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3 Stocks to Pay Off for Transforming Payments

Technology has revolutionized the way payments are made. From cash to plastic to mobile and now the biometric system, there seems always a new dimension to the payments industry. If new customer habits, technological innovation, tough competition and investment inflows are driving this transformation, it is the need for tight security that is at the root.

The progress from cash/check to card introduced easy payments. Then, the growth in e-commerce and mobiles encouraged the industry players to take a step at a time toward speedier and safer payment options.

The Story of Evolution in Payments

Plastic money has gained prominence over hard cash given its ease of use. According to The Nilson Report (Dec. 2013), paper transactions in the U.S. decreased from 51% in 2007 to 40% in 2012, and is expected to decline further to 26% in 2017. Meanwhile, card-based transactions have increased from 44% in 2007 to 54% in 2012, and are expected to increase to 67% in 2017.

The contactless mode of payment is fast gaining popularity thanks to the widespread use of smartphone technology in our routine lives. Many large retailers like McDonald's, KFC, Burger King, Subway and Starbucks to name a few, use cloud-based mobile wallet apps, thereby making significant contributions to this form of payment.

Mobile users were skeptical of using their devices for transactions until a few years ago, mainly for security-related reason. According to Statista, mobile spending in 2015 will hit $431 billion globally, but by 2017 this figure will increase to more than $720 billion. This industry is expected to grow in the U.S. from $50 billion in 2014 to nearly $150 billion by 2019, according to the research firm Forrester.

The introduction of apps like Google Pay from Google Inc. GOOG , Apple Pay from Apple Inc. AAPL and Samsung Pay has given a boost to the mobile payments space. BI Intelligence estimates that the number of people making a mobile payment at least once a year will grow from nearly 8% of the U.S. consumer population in 2014 to 65% by 2019.

While the usage of phones to make contactless payments is expected to increase over time, they are likely to co-exist with the other means of payment - from contactless credit cards to cash - for some time now. Mobile money remittance from one location to another is also fast gaining prominence because of the flexibility it offers.Players like Western Union Co. WU are aggressively investing in their mobile money transfer business.

Another arena where technology has helped the payments industry is in its fight against fraud. Industry leaders are turning to the biometric technology which would use a payer's physical body to authenticate payment. According to a recent report by Acuity Market Intelligence, mobile biometrics is set to secure 65% of all mobile commerce transactions by 2020, generating $34.6 billion in annual revenue.

MasterCard Inc. MA recently announced that it is testing the facial recognition technology to authorize transactions, with an anticipated rollout to the general public this fall. Visa Inc. V is also providing additional security to transactions made by its customers by allowing the use of palm, voice, iris, or facial biometrics to authenticate the transaction.

Players to Profit the Most

Below we point out some players that are sure to gain from the evolution in the payments industry. All these stocks have a favorable Zacks Rank and attractive EPS growth rate.

Visa Inc. V Zacks Rank #2 (Buy) with an EPS growth rate of 17.7%, is no doubt a leader in the payment processing space. It operates the world's largest retail electronic payments network and manages the most recognized global financial services brand. It has endured uneven global economic situations with its ability to drive strong volume and revenue yield.

Visa is ideally positioned to benefit from the well-documented global shift from paper-based to electronic transactions at the point of sale. Its combination of strong intrinsic volume growth, impressive pricing power, meaningful exposure to non-discretionary spending and relatively stable market share will support long-term sustainable above-average organic revenue growth.

Western Union has a Zacks Rank # 2 and an EPS growth rate of 8.7%. Though the company has traditionally been drawing a major portion of its revenues from physical cash transfer, it is aggressively investing in the electronic channel (7% of total revenue in second-quarter 2015).

Revenues in the segment accelerated 19% year over year (versus 17% in the March quarter) driven by geographic expansion (wu.com is available in 29 markets) and improved functionality (i.e., growth of mobile, bank accounts). The company continues to offer access through mobile phones and now has 17 mobile-phone partners. In the U.S., U.K. and Australia, customers can also send money via the Western Union mobile app.

PayPal HoldingsPYPL holding a Zacks Rank #2 and with an expected EPS growth rate of 17.6% was an early entrant in the mobile payments space. It spun off from ebay in July this year and thereafter started trading on the Nasdaq stock exchange. The company is about to close the acquisition of Xoom Corp., which will make it a dominant player in the mobile payments space.

PayPal is gaining in the fast growing digital payment space and to this effect has bought two companies: Venmo, a person-to-person money transfer and digital wallet service; and Braintree, a service that allows small merchants to accept Apple Pay, credit cards, and other money transfer services. Both services had doubled their transaction volumes in 2014.

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MASTERCARD INC (MA): Free Stock Analysis Report

VISA INC-A (V): Free Stock Analysis Report

APPLE INC (AAPL): Free Stock Analysis Report

WESTERN UNION (WU): Free Stock Analysis Report

PAYPAL HOLDINGS (PYPL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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