With the emergence of technologies that allow people to use their smartphones to pay for purchases at the grocery store, gas station, or coffee shop, and pundits either prophesying the end of the world or joyously heralding a brilliant cash-free future, you might think the federal government has already stopped printing dollar bills and minting quarters.
Have no fear: The death of cash has been greatly exaggerated, but the use of payment by smartphone and similar devices is unquestionably on the rise. Here's a primer on this financial phenomenon, along with five companies set to make a bundle off the trend.
Please swipe your smartphone
The technology behind paying with a smartphone is called "near field communication," or NFC. Wikipedia defines it as "a set of standards for smartphones and similar devices to establish radio communication with each other by touching them together or bringing them into close proximity, usually no more than a few centimeters."
In the real world this translates into bumping your phone against -- or bringing it very close to -- a special NFC payment reader installed at the register. A chip in the smartphone interacts with the reader and, voila, the payment hits your credit line or bank account and is processed. And it's not a smartphone-only technology. An NFC chip could also be built into a traditional-looking credit card, allowing you to just tap it on a merchant's reader to make a payment.
There are all sorts of possibilities. Lucas Scheybal, founder of watch manufacturer Laks, has designed a wristwatch with an NFC chip built into it. He recently spent two weeks in New York City with no means of paying for anything other than this watch. "I did survive," Scheybal told Financial Times. "Gasoline and food were not a problem. It was easy getting around New York because there are 20,000 taxis that accept contactless payments."
Five for the money
As he could also get himself a Starbucks coffee or McDonald's Big Mac, Scheybal actually did better than merely survive, which just underlines how ubiquitous NFC payment has gotten. And the number of merchants who accept these payments is only going to grow. This brings us to our list of five companies set to benefit the most from the trend:
1. Visa
2. MasterCard
3. Discover
4. American Express
5. eBay
It's these five companies that will process the majority of the new electronic payments the worldwide contactless transactions are going to generate. And these companies make money by getting a cut of every electronic payment they process -- often 2% to 3%. Regardless, it adds up to big money just as the market stands now. As contactless payment becomes more widely trusted and accepted by the average consumer, and the NFC technology is built into every smartphone, these five companies will inevitably benefit in a big way.
Who's better, who's best?
MasterCard and Visa are undoubtedly in the best position to make the most of this trend, as both currently dominate the electronic payment industry. In 2011, $5.8 trillion in payments was processed by Visa, while $3.1 trillion was processed by MasterCard.
In terms of NFC capabilities, in the U.S. MasterCard alone has more than 120,000 of its "PayPass tap-to-pay terminals" installed at merchants. Around the world, the company has more than 300,000. Visa offers a system similar to MasterCard's called "payWave." payWave can be used at hundreds of thousands of merchants globally. American Express has something called "expresspay," a credit card with a built-in NFC chip. Discover has a similar system called "Discover Zip."
Where MasterCard might hold the edge right now over Visa is in its partnership with Google and Sprint. Google has an Android app called "Wallet," which is a software interface that works with the phone's built-in NFC chip, allowing consumers to "bump" their phones against a payment terminal to quickly make a payment. Android phones make up about 50% of the smartphone market, give or take, so this partnership offers MasterCard a lot of built-in advantage.
Look for the dark horse in this race
Visa and MasterCard, who carry the most clout in the industry and do the most business, will likely profit most. And as long it continues to charge higher merchant fees and the $95 annual fee for its basic card, American Express will never hit the heights of Visa and MasterCard, but it's a perennial industry heavyweight and will get its fair share of the contactless payment trend.
The dark horse in the pack, and perhaps the one to really watch, is eBay's PayPal. Right now the up-and-comer processes upwards of $100 billion per year in electronic transactions. PayPal estimated mobile phone transaction volume of more than $3 billion for 2011.
All five of these companies are on board with contactless payments to one degree or another. As such, all will benefit from the inevitable increase in their use and are therefore worth keeping an eye on. Learn about some other stocks worth keeping your eye on in the financial services sector, including one Warren Buffett could have loved in his earlier years, in our free report, "The Stocks Only the Smartest Investors Are Buying." Download your copy while it's still available and the stocks are hot.
