I recently read something startling: Nearly two-thirds of all credit card users have experienced at least one bogus purchase.

According to the Nilson Report, approximately 13 cents of every $100 in card spending is fraudulent. That might not sound like much until you consider that consumers used plastic to ring up $40 trillion in worldwide purchases of goods and services last year.

That’s more than $75,000 in bad transactions going through the system every minute of the day. Global losses from card fraud reached $32 billion last year and are expected to total $397 billion over the next decade. This epidemic is particularly virulent in the United States, which accounts for one-fourth of global card spending volume but nearly half of all fraud.

While consumers bear little responsibility, merchants, processors, and financial institutions must absorb these huge losses each year.

Unfortunately, all signs point to this problem worsening over the next few years. For starters, cash transactions continue to dwindle in the e-commerce era. Good old paper greenbacks now account for just 18% of consumer transactions (and most of those are $10 or less). Meanwhile, there are approximately 624 billion card purchases each year.

At the same time, thieves have become increasingly sophisticated, employing a wide variety of skimming, phishing, and hacking techniques to access sensitive data and then either use it or sell it on the dark web. It’s an ongoing cat-and-mouse game.

There has been a nationwide overhaul in payment processing infrastructure in the past few years. Magnetic strips have become a relic of the past, like the old manual imprint machines before electronic networks. Banks have mailed hundreds of millions of smart card replacements that are inserted rather than swiped. These chips transmit a unique, encrypted transaction code with each purchase that can never be used again.

Even that is passé in the eyes of some. Wireless near-field communications (NFC) technology sends data via electromagnetic waves, enabling shoppers to simply tap their cards (or wave their mobile devices) at the checkout register and be on their way.

This long overdue transition has unleashed a nationwide replacement cycle for next-gen point of sale (POS) terminals that can process these cards. From mom-and-pop pizza joints to national retail chains, almost every merchant that accepts plastic has been forced to upgrade their check-out systems to comply with tightened security protocols.

At one point, approximately 23,000 new chip terminals were connected weekly across the country. And they aren’t cheap, typically ranging from $500 to $1,000 upfront. It has been a multi-billion dollar sales windfall for a handful of well-positioned equipment vendors.

Profiting From Plastic

I’ve been a fan of this industry since 2016, the early days of the migration away from swipe-and-sign. At the time, I pointed readers towards Verifone, which already had 29 million card readers installed at convenience stores, supermarkets, doctor’s offices, hotel lobbies, gas pumps, and just about anywhere else.

It was acquired a couple of years later by a private equity firm for $3.4 billion, a transaction that yielded a generous 50%+ premium.

Five years hence, we’re much further along in this upgrade cycle. But other catalysts have emerged, not the least of which is the post-pandemic movement towards electronic (and often contactless) transactions. Many theatres, stadiums, arenas, and other entertainment venues have gone completely cashless.

Meanwhile, portable handheld card readers are everywhere. Your local ballpark’s beer and hot dog vendors carry them through the stands. So do flight attendants. And taxi drivers. And parking lot attendants. And hair stylists.

You’ve probably also noticed the proliferation of tablet-based devices that employees can carry around to facilitate quicker check-outs. They have become popular with bartenders, restaurant servers, and even boutique clothing stores.

These newest POS terminals are not only up to code on fraud prevention but also have built-in cameras and barcode scanners and can perform a wide variety of tasks, from inventory management to loyalty card reporting. They also maximize floor space and gather customer information to assist with marketing efforts.

But that’s only part of the equation.

While POS manufacturing can be a lucrative business, these are one-and-done sales. However, from the day it’s unpacked and connected to the day it’s finally unplugged, each new terminal might handle a million card transactions over its useful lifespan.

And somebody gets a cut of every single one.

Fees, Fees, Fees

Banks that issue credit cards collect fees and earn interest on outstanding credit balances. They are also entitled to a small slice (known as the interchange fee) from each transaction. As you may know, Congress has begun an effort to lower the cap on these fees. But banks, airlines, and even some consumer groups (who love sky miles) are united in their opposition and have powerful lobbyists.

In any case, I’m more interested in the other parties to these transactions: The merchant acquirers. From your local gym to your favorite grocer to giant big box retailers like Target (NYSE: TGT) every store that accepts cards teams up with an acquirer that communicates with the issuing financial institution, settles up each day’s batch of credit and debit transactions, and then ultimately makes sure the funds are transferred and safely deposited into the merchant’s bank.

These guys also earn a processing fee every time a card is inserted or tapped. These fees generally add up to around 3% — or $3 from your $100 dinner tab.

For years, these transaction charges were largely invisible to consumers and paid for entirely by store owners. But in the wake of new laws, thousands of locations nationwide have begun adding 2% or 3% back to the bill to cover card processing fees. Once rare, it has become common practice in many states.

It’s hard to blame them. Picture a small hardware store that does $300,000 in yearly credit card sales. At an average of 3%, their card processor would deduct $9,000 in fees over the course of a year, a meaningful hit to the bottom line.

So do the math on a national chain like Home Depot (NYSE: HD) which hauls in that much every single minute of every single day. Across the country, U.S. merchants handled a staggering $9.4 trillion in card sales volume last year. And all those transactions generated approximately $120 billion in fees for card processing networks.

And with more purchases going through cashless, digital routes, this total is headed nowhere but up. Americans just spent $9.8 billion on Black Friday sales alone, followed by $12 billion on Cyber Monday – double the level from 2016.

This is definitely an area worth keeping an eye on… as readers of my Capital Wealth Letter know. I just added shares of a company poised to profit from the electronic payment processing boom to our portfolio.

That’s not to say we don’t also have cryptocurrency — the ultimate form of electronic payment — in our sights as well. Our team thinks a select few cryptos are about to go on another monster run — and we’ve got the scoop on how you can profit. Go here now.