outside the United States.
VeriFone is also making substantial investments in terminal technology and application-centric, user-friendly tools.
Already, VeriFone's stock reflects it's aggressive and smart approach to being the glue that binds together all the pieces of the mobile-payments business. Net income for the quarter that ended Oct. 31 was $49.4 million – a big swing from the $2.2 million loss recorded in the same quarter the year before.
Revenue grew 19% on a year-over-year basis, reaching $1 billion. And VeriFone's shares, which closed Wednesday at $38.86, are trading near their 52-week high of $41.47.
Looking at a graph of the stock reminds me of the trajectory of an Atlas rocket. If there's going to be a starry future for anyone in the overcrowded mobile-payments kitchen, I've got my money on VeriFone delivering up whomever survives on their gilded plates.
[Editor's Note: Shah Gilani, a retired hedge-fund manager and renowned financial-crisis expert, walks the walk. Not long ago, in a Money Morning exposé, Gilani warned that high-frequency traders (HFT) were artificially pumping up market-volume numbers, meaning stocks were extremely susceptible to a downdraft.
When that downdraft came, Gilani was ready – and so were subscribers to his new advisory service: The Capital Wave Forecast. The next morning, because of that market move, investors were up 186% on a short-term euro play, and more than 300% on a call-option play on the VIX volatility index.
Gilani shows investors the monster "capital waves" now forming, and carefully demonstrates how to profit from every one.
But he doesn't stop there. He's also the consummate risk manager. As the article above demonstrates, Gilani also makes sure to highlight the market pitfalls that can ruin years of careful investing and saving.
Take a moment to check out Gilani's capital-wave-investing strategy – and the profit opportunities that he's watching as a result. And take a look at some of his most-recent essays, which are available free of charge. Those essays can be accessed by clicking here.]
News and Related Story Links:
- Money Morning News:
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- Money Morning News Analysis:
Retailers Report Disappointing Increase in Their In-Store Black Friday Sales, Despite Solid Jump in Online Results.
What is an Automated Clearing House?
- Money Morning News Analysis:
By Yanking the Teeth Out of Dodd-Frank Act Ratings Rules, SEC Blunts Hope for Real Financial Reforms.
Banking Sector Focus: Debit or Credit? Who Pays Interchange Fees?
What is a Killer App?
Near-Field Communication (NFC) Technology.
VeriFone to Acquire Hypercom to Accelerate Global Expansion.
- Money Morning News Archive:
News Stories About Smartphones.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of 10X Trader, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade.
Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps.
Shah is a frequent guest on CNBC, Forbes, and Marketwatch, and you can catch him every week on Fox Business's "Varney & Co."
He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.