Visa and MasterCard are well positioned in the mobile-payment ecosystem.
Mobile payments have garnered substantial interest in recent months, yet no single paradigm for mobile-payment solutions has spurred the technology into widespread use. Visa (ticker: V), with its recently announced open, interoperable and globally functional digital wallet, is especially well positioned to capture mobile-payment demand in our view.
We believe that Google (GOOG), Apple (AAPL) and other Internet players are complements to Visa and MasterCard (MA) in the mobile-payment space.
Payment responsibilities are both Visa's and MasterCard's comparative advantages, and Google and Apple more likely aim to expand the mobile-payment revenue pie through targeted advertising and online apps, in our view.
Visa and MasterCard offer the quickest route to the mobile-payment market based on their open and interoperable infrastructure, rendering them integral players in the mobile-payment ecosystem.
Contactless technologies (e.g., microSD cards, barcodes, stickers) have achieved only limited success largely due to their disparate technology standards.
We expect near field communication (NFC) to overcome this adoption hurdle and emerge as the mobile-payment industry standard due to its superior security, comparability and interoperability.
Several handset manufacturers have made NFC commercially available, and demand should grow as consumers increase their familiarity with the technology and begin to realize mobile payment's value over traditional card payment (e.g., targeted offers, enhanced security).
We foresee mobile-payment demand precipitating in 2012 after initial deployments of NFC-enabled handsets and commercialization of pilots from leading U.S. financial institutions.
Three models will emerge. Comparative advantages of mobile-network operators (MNO), financial institutions and payment networks (e.g. Verizon Wireless [a joint venture of Verizon Communications (VZ) and Vodafone Group (VOD)], Bank of America (BAC), Visa and MasterCard) incline us to believe that three business models will emerge in mobile payments: a bank-centric approach, an MNO-centric approach and a collaborative approach.
These models will likely leverage existing payment rails to bring mobile payments to market, allowing Visa and MasterCard to monetize the 70% compound-annual-growth rate (CAGR) in mobile-payment transaction volumes expected in the next five years.
Economics are favorable for Visa and MasterCard. In any of the aforementioned business models, we believe that Visa and MasterCard will at least maintain their present network fees for credit and debit transactions given the security needs associated with mobile payments.
Additionally, the players could earn additional revenue by providing merchants with value-added services (e.g., data analytics) to aid top-line growth.
Given the recent trends in mobile payments, we reiterate our Outperform rating on Visa and MasterCard.