Please ensure Javascript is enabled for purposes of website accessibility

The Smartphone Revolution Is About to Change Everything

By Patrick Morris – Mar 30, 2014 at 11:31AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The way Americans pay for goods will soon be changing, and this will have incredible impacts on firms like MasterCard, Visa, and Bank of America, but also titans like Google, Starbucks, and even eBay.

The plastic credit card is used every day by almost every American representing trillions of dollars, but it will soon be subject to revolutionary change, transforming the lives of individuals everywhere. This will change not only financial companies like MasterCard (MA 1.47%) and Bank of America (BAC 1.96%) but technology titans like Google (GOOGL 0.36%) and eBay (EBAY 1.77%) and even retailers like Starbucks (SBUX 1.93%).

The technology behind the magnetic stripe on the back of a credit card is almost 50 years old, and in the wake of the Target data breach, many people have begun to reevaluate how they make everyday purchases as they call for greater security.

As a result, some have switched from debit cards to credit cards and others from cards to cash. But ultimately, these will be temporary changes. One day soon; a person's smart phone will become their wallet, except it will be safer and more secure. And it will revolutionize the $17 trillion payments industry.  

Source: Flickr / Tom Purves.

The mobile payments industry
Individuals are becoming more and more comfortable with the idea their cell phone could one day replace their wallet. A recent study by Bain & Company noted while only 3% to 7% of consumers worldwide have used their phones to make a purchase in a store, twice as many used mobile payments in 2013 versus 2012.

And while a fractional amount of consumers have used mobile payments, between 16% and 27%, depending on the country, are willing to try. In addition, ABI Research expects total mobile payments to grow to $46 billion by 2016 more than five times the $8.5 billion seen in 2011.

Many may be concerned about security, but a mobile device is a computer, and there is a huge opportunity for improved security relative to current standards. In a recent conversation, Jason Oxman, the CEO of the Electronic Transactions Association (ETA) -- which represents the payments technology industry -- noted simply, "I think mobile payments is a very exciting and increasingly important area of the payments industry."

Knowing there are more active phones and credit cards than there are people in the United States, he highlighted mobile payments combines consumers' love of mobile devices and electronic forms of payment, which is a recipe for "huge success." With different aspects of individual's lives becoming more reliant on mobile devices -- from communication, to entertainment and much more -- there is no denying people are becoming more tied to mobile devices. This will ultimately bring about the revolution in the payments industry, which Oxman himself is "hugely bullish," on.

Changes in the payments industry
As with any major change, there are going to be winners and losers.

It will be absolutely imperative for corporations like MasterCard and Visa to ensure their technological capabilities allow them to maintain their dominant position as the payment processors.

When you consider MasterCard processed 40 billion payments totaling $2.7 trillion and Visa processed a staggering $6.9 trillion among 72 million transactions, the firms clearly understand their success hinges on how well they adapt to the shifting dynamics in its industry. 

The banking beneficiaries
Beyond the processors of payments, there will be changes for the banks. Bank of America watched its mobile banking users grow by 20% to 14.4 million individuals in 2013. In order for Bank of America to capitalize on its customers increasing comfort in the mobile industry, this change must move beyond simply allowing easier access to personal accounts and into a more encompassing service and product offering.

The Bain study noted; "consumers expect banks to provide their digital wallet, and they trust banks more to do this than they trust other types of companies including retailers, start-ups or related technology providers. Banks and card providers that move too slowly could miss opportunities to build customer loyalty, [and] acquire affluent new customers." 

Expanding outside of financial services
The banks and payment processors will see major change but so will a company like eBay, through its PayPal platform. It had more than $27 billion in total mobile payment volume last year, almost double the $14 billion seen in 2012.

The company highlighted "mobile was a key catalyst," in its earnings release, noting the use of PayPal outside of an eBay transaction grew by 128% on the year. While many think of eBay as simply an online retailer, its PayPal business could be the ultimate driver of its success moving forward. 

Source: @googlewallet

Also in the technology sphere, there is looming titan Google, which through its Google Wallet app already has the capabilities to allow individuals to make purchases in stores through their phones. Oxman noted Google "has the resources to do it right and attract consumer attention, and it is safe to say this could be a big growth area," so while it isn't a key player yet, it absolutely could be. And while customers may be more comfortable with banks for the time being, that comfort may expand one day.

This reality of change coming from technology companies led the noted CEO of JPMorgan Chase, Jaimie Dimon to say at his firm's annual meeting, technology companies; "all want to eat our lunch. I mean every single one of them, and they're going to try."

Onto the retailers
This change will move beyond just those companies providing the underlying technology to ensure secure and reliable payments to the retailers. Customers who use mobile payments could in turn be more easily offered loyalty points or location-based offers, which could lead to more sales.

Starbucks is a key example success, as its popular app and payment platform has been immensely successful. It has capitalized on its platform that is easy, convenient and rewarding to customers. In fact, Oxman added; "Starbucks is the number one mobile payments platform in the country right now. They are the single most successful mobile payments provider because they've done it right."

Looking forward
Mobile payments are in their infancy, and represent just a fraction of total payments volume. But it is a quickly moving and rapidly expanding industry, which could disrupt almost every sector and company.

There will be companies that capitalize on these shifting trends and those that do not, so understanding the who the ultimate benefactors are of this pivitoal trend will be critical to any investment decision.  

Patrick Morris owns shares of Bank of America and Starbucks. The Motley Fool recommends Bank of America, eBay, Google, MasterCard, and Starbucks. The Motley Fool owns shares of Bank of America, eBay, Google, MasterCard, and Starbucks. 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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.