The emerging mobile payments market holds many opportunities for shrewd investors. In fact, research firm Forrester estimates that U.S. mobile payments are on track to hit $90 billion transactions by 2017. That's an impressive 48% compounded annual growth rate over last year's mobile spending of $12.8 billion. As mobile trends grow both domestically and overseas, so too should the chance for investors to cash in on those companies that are driving the mobile payments revolution.
Today, we'll focus on the key players in this developing market, and which stock investors should own in 2013.
A Square deal
Coffee retailer Starbucks (NASDAQ:SBUX) is one merchant that's been quick to integrate mobile payments solutions into its business. Last August, Starbucks teamed up with payments processor Square. In addition to investing a cool $25 million in the startup, CEO Howard Schultz also accepted a position on Square's board of directors. But that's just the start of it.
Today, Starbucks customers can use their smartphones to make purchases at 7,000 Starbucks locations in the United States. That's because Square's technology allows customers to pay with a credit or debit card linked to their smartphone. So far, the partnership with Starbucks has paid off. In November, Square confirmed that it was handling $10 billion in annual transactions.
Starbucks is one of just a handful of retailers that are proactively getting ahead of trends in the mobile commerce segment. This should help the coffee chain profit down the line, as consumers become more comfortable making purchases with their smartphones.
From online to on-the-go
eBay's (NASDAQ:EBAY) PayPal unit is another player with a head start in the mobile payments race. As the longtime leader in online sales, PayPal is now making an aggressive push into in-store pay solutions. Last year, the company tested its mobile point-of-sale system in roughly 2,000 Home Depot stores throughout the United States. PayPal has since expanded to include around 18,000 participating stores in its platform .
Last month, PayPal announced that 23 national retailers would now feature the company's point-of-sale technology in their stores. This initiative to get its POS payment service into physical store locations is just one piece of the massive puzzle that is PayPal's digital payments network. These days, PayPal offers customers everything from free card readers and mobile apps to online money transfer services and everything in between.
PayPal is covering all the bases now that customers can use its services to make purchases online, on their mobile devices, and at the register. In 2012, PayPal members sent nearly $24 billion to one another, according to the website VentureBeat. That's a whopping 250% increase over the previous year. And the momentum should continue. In the year ahead, eBay CEO John Donahoe expects PayPal to surpass $20 billion in annual sales volume.
Additionally, eBay's PayPal currently has 117 million active accounts. And PayPal shouldn't have trouble adding new accounts in the future thanks to recent deals with brick-and-mortars, as well as a partnership with NCR (NYSE:NCR). The POS tech company will integrate PayPal into its mobile pay app, which allows restaurant visitors to pay for their meals from their phones. This should further boost PayPal's reach since NCR handles payments for 38% of the top 100 restaurants in the U.S., according to VentureBeat.
What about the plastic?
For merchants, one key benefit to offering these alternative payment options is that they don't incur unfair interchange fees like those imposed by the major credit card companies. With disruptors such as PayPal and Square gaining ground, many investors wonder how long the credit card companies can keep pace.
MasterCard and Visa are quickly losing favor with U.S. retailers, who for years have been forced to pay them rising "swipe fees." Worried by the growing threat of mobile payments, MasterCard and Visa launched a joint venture with mobile carriers known as ISIS. Similar to Google's Google Wallet platform, ISIS relies on near-field communication, or NFC, technology in smartphones.
However, payments via NFC have struggled to gain traction because consumers are required to have NFC-compatible handsets. For example, Apple has yet to include NFC technology in any of its mobile devices -- therefore excluding a significant portion of the market.
Cloud-based payments, on the other hand, such as those offered through PayPal and Square, are much more convenient for both consumers and retailers since they just require a free app installed on a user's phone. Ultimately, the companies that will gain a foothold in the emerging mobile payments market are those that offer the most convenient solutions for the consumer.
For this reason, I believe PayPal is the safest bet for investors in the mobile payments space today. Together with parent company eBay, PayPal has built a brand that consumers know and trust. Shares of eBay are already up more than 12% year to date. However, I suspect the stock will climb higher from here, powered by new opportunities in its PayPal business.