Forget Visa, This Company Is The Future of Payments

When it comes to financial dealings, cash is still king, accounting for 85% of global transactions.  Still, credit card usage has been growing steadily for a decade. That has helped shares of Visa (NYSE: V) rise roughly 25% annually since the company’s 2008 initial public offering (IPO).

Now, all eyes are on the mobile payments market. This industry is expected to grow from $50 billion in 2014 to nearly $150 billion by 2019, according to the research firm Forrester. That sets the stage for another investment opportunity in the financial transactions market.

#-ad_banner-#In July, PayPal Holdings (Nasdaq: PYPL) was spun off from corporate parent eBay (Nasdaq: EBAY). The spin-off was long overdue. As long as PayPal was officially a property of eBay, there was little chance it would partner with (Nasdaq: AMZN), one of eBay’s largest competitors. Now that PayPal is independent, the partnership restrictions related to eBay are gone. A potential partnership with the largest online retailer is a huge market opportunity and could be a huge catalyst for the stock price.

PayPal has been a phenomenal growth story. Launched in 1998, the company was one of the first to enter the electronic transfer space. In 2002, it was acquired by eBay for $1.4 billion. When eBay spun PayPal off to operate as a standalone company, it had a market value of $40 billion. And it’s not yet a “mature” company:   transactions and total payment volume have been growing at a rate of more than 20% per year since 2012.

PayPal’s size is a huge competitive advantage. While many mobile payments start-ups burn cash and are awash in debt, PayPal has $4 billion in cash and short-term investments on the balance sheet and negligible debt. This advantage allows PayPal to outspend or acquire emerging rivals. PayPal has already brought Venmo, a person-to-person money transfer and digital wallet service, into its portfolio; and it also acquired Braintree, a service that allows small merchants to accept Apple Pay, credit cards, and other money transfer services. Both services doubled their transaction volumes in 2014.

The acquisition that has the biggest potential for the company is that of publicly traded Xoom (Nasdaq: XOOM). Xoom is an international money transfer service that allows customers to use the service without needing a bank account or even an Internet connection to receive funds. This technology allows billions of people around the world that are outside the banking system to seamlessly transfer money.  The World Bank estimates that there are still nearly two billion adults without a bank account. Suffice it to say, Xoom is also growing at a rapid clip.

Investing is all about projecting the future, and nowhere is that more difficult than the payments space.  PayPal has a number of advantages that make it a favorite to thrive in this competitive space. It has the first-mover advantage, the diverse platforms and technology, and the capital to grow by acquisition.

Risks To Consider: The biggest risks to PayPal are technology related. Can PayPal continue to attract new users to its platforms? If it can, it gains more leverage for negotiations with merchants while suffocating competitors.

Action To Take: Shares of PayPal will be volatile, but for investors looking for a chance to earn the huge 20%+ returns per year that Visa has delivered since its IPO, PayPal is the best opportunity to match such gains.

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