Mobile payments are changing the way we spend money by making payments more convenient. Splitting a bill, paying a babysitter, or paying back a friend has never been easier. Mobile payments allow your debit card to stay in your wallet while you make a contactless payment at the point-of-sale, or purchase things right from your smartphone.

What are mobile payments?

Mobile payments are the use of a mobile device, such as a smartphone or tablet, to send or receive money. They primarily encompass mobile commerce, or m-commerce, which is the act of making a transaction via a mobile device, and peer-to-peer (P2P) payments, the act of sending money to other people, usually family and friends. This is usually done through apps hosted by the device. Devices can now make mobile payments for in-app, online, and point-of-sale (POS) purchases.

A smartphone displaying an online shopping cart with a real shopping cart in the background.

Consumers are more willing to use a smartphone to make a financial transaction than ever before. Image source: Getty Images.

Examples of mobile payments include:

  • Robust mobile wallet platforms offered by PayPal Holdings Inc (NASDAQ:PYPL), including its core service and subsidiary Venmo, and Square Inc's (NYSE:SQ) Cash App.
  • P2P platforms hosted by multiple banks, such as Zelle, or a single bank's own mobile app.
  • Retailers' own proprietary apps, with companies as diverse as and Domino's Pizza offering popular mobile offerings that let customers buy goods from them directly via phone or tablet.
  • Third-party companies whose services are based on mobile payments, such as GrubHub, whose mobile app lets customers order food deliveries from participating restaurants.

How do mobile payments work?

Most mobile payments work the same way as any online purchase: The mobile device used to make the purchase sends the consumer's payment information via the Internet to the merchant's website or app. At a point-of-sale, such as a supermarket checkout counter, contactless payments with smartphones or smartwatches use a technology called near field communication (NFC). Devices with NFC technology can communicate with each other when they're very close together. With the right software, your smartwatch or phone can "tell" the credit-card terminal your payment information, making your payment quick and easy.

Business models that benefit from mobile payments 

Before we discuss the individual companies that might benefit from this trend in mobile payments, let's take a step back and examine the different business models these companies represent and exactly how companies are profiting from this trend.

Digital wallets. Mobile wallet players such as PayPal and Square's Cash App enable mobile commerce or P2P payments. For m-commerce purchases, these digital wallets often charge a small fee, or a percentage of the transaction price, for each purchase. While most of these fees eventually enrich the originating bank or payment network, the mobile wallet platform keeps a small slice. For m-commerce purposes, the merchant almost always pays these fees. 

P2P ecosystems. Companies that enable P2P payments rarely aim to profit directly from those transactions. But even if they're not generating fees for their payment providers, P2P payments do increase the time consumers spend with the platform, which is why so many players are excited to enter this space. For instance, the more users send money to their friends or family members via PayPal, the more familiar and comfortable they and their payments' recipients become with it, increasing the odds they'll use PayPal to make more purchases elsewhere.

A person holding a smartphone while it displays the Venmo app. Chinese food container on the table in the background.

P2P apps, such as Venmo, are growing in popularity and can be used for things such as paying a friend back after splitting a meal. Image source: PayPal Holdings Inc.

Retail. Some companies use mobile payments to sell their products and services directly to their customers. By making those purchases more convenient, allowing customers to buy something with a click on their phones, merchants can increase sales and reach their customers better than ever before.

Mobile infrastructure. Companies in the mobile network industry, such as smartphone manufacturers, telecom companies, and mobile component suppliers, will indirectly benefit from the growth of mobile payments. Contactless payments at the point-of-sale and payments made in-app on a mobile device are key pieces to a future dominated by mobile infrastructure and networks. For the companies building those networks and devices, the more consumers connect to the world through mobile devices, the better.

How popular are mobile payments?

Mobile payments are becoming more popular and useful precisely because smartphones have become such a huge part of our lives. In developed and emerging economies, most consumers not only own smartphones now, but use them more every day. These devices remind us of appointments, help us navigate to our destinations, and help us watch videos and check emails. It only makes sense, then, that so many people also want to use smartphones for making purchases as well.

The 2017 U.S. Consumer Payment Study published by Total Systems Services depicted a public seemingly more willing than ever before to use smartphones for financial transactions. The survey found that 29% of respondents used P2P payments. That number surpassed 40% for people under 34 years old, and it steadily trended downward as the respondents' ages increased. However, 42% of those who have not yet used P2P payments said they were either "very likely" or "somewhat likely" to in the next year.

A person using Masterpass, an app on a smartphone, to make a purchase at a restaurant counter.

Contactless payments and apps on smartphones, such as Mastercard's Masterpass, can be used to make purchases online or in the store. Image source: Mastercard Inc.

The Total Systems study also found that 51% of all respondents were interested in using their phones to make a payment instead of a card when checking out, and 33% were interested in using a wearable device, such as a watch, to do the same. 

There is also plenty of evidence that m-commerce continues to gain acceptance with consumers. It accounted for 34.5% of total U.S. e-commerce sales in 2017, but that percentage is expected to grow to 53.9% by 2021, according to an eMarketer study.  

Mobile commerce is not just a U.S. phenomenon, either. In the Middle East and Africa, smartphone usage grew 33% year over year in 2017, and 63% of e-commerce transactions came from a mobile device. In Latin America, mobile transactions grew 37% year over year, according to research by online advertising platform Criteo SA.

How people use mobile payments now

Given the increased willingness of the public to use their smartphones to make financial transactions, it seems only natural to expect that mobile payments will become further ingrained in consumer behavior. Mobile devices can now perform nearly every kind of financial transaction, including: 

  • Applying and paying for a mortgage
  • Paying bills
  • Making purchases in-app, online, and at the point-of-sale
  • Transferring money between bank accounts
  • Investing money in your favorite stock recommendations from The Motley Fool
  • Ordering food ahead for take-out or delivery
  • Sending money to family members and friends

The easiest way to invest in mobile payments: ETFs 

For investors who see the potential in this space but don't have the time or inclination to pick individual stocks that might benefit from this trend, there is another way: the PureFunds ISE Mobile Payments ETF (NYSEMKT:IPAY). An ETF, or exchange-traded fund, is a basket of securities investors can purchase from their brokerage account. Often, ETFs buy securities, such as stocks, that track a specific index, such as the S&P 500, or the industrial sector.

The Mobile Payments ETF is one of the only funds solely dedicated to following the payments industry. Considering that many of its top holdings are some of the market's biggest winners over the last several years, including Mastercard, PayPal, Square, and Visa Inc, it is not surprising that the ETF has easily beaten the broader S&P 500's performance since its inception. Many of the fund's holdings overlap with the stock picks we discuss below.

Top mobile payments stocks

The 10 ideas listed below offer investors what I believe to be the best chance to both invest in this trend and beat the market over the next several years.

Company Company Type Market Cap
Alibaba Group Holding (NYSE:BABA) Chinese e-commerce $410 billion
Apple (NASDAQ:AAPL) Technology $744 billion
Bank of America Corp (NYSE:BAC) Bank $286 billion
Domino's Pizza (NYSE:DPZ) Quick service restaurant $12 billion
GrubHub Inc (NYSE:GRUB) Restaurant delivery $7.4 billion
JPMorgan Chase & Co. (NYSE:JPM) Bank $346 billion
Mastercard (NYSE:MA) Payments network $209 billion
PayPal Holdings (NASDAQ:PYPL) Payments platform $111 billion
Skyworks Solutions Inc (NASDAQ:SWKS) Semiconductor $13 billion
Square (NYSE:SQ) Payment processing $32 billion
Tencent Holdings (OTC:TCEHY) Chinese mobile platform $418 billion
Verizon Communications Inc (NYSE:VZ) Wireless network $235 billion

Data source: Google Finance.

Let's take a closer look at some of these mobile payments investment ideas to see why they could offer shareholders market-beating returns in the years ahead.

Big banks invest big in mobile

While all big banks have been investing heavily in mobile payment technology, the two whose efforts most stand out are Bank of America and JPMorgan Chase. Bank of America now boasts more than 26 million active mobile users. While that's impressive, the growth of the bank's mobile user engagement is even better. In the bank's most recent quarter, users logged into their accounts using smartphones or tablets more than a billion times, a number that has more than doubled since the end of 2015.  

One of the keys to Bank of America's success in the mobile arena is the integration of so many financial activities Bank of America account holders can access with one simple mobile log-in. Besides standard banking transactions, account holders can also access more exotic options such as digital mortgage and auto shopping experiences embedded within its mobile app.  

A high-rise building with a large sign on the roof that reads "BANK."

Banks such as Bank of America and JPMorgan Chase are investing heavily in fintech applications such as mobile payments. Image source: Getty Images.

JPMorgan Chase's mobile numbers might be even more impressive. When the company reported its earnings, it boasted well over 30 million active mobile users, demonstrating strong and consistent growth over the past several years.  

JPMorgan Chase has also not been afraid to experiment with bold mobile offerings. It's introduced Finn by Chase, an all-mobile bank designed to attract millennial consumers. Finn offers traditional features such as free access to tens of thousands of ATMs, no monthly fees, and around-the-clock customer service, but it combines those with more innovative features such as automatic savings tools and spending trackers.  

Both Bank of America and JPMorgan are also among the biggest participants in Zelle, the mobile P2P payments platform. The Zelle Network can be accessed from banks' own mobile apps, giving account holders the ability to send money to friends using only their email address or phone number, without ever leaving their banks' own ecosystem to do so. In the past 12 months, Zelle processed hundreds of millions of transactions exceeding $100 billion in total volume.  

PayPal: The mobile wallet of choice

Mobile payment volume, defined as transactions originating on a mobile device, now makes up almost half of PayPal's total payment volume. A major driver of PayPal's mobile growth has been One Touch, which now features more than 100 million consumers and 10 million businesses enrolled on the platform.  

One Touch allows users to enroll devices, such as smartphones, that save the customer's payment and delivery preferences. Once registered, consumers can make purchases from participating merchants with just one click of the button -- with no need to enter tedious data such as their name, credit-card number, expiration date, billing address, etc., on a small smartphone screen. By allowing PayPal to store that data, there is no need for customers to enter this information on merchants' websites where they might never have made a previous purchase, or that they don't fully trust. More convenient and secure -- a win-win! 

Circle grpahs comparing the effectiveness of PayPal's sales conversion rates to competitors.

PayPal's One Touch has propelled the platform to best-in-class sales conversion rates. Image source: PayPal Holdings Inc.

Sellers also like the program because One Touch features a sales conversion rate of 88.7%, far higher than the combined average of 55.3% attained by other digital wallets, according to research firm comScore. Sales conversion rates are defined as consumers completing an online or mobile purchase once they have clicked on a payment method within the same browsing session.  

Square's Cash App

Square is perhaps best known for its mobile attachments that made it easy for small merchants to accept card payments at the point-of-sale. Of course, Square has come a long way since then! It now offers a robust ecosystem of products and services that include everything from business loans and restaurant delivery to innovative hardware and industry-specific POS systems. Yet it's Square's Cash App that makes it an especially exciting mobile payments investment.

Estimates showed total downloads for Square's Cash App were more than even PayPal's Venmo. Early in 2018, Square introduced the Cash Card, a debit card linked to its app, to further engage its customers. While debit-card volume grew, it wasn't until the company rolled out Cash Boosts, a rewards program that offered cash back when the card was used at participating merchants, that volume really boomed. Just one month later, card volume reached $250 million, or triple the amount that was being purchased with the card just six months earlier, in December 2017.  

However, Square does not plan on stopping there to increase engagement with Cash App. In fact, there seems to be evidence that Square wants to duplicate almost any type of financial activity through its app. In a recent conference call, CEO Jack Dorsey expounded on this, saying he wanted the app to feature these functions so the company could serve an under-banked, or even an unbanked, audience, bringing these crucial services to those who most need it. 

Final thoughts

As technology matures, consumers' demand for convenience only grows faster. Mobile payments technology enables consumers to pay for any bill or purchase with whatever device is closest to hand. As 5G networks spread and the Internet of Things grows, all indicators point to mobile payments becoming an even bigger factor in daily life. The ideas above represent some of the best ways investors can capitalize on this growing trend.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.