2 Retail Stocks Cashing In on Digital Payment Systems

Starbucks (Nasdaq: SBUX  ) is one of many proactive retailers leading the charge to faster and more convenient checkout solutions. While a more mainstream switch from credit card swipes to digital payments is still a few years out, the companies driving this change will certainly profit down the road. However, you may be surprised to learn who will benefit the most from this digital revolution.

The not so obvious answer is rooted in the psychology of customer behavior. But before we rummage through the average shopper's psyche let's first meet the companies that are hoping to grab a piece of the mobile payments pie. Not to be confused with retailers, these businesses are looking to profit by providing the infrastructure.

The contenders
Visa
(NYSE: V  ) made a play for the market earlier this year when it launched a digital wallet service meant to rival similar offerings from MasterCard. The new program, V.me, lets users check out online without typing in a credit card number. Though, to be a real contender in the space Visa knows it needs to make the service compatible with smartphones so that shoppers can use their mobile device for in-store payments as well as online ones.   

These payment processors also face competition from wireless carriers. AT&T (NYSE: T  ) , T-Mobile, and Verizon formed an alliance in 2011 known as ISIS. The joint venture is working with merchants around the country to provide convenient in-store payment systems that let customers check out using their mobile devices. Similar to Google Wallet, ISIS uses near-field communications technology to process payments made through an application on a user's smartphone.

Thanks to its PayPal division, online marketplace eBay (Nasdaq: EBAY  ) is also getting ahead in the developing world of digital currency. Yet, unlike others competing in the online payments space, eBay has dominated the industry for more than a decade. In doing so, it built a brand that people know and trust. This competitive advantage is helping eBay grow its digital payments program at an impressive rate. In fact, eBay CEO John Donahoe now expects PayPal and eBay Mobile together to conduct about $20 billion in transaction volume this year.

The real winners
PayPal and other forms of mobile transactions, such as those offered by tech start-up Square, will undoubtedly transform the payments industry. All of this sounds promising, although at this point there's no way of knowing for certain which payments program will stick around for the longer term. Meanwhile, the stocks that really come out on top are hidden in plain sight.   

As the transaction processors and wireless carriers take to the streets to fight for a spot in the growing digital commerce empire the less obvious winners are the retailers -- particularly early adopters like Starbucks. Think about it. As payments become easier and faster to execute, a customer is less likely to notice how much they've spent on a specific purchase.

Less is more
Because mobile and digital services are still in the early stages, many of these retailers are getting to use the technology for free. PayPal for example, has been testing its mobile point-of-sale system in nearly 2,000 Home Depot (NYSE: HD  ) stores around the country. The home improvement store says PayPal's system is "fast, secure and convenient -- all at a lower transaction cost."

Last week, Starbucks joined forces with Square to bring its mobile payment services to 7,000 Starbucks stores around the country. With mobile transactions on track to hit $670 billion in the next three years, this was a smart move by the coffee retailer. These alternative payment options make it easier for consumers to overspend. Therefore, as more shoppers become comfortable making digital payments the value proposition for retailers grows.

Additionally, many of the new payment services allow retailers to electronically collect data about their customers. They can then use this information to send targeted coupons or deals to a nearby shopper's smartphone. All of these factors create a favorable environment for early adopters, particularly Starbucks and Home Depot, as they can test different methods.   

We're still in the early stages of this digital revolution. And you can bet more leading retailers will enter the market as it continues to flourish. For timely coverage of the shift to a cashless society, add the stocks below to My Watchlist -- the Motley Fool's free stock-tracking tool. Click here to get started for free today.

Fool contributor Tamara Rutter does not own shares of any companies mentioned in this column. Follow her on Twitter, where she uses the handle @TamaraRutter for more Foolish insights and investing advice. The Motley Fool owns shares of Starbucks and Google. Motley Fool newsletter services have recommended buying shares of Starbucks, Google, The Home Depot, Visa, and eBay. Motley Fool newsletter services have recommended writing covered calls on Starbucks. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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