Africa's role in the global economy is visibly changing. It is no longer the world's tip jar, but rather a formidable growth pillar.
Kenyan telecom company Safaricom, for instance, is the world leader in mobile payments. More than 17 million of Kenya's 40 million citizens use Safaricom's mobile payment service, M-PESA. In addition, close to 25% of Kenya's Gross National Product flows through the service.
Interestingly, the success of mobile money is not an exclusive Kenyan affair. Africa as a whole is embracing mobile money as a way to enhance convenience and security as well to step up efforts in financial inclusion for the unbanked.
In light of this, payments bigwigs Visa (NYSE:V) and MasterCard (NYSE:MA) have increased their presence in the continent. Not only have Visa and MasterCard increased issuance of plastic money, but they have also made bold mobile money initiatives. Could this spur the next round of prolonged growth for the two bigwigs?
The foray into African mobile payments
Visa has forged a strategic alliance with French telecom heavyweight Orange for the Botswanan mobile money market. As of August, subscribers of Orange's mobile money service, Orange Money, in Botswana were able to link their mobile money accounts to the Visa network. Users who sign up with the service get Visa cards that they can use to make online transactions, point of sale transactions, and withdraw money from ATMs, among other services.
Although the service is a pilot, Visa plans to roll out the service in 12 countries across Africa and the Middle East, reiterating its wider agenda of driving more than 50% of its revenues outside of the U.S. by 2015. MasterCard, on the other hand, is one of the players behind the launch of the world's first Arabic mobile Wallet in Egypt, called Flous, which means "money" in Arabic. The service intends to tap into Egypt's 94 million mobile users.
To digress a bit for the sake of providing context, both Visa and MasterCard have greater underlying plans for mobile money. Back in February at the Mobile World Congress in Barcelona, MasterCard unveiled its digital wallet and mobile checkout MasterPass, giving a two-year timeframe for full-scale implementation. This was around the time when Visa announced its mobile money partnership with Samsung. Under the partnership, Samsung is set to preload Visa's pay Wave application on to its Near Field Communication enabled handsets, allowing consumers and financial institutions to link their Samsung handsets to their bank accounts.
Drawing from these separate moves, it's clear that MasterCard's and Visa's forays into Africa's mobile payment sector are part of their greater agendas for mobile money.
Other than the growing popularity of mobile money in Africa, other variables point toward tremendous economic growth going forward. Driven by the emergence of a middle class, consumer spending is currently estimated to be more than 60% of Sub-Saharan-Africa's GDP.
A luxury market is also quickly developing in the continent. Kenya's upper class, characterized by households where the head holds higher managerial, professional or administrative positions, is expected to grow by 28% between 2011 and 2020, according to data from Euromonitor International. China is expected to grow 4% over the same period, while Russia is expected to contract 2%.
While pockets of instability remain in some parts of the African continent, the stereotypical narrative of a problematic Africa has changed to that of economic prosperity.
Visa and MasterCard have made a good bet on Africa as they will not only gain from mobile money and increased spending, but also from the underlying shift among the growing banked population to plastic money. Once Visa and MasterCard's prospects in Africa come to the foreground, both players could clock unimaginable gains.
Closer to home, investors remain divided over Visa's and MasterCard's valuations. Visa's trailing 12-month P/E ratio of 23.25 is fairly high, as is MasterCard's 28.48. The latter, however, has shown stronger earnings growth over the past three years, with net income increasing from $1.84 billion in 2010, to $1.90 billion and $2.7 billion in 2012.
Given that MasterCard and Visa have huge moats around their businesses, paired with the potential for future growth as signaled by Africa's promise and the fact that roughly 85% of the world still uses cash transactions, these valuations are fair. They both make good steady investments for shareholders looking to clock huge gains in the long haul.
Lennox Yieke has no position in any stocks mentioned. The Motley Fool recommends MasterCard and Visa. The Motley Fool owns shares of MasterCard and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.