We’re moving more and more toward the cashless society that has long been predicted for us, although something needs to replace the cash. Credit cards are doing just fine with this.
Cash used to be king, and in fact not that long ago it was the only way to buy something for money, at least since cash was invented. Plastic came along though, and people would use credit cards to buy things instead of cash.
Debit cards came along later, which now gave people the choice between credit cards, which they might not have due to needing to qualify for one, or debit cards which are linked to bank accounts which anyone can qualify for.
Plastic payments gained more and more in popularity over the years, but this transition was far from a fast one, even though plastic beats cash handily. You can just carry a card with you when you pay with plastic, you don’t have to worry about change, plastic payments are even faster, if you lose it you don’t lose all your money like with cash, as it is secured and has fraud protection, and more.
You can even track your purchases though online banking or on your phone, no longer having to keep and pore over receipts to track your spending. It used to be quite a task keeping your personal books with cash, where everything had to be entered on paper, with very few even attempting it, leaving them less informed. This is something no one needs to do at all anymore due to the marvels of technology, and we can track and organize our spending in ways unimaginable before.
Many people still use and like to use cash, for whatever reason, so it is not going so quietly. It is going to be a while before we move into a truly cashless society, but cash is dying a little more each year and this means other payment processors stand to gain from this.
Visa, MasterCard, and PayPal All Stand to Benefit, More and More
Among those who gain the most from our moving further and further away from cash is Visa, MasterCard, and PayPal. Visa and MasterCard are the kings of payment methods, with Visa alone processing $11 trillion worth of payments last year, and MasterCard not far behind in second. Together, have such a stranglehold on the market that it’s not even imaginable that a competitor could even join this exclusive payment processing club anytime soon.
The real key here is Visa and MasterCard’s market share with credit card issuers, and this is where they dominate. Banks do get to choose here and the choice is just about always between Visa and MasterCard. Visa is a little bigger but both are behemoths.
PayPal can be included in the big three, due to the way that they dominate the world of online payments. PayPal simply dwarfs the competition, and there really isn’t a service beyond PayPal that worth mentioning.
PayPal is only an intermediary processor though, and the real benefit of using it is that you can use your credit cards online and just share the information with PayPal. PayPal handles the transaction with the merchant and charges your credit card. The merchant never receives your card information, and given that even some big and trusted names get hacked once in a while, the less places you give your card to, the better.
We might think that our moving to buying so many things online would lead us toward PayPal and somehow away from Visa and Mastercard, all this really does is replace their using their cards directly with doing it through an intermediary.
This means that this growth will help PayPal, but will also help Visa and MasterCard because it will drive more business their way as well. You can’t use cash online, and when you use a bank account, there is a waiting time of several days before the payment clears your bank and the merchant gets access to your funds, which can obviously be a problem.
Credit cards do not have these limitations, as Visa and MasterCard make sure that they get authorized in not days but seconds, so their marriage with online shopping is a very nice one indeed.
All three companies are growing, and their stock is growing even more. It’s not hard to figure how PayPal’s business has grown, with online spending taking off and their prominent role in that market, and it’s also not hard to see this continuing for some time perhaps.
It Is the Size of Their Competitive Advantage That Really Makes Them Shine
The real key with these companies isn’t their size, it’s their size relative to their nearest competitors. Visa and MasterCard have virtually locked up most of the business that the industry does, and while they do have real competitors such as Amex and Discover, there is a lot of distance in between.
The same is true of PayPal in regards to their competitive advantage, and the PayPal brand is so strong that it’s hard to imagine anyone catching them or even coming that close.
Not long ago, some imagined cybercurrencies cutting in and perhaps even taking over the payments scene, but there was never any real chance of this having an impact when compared to the amount of business Visa and MasterCard does. Credit cards or any transaction in hard currency is vastly superior to cybercurrency transactions.
One of the most important features of a good currency is stability. Hard currency like the U.S. Dollar is completely stable relative to itself, so if you receive $100 U.S., you know you will get $100 U.S. Cybercurrencies fluctuate like nothing we’ve ever seen, and they are absolutely terrible as a payment method, although you can make a lot of money speculating on them.
The very idea that we could construct digital currencies that may be traded among one another and expect any sort of stability was a pretty far out one. No matter how stable you make a cybercurrency, you will always be doing a forex trade with it, involving currency risk, versus doing transactions in the same currency, which does not have any currency risk.
Over the last 3 years, the stocks of all three companies are up over 100%, with PayPal up almost 200%. This has resulted in their price/earnings multiples going up a lot, where all are well beyond the market average.
Visa, MasterCard, and PayPal are perfect examples of how price to earnings ratios only look at the present and the very near term and neglect the future. Even investors who may only hold their stocks for a couple of years are around as the future changes, and a lot of value that is in stocks is made up of the future prospects of a company.
These three companies really shine here, and have the stock performance to match. It is both the extent of their future profits and the relative confidence that this will happen that makes Visa, MasterCard, and PayPal all very good-looking long-term plays, perhaps even as good as these things get.