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The latest wave of credit card hacks has finally convinced U.S. retailers and card issuers such as MasterCard (NYSE: M ) and Visa (NYSE: V ) that they urgently need to invest in security upgrades. Although the Target (NYSE: TGT ) hack was the most-publicized event, other large retailers such as craft retailer Michaels Stores and Neiman Marcus as well as White Lodging, which manages Westin and Sheraton (owned by Starwood), Hilton, and Marriott hotels, have all been hit by massive security breaches in the recent past. Point-of-sale, or POS, equipment manufacturers VeriFone Systems (NYSE: PAY ) and NCR Corp (NYSE: NCR ) are some of the companies that are likely to see more business after the latest industry developments.
The EMV standard
The EMV standard is named after three companies: EuroPay, MasterCard, and Visa. The standard contains the same personal information that is found in the magnetic strip of a credit card, but in in this case the data is encrypted which makes it much harder for criminals to access or duplicate the data. In many cases, the chips provide an additional layer of security that requires the use of a PIN number with every transaction.
VeriFone and NCR provide POS systems that are used at most retail outlets and banks that accept plastic. A smart card that sports an EMV chip also usually includes a magnetic strip that is compatible with existing equipment. However, this will have to change. For the new EMV standard to be truly effective and achieve its desired security objectives, the magnetic strips will have to be eliminated. This will effectively render the older generation POS systems redundant, and retailers will have to upgrade to meet the EMV requirements.
The new POS systems will come with other benefits too. They will be able to accept contact-less payments via Near Field Communication, or NFC, devices such as the ones used in many smartphones. The switch to EMV chip-based cards is expected to be complete by the fall of 2015. There are other companies that plan to build their own POS systems to meet the requirements of the new standard. Amazon is planning to launch a Kindle-based POS system, while eBay (NASDAQ: EBAY ) , Apple, and Square are all readying their own systems.
Both VeriFone and NCR have crushed the S&P 500 over the last couple of years, although they have recently been moving in different directions.
NCR enjoys much better net income than VeriFone, as the latter's bottom line has taken a hit lately.
NCR trades at a cheap forward P/E ratio of 10 in comparison with VeriFone's forward P/E ratio of 30.
Mobile payments can grow NCR's top line
eBay and Paypal reported 153% and 193% year-on-year growth, respectively, in mobile payments late last year. Gartner forecasts that worldwide mobile transactions will grow by an average of 42% through 2016.
Consumers are increasingly embracing the notion of leaving their wallets at home and using their smartphone apps to pay. Mobile commerce ecosystems span across several industries that include payment processing network companies such as MasterCard and Visa as well as POS equipment companies such as VeriFone and NCR.
NCR has launched NCR Mobile Pay, an app that allows a diner to access and pay a check, alert a server, designate 'favorite' menu items, or post a review to a social media network. NCR says that the payment details are fully encrypted and the transactions are processed by a secure cloud-based system.
NCR also acquired Digital Insights Corp. an online and mobile solutions provider, late last year from Thoma Bravo for $1.65 billion. NCR can leverage the expertise of Digital Insights to better exploit the opportunities that exist in the mobile payment sector.
NCR also acquired London-based Alaric Systems for $84 million. NCR intends to use its two strategic acquisitions to offer its financial services customers fully integrated omni-channel products that include ATM hardware and software, digital banking, branch hardware and software, fraud detection software, ATM and card transaction software, electronic bill-payment services, and check-imaging solutions.
The Digital Insights deal will also give NCR a new source of customers. About 800 of the more than 1,000 U.S. financial institutions which were Digital Insights customers weren't previously NCR customers. Digital Insights also sports 4.8 million mobile end users and 12 million online banking users.
Alaric, on the other hand, provides fraud prevention and secure transaction switching software that powers more than 1.25 billion transactions per month across 30 countries. Alaric software will help NCR lower its cost per transaction primarily by routing its transactions away from legacy switches which tend to be prone to security breaches.
Foolish bottom line
Both VeriFone and NCR should see significant growth in new orders as banks and retailers rush to replace their old POS systems with new EMV-compatible ones. Since the move to chip-embedded cards is projected to last for the next 12-18 months, a lot of that business is likely to be realized in the near-term.
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