The world's march toward a cashless society continues to accelerate. In fact, the global share of digital payment volume surpassed that of paper-based means of payment in 2014, according to the 2015 Euromonitor Consumer Payments report.
As electronic transactions become more mainstream, companies at the forefront of the non-cash payment movement -- offering cards, digital and mobile solutions -- continue to profit from the growing trend.
A 2015 report from Capgemini and the Royal Bank of Scotland estimates that non-cash payment volumes grew at a rate of 8.9% worldwide to reach a record 390 billion transactions in 2014, according to the latest data made available. The high growth trend is further fuelled by a continued shift in Asia-Pacific countries, led by China, to non-cash transactions and a widespread adoption of mobile and contactless technology for payments in developed markets, said the report.
Mirroring these findings, the card payment volumes in Asian countries, which overtook North America in 2012, are projected by Euromonitor to make up 48% of global payment volume by 2019. Select payment companies with large and growing geographic footprints are well-positioned to tap into mobile and other modes of cashless payment, including credit cards, driven by greater acceptance of digital technology, according to Morningstar equity research.
| Visa Inc. Class A | ||
| Ticker | V | |
| Current yield | 0.67% | |
| Forward P/E | 24.3 | |
| Price | US$77.72 | |
| Fair value | US$104 | |
| Data as of May 6, 2016 | ||
A company with a ubiquitous payment brand, 
Visa (V) provides authorization, clearing and settlement of electronic payment transactions. The firm generates revenue by charging fees to its customers based on the dollar volume and the number of transactions processed through the network.
A dominant force in the global market, Visa accounts for about half of all credit card transactions and nearly three fourths of debit card transactions, according to the Nilson Report.
"In a world in which the number of digital payment transactions is constantly growing, this wide-moat company should flourish," said Morningstar equity analyst Jim Sinegal in a report, noting that the trend creates a long runway of growth opportunities.
Visa's strong competitive advantage is rooted in generous spending on technology, security and marketing, which makes it harder for competitors to offer possible alternatives in the payment space, says Sinegal, who recently raised the stock's fair value to US$104 from US$71.
With an eye on the growth prospects for electronic spending around the world, he projected annual revenue growth of 11% over the next five-years, with operating margin growing from 54.1% in 2015 to 57.3% in 2020.
Sinegal pointed to Apple Pay's early success to stress that new payment methods would incorporate, rather than disrupt, Visa's business. "Visa is king of the hill in the digital payment market and will not be easily toppled," he said.
| MasterCard Inc. | ||
| Ticker | MA | |
| Current yield | 0.72% | |
| Forward P/E | 23.4 | |
| Price | US$96.68 | |
| Fair value | US$120 | |
| Data as of May 6, 2016 | ||
Another dominant presence in the global payments solutions market, MasterCard (MA) generates revenue by charging fees for its transaction processing services for credit and debit cards, and electronic cash.
The company started 2016 on a strong note, reporting first-quarter revenue of US$2.4 billion, up 10% compared to the same period in 2015, driven by a 14% jump in processed transactions and a 13% rise in the total value of customer transactions.
"MasterCard will eventually process a much larger share of total payment transactions, resulting in healthy top-line growth for years to come," said Sinegal, stressing that the company's "global presence strengthens this tailwind even further--well over half of revenue is generated outside the United States."
The firm allocates substantial spending budget to security and efforts in the digital payment space, which Sinegal regards as "investing well for the future."
As an acknowledgment that the transition to electronic payments, boosted by digital wallets, will only increase the volume flowing through MasterCard's network, he recently upped the stock's worth from US$106 to US$120. Sinegal's five-year forecast pegs average revenue growth at 9%, with operating margin averaging 40%, and he expects pre-tax operating income growth to average 8% per year after 2019.
| American Express Co. | ||
| Ticker | AXP | |
| Current yield | 1.8% | |
| Forward P/E | 11.6 | |
| Price | US$64.51 | |
| Fair value | US$76 | |
| Data as of May 6, 2016 | ||
The biggest U.S. credit-card issuer by purchases, American Express (AXP) provides charge and credit card products, travel services, network services, loans and other products and services to businesses and individuals.
On the one hand, the company is spending aggressively to grow its customer base and forge retail partnerships. On the other, it plans to cut US$1 billion in costs by the end of next year.
In a press release announcing the company's first quarter results, chief executive Kenneth Chenault said: "Our priorities for this year and next continue to be accelerating revenue growth, resetting our cost base and optimizing the investments we're making in the business."
The wide-moat company that counts Warren Buffett's Berkshire Hathaway (BRK.B) as its largest shareholder is betting big on mobile payments. Apple recently started offering its mobile payment service, Apple Pay, to American Express cardholders in Canada and Australia. The credit card firm stands to gain further as Apple Pay is rolled out to Spain, Singapore, Hong Kong and other regions later this year.
"American Express accounts for a significant percentage of an electronic spending pie that is certain to expand for years to come," said Sinegal, who recently hiked the stock's fair value from US$72 to US$76.
| PayPal Holdings Inc. | ||
| Ticker | PYPL | |
| Current yield | - | |
| Forward P/E | 22.8 | |
| Price | US$39.48 | |
| Fair value | US$48 | |
| Data as of May 6, 2016 | ||
A leader in online payments, PayPal (PYPL) provides electronic payment solutions to merchants and consumers around the world.
"The company has a big head start over its [digital] wallet competitors in terms of trust and online acceptance, which should allow it to benefit from the rapid growth of digital payments over the near term," Sinegal said in a Morningstar report.
The company has had a strong start to 2016, reporting US$81.1 billion in transactions in the first quarter--a growth of 31% over the last year--while adding 4.5 million new customer accounts.
"Mobile payments now account for just over one fourth of volume processed, and mobile volume grew at a 54% rate during the quarter," said Sinegal, who appraised the stock's worth at US$48.
Although PayPal will likely come under pressure from new players in the payment processing space, Sinegal said the company's leading position in online commerce and strong brand equity "should be sufficient to allow the company to earn excess returns on capital for an extended time frame."
Having split from eBay last year, PayPal remains strategically focused on building new mobile-wallet partnerships with leading mobile companies around the world to generate new revenue streams and account holders.
Sinegal projected 15% average annual revenue growth over the next five years, and operating margin to grow from 16% to 19%.
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