A 2013 study by Tufts University notes that the cost to society of using cash -- coins and dollar bills -- is over $200 billion per year in terms of fees, theft, and lost productivity. Each year we spend $8 billion in ATM fees and $500 million is lost each year to theft due to carrying cash. It is also unhealthy: 94% of US dollar bills carry pathogens, according to the study. But the real issue is convenience. The study found that people spend 28 minutes per month in travel time to access cash, a cost of $31 billion in lost productivity, not to mention all the time when cash is unavailable at a given purchasing moment.
Noting the ability of cash to be used in criminal activity and making it easier to avoid taxes, Benjamin Mazzotta, a researcher for Tufts, said in an interview, "If a government could redesign money, they likely wouldn't create coins or paper currency."
This all points to a trend toward a cashless society.
As the trend toward a convenience and a cashless society marches on, it could shape the future for a number of stocks. While much has been focused on the leaders in the field of cashless payment, Visa and MasterCard, are there hidden opportunities beyond these well-known names?
With a $2.89 billion market cap, VeriFone Systems (PAY) is a leader in electronic payment solutions, particularly at the point of sale. The company provides technology and services health care firms, financial services companies and large retail chains. The focus of interest is on mobile retailing and automated sales process methodologies, with particular emphasis in the software services revenue model. CEO Paul Galant promoted the software services revenue model, and the stock responded in the second half of 2013, rising almost 75% to close near $26 per share on Wednesday. This could be a problem with the stock, as the run-up in price might have gotten ahead of earnings (or lack thereof).
If you think the price of VeriFone stock might be a little expensive, perhaps consideration should be given to Ingenico S.A. (INGIY), the French payment processor with offices around the globe. However, after starting 2013 near 40 euros per share, the price has now risen close to 50% in 2013, closing near 60 euros on Wednesday. With a market cap of 3.22 billion euros, the firm has a relatively rich P/E ratio at 30.21 when compared to VeriFone's P/E near 22. The stock is traded on the Pink Sheets in the U.S.
More aggressive investors may wish to consider USA Technologies, a leading provider of wireless credit card transaction processing systems and machine payment solutions. USAT's technology enables unattended machines, such as vending machines that sell soft drinks and snacks, arcade games, or washers and dryers found in commercial laundry facilities to accept credit card transactions as opposed to cash only.
In December, Northland Capital Markets issued an outperform rating on the stock with a price target of $3.50. The stock is currently trading near $2.40. At the current stock price USAT trades at eight times EBITDA and 1.65 times recurring revenue, which is expected to rise in 2014 by over 20%. However, looking at more standard analysis, such as price-to-earnings ratio, USA Technologies might look a little expensive at 70.01. However, with a forward P/E projected by Bloomberg to move down to 41 by June 2014 there is obviously an expectation for growth in the earnings department.
Perhaps the most significant benefit the firm provides its clients is increased sales. USAT studies show that when a vending machine offers a credit card payment option, sales increase by 30%, according to Veronica Rosa, vice president for investor relations. "Many times people might not have cash or find it inconvenient to use cash and will walk right past a cash only vending machine."
"Currently cashless adoption is very low among vending machine owners -- and the self-serve market, in general," said Rosa, noting 93% of vending machines are currently without a credit card payment option. USAT is currently the only firm servicing the small vending machine niche with a complete, end to end service, according to Rosa. USAT has grown their service base to 217,000 connections as of Sept. 30, with service revenue from license and transaction fees making up 84% of their total revenues.
One opportunity to consider with this stock is the anticipated shift in credit card technology from a magnetic-tape-based system to digital, known as EMV or integrated circuit cards popular in Europe. The recent Target store theft of credit card data lit a fire under the discussion of changing credit card technology to EMV. Due to its European roots, Ingenico may have a leg up in this realm, but smaller firms such as USAT are currently engaged in interesting radio frequency identification payment deployments as well as contactless payments. This past December the U.S. Patent and Trademark Office granted USA Technologies its 87th patent, and this portfolio of patents could also provide a source of investor value as well. While Rosa didn't cite any patent in particular, she noted that six of the patents that relate to the integration of cashless payment systems into a vending machine could prove specifically valuable.
It's difficult to exactly forecast the problems that cashless payment processors may face in the future. It could be competition from manufacturers in specific point of sale industries, such as Crane Merchandising in vending or Mac-Gray in the coin-operated laundry market. It could be payments methods such as Bitcoin or Quark gaining in popularity. To be sure, the difficulties faced by VeriFone and Ingenico would likely be different from that faced by USAT, which could find problems that relate to the fragility of the small ticket target market who own vending machines. But if the trend toward a cashless society continues, this market segment could benefit. The key is finding the appropriate value that has potential for price appreciation.
