As Payment Processing Evolves, Look To These Companies

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Sometimes interesting investment themes are just too expensive to dive into. The expansion of payment processing into developing markets is captivating because it plays a valuable role in economic development and dynamic growth. Unfortunately, many of the stocks in this area are not attractively priced. Investors would be better served buying shares of Western Union (NYSE: WU) than BlackBerry (NASDAQ: BBRY) or eBay (NASDAQ: EBAY).

Payment processing around the world

In an attempt to increase consumer base outside the U.S., leading e-commerce company eBay’s PayPal unit is planning to usher in a credit card reader for small traders in some of the countries. This move by the company is taken to strengthen global presence and have an edge over competitors like Square and Intuit. The U.S. version of this product ‘PayPal Here’ was started in March 2012 to seek allegiance of taxi drivers, interior designers and undersized businesses.

In an interview the vice president of global product at PayPal Hill Ferguson said, “We’re bringing PayPal Here to market in countries where swiping is not the norm. It’s a more complicated product because the hardware has to be accredited and certified by banks and regulatory agencies. But the value proposition is the same. We’re helping small businesses sell more stuff.”

The card reader, which is based on chip and pin technology, will be launched in the UK this summer, said Ferguson.

Square and Intuit are the other players in this domain having presence in the US and Canada, and they are posing tough competition to PayPal. This device enables merchants receive non-cash payments and also helps them save money spent normally on credit card equipment. 

PayPal’s new credit card reader is providing the company an opportunity to attract small businesses outside the US and make a strong base in e-commerce market. As data shows, PayPal collected last year a payment of more than half its $145 billion.

Visa (NYSE: V), the world’s largest payments technology firm, in collaboration with Samsung Electronics, a leading multinational electronics company, will facilitate mobile users to use their handsets as a debit or credit card.

The companies said in a statement at the Mobile World Congress in Barcelona, “Visa’s PayWave application will be a standard feature on Samsung devices equipped with near-field-communication (NFC) technology, which allows customers to pay for goods or services by tapping their phones on a reader.”

The partners are also ready to work together on banking technology to help download account statements safely by using Samsung devices for payments.

Electronics companies and financial technology firms like MasterCard are encouraging NFC applications for use in so-called mobile wallets. 

The partnership of Visa and Samsung is going to bring a revolution in the mobile payment technology space because this is for the first time that a top NFC mobile handset maker and a financial network have join hands to develop wide-scale wireless payment program.

Visa and Samsung Electronics first came together in 2012 when they offered NFC mobile payments at London Olympics in UK, and equipped mobile phones of athletes with this application.  

Since this NFC mobile payment technology is in the budding phase, it requires better understanding and cooperation among different stakeholders like financial institutions, mobile phone service providers, credit card companies and handset manufacturers to make this a success. It is expected that the total number of NFC-based phones in market will rise to 1.95 billion in 2017 compared to 102 million in 2012, according to a research.

Canada-based smartphone maker BlackBerry hopes to receive a response its developing mobile payment feature, BBM Money. The mobile device maker is partnering Indonesian bank PT Bank Permata, which is partly owned by Standard Chartered (STAN), to give users a luxury to do financial transactions using the BlackBerry Messenger service, according to a statement by both the companies.

BlackBerry wants to focus on the mostly-untapped Indonesian smartphone market where it is already the leading player. The phone maker sees opportunity in the country with a population of 249 million, and with the help of the Jakarta-based bank, it wants to exploit opportunities. Moreover, it doesn’t want to lose messenger service customers to rivals like WhatsApp. The initiative is expected to announce a strong arrival of BlackBerry into money transfer services market dominated by Western Union and MoneyGram International.

Western Union, in an attempt to greatly expand its mobile money transfer service, recently announced a strategic agreement with Ericsson. Western Union has certified the Ericsson Wallet Platform, which allows customers to use their mobile phones to transfer money. With its strong brand image and loyalty, Western Union is set to benefit greatly from this agreement.

PT Bank Permata’s head of electronic channels Bianto Surodjo said, “If they (users) want to do the payment, they just go into BBM Money and they transfer in a simple way as if they were chatting. We want to put financial activities into customers’ habits because BlackBerry Messenger is becoming like the culture here for people to communicate.”

Testing of this mobile-payment technology is restricted to only one bank in Jakarta keeping in view the complexity and regulatory constraints, according to T.A. McCann, vice president of BlackBerry Messenger.

McCann cautiously warned that the BBM Money is just one of the features of ongoing makeover of the smartphone maker’s messaging service, and that he doesn’t expect the money transfer service alone to bring back customers who have stopped using BlackBerry devices.

Valuation considerations

Based on valuation multiples, only BlackBerry and Western Union are attractive:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/B</strong></p> </td> <td> <p><strong>P/FCF</strong></p> </td> <td> <p><strong>D/E</strong></p> </td> <td> <p><strong>EPS Growth Next 5 Years</strong></p> </td> </tr> <tr> <td> <p><span>BBRY</span></p> </td> <td> <p><span>BlackBerry</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.56</span></p> </td> <td> <p><span>0.74</span></p> </td> <td> <p><span>8.48</span></p> </td> <td> <p><span>0</span></p> </td> <td> <p><span>5.0%</span></p> </td> </tr> <tr> <td> <p><span>MGI</span></p> </td> <td> <p><span>MoneyGram International</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.75</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>14.7%</span></p> </td> </tr> <tr> <td> <p><span>WU</span></p> </td> <td> <p><span>Western Union</span></p> </td> <td> <p><span>8.54</span></p> </td> <td> <p><span>1.45</span></p> </td> <td> <p><span>8.8</span></p> </td> <td> <p><span>12.38</span></p> </td> <td> <p><span>4.28</span></p> </td> <td> <p><span>10.7%</span></p> </td> </tr> <tr> <td> <p><span>INTU</span></p> </td> <td> <p><span>Intuit</span></p> </td> <td> <p><span>30.22</span></p> </td> <td> <p><span>4.81</span></p> </td> <td> <p><span>7.21</span></p> </td> <td> <p><span>25.25</span></p> </td> <td> <p><span>0.18</span></p> </td> <td> <p><span>13.4%</span></p> </td> </tr> <tr> <td> <p><span>EBAY</span></p> </td> <td> <p><span>eBay</span></p> </td> <td> <p><span>26.92</span></p> </td> <td> <p><span>4.94</span></p> </td> <td> <p><span>3.32</span></p> </td> <td> <p><span>26.91</span></p> </td> <td> <p><span>0.22</span></p> </td> <td> <p><span>14.6%</span></p> </td> </tr> <tr> <td> <p><span>MA</span></p> </td> <td> <p><span>MasterCard</span></p> </td> <td> <p><span>24.05</span></p> </td> <td> <p><span>8.76</span></p> </td> <td> <p><span>9.4</span></p> </td> <td> <p><span>24.93</span></p> </td> <td> <p><span>0</span></p> </td> <td> <p><span>17.8%</span></p> </td> </tr> <tr> <td> <p><span>V</span></p> </td> <td> <p><span>Visa</span></p> </td> <td> <p><span>73.54</span></p> </td> <td> <p><span>12.07</span></p> </td> <td> <p><span>3.87</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0</span></p> </td> <td> <p><span>18.6%</span></p> </td> </tr> </tbody> </table>

Unfortunately, BlackBerry is too speculative at this point. It is trying to be David to multiple Goliaths in Apple and Samsung in the smartphone market.

Western Union is a more plausible investment candidate based on its positive earnings and low price-to-sales and price-to-earnings ratios.

Conclusion

eBay’s payment processing story is very interesting, but not investible at current price multiples. BlackBerry is has too many uphill battles to face, making it “cheap for a reason.”


BillEdson11 has no position in any stocks mentioned. The Motley Fool recommends eBay, Visa, and Western Union. The Motley Fool owns shares of eBay. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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