Financial technology has reached a point of inflection. A new set of winners is emerging in the digital payments industry.
It is an even bigger win for Alphabet (GOOGL) .
To learn why, rewind back to 2011 when the Mountain View, Calif., company revealed its mobile payment system. Google Wallet used a radio wave technology called near field communications (NFC) and software to turn Android smartphones into virtual digital wallets.
With development partners Mastercard (MA) , Citibank (C) and First Data (FDC) sharing the stage in New York, Google product managers explained that tapping a smartphone at the point of sale made so much more sense than rooting around in pockets and purses for credit cards and cash. It was a compelling, if futuristic argument for the future of mobile payments.
Watch what First Data's CEO just told TheStreet.
Unfortunately, it went nowhere, at least until Apple showed interest.
After a flurry of payment related acquisitions, the iPhone maker partnered with American Express (AXP) , Visa (V) and Mastercard in 2013. A year later, Apple Pay was born. It also used NFC but its big innovation was anonymizing personal data with single-use digital tokens.
Over time, EMV tokenisation has become the standard for contact-less payments.
NFC-enabled point of sale terminals, championed by Visa and MasterCard, are now standard equipment in most parts of the developed world. By default, all of these devices also support Apple and Google mobile payment systems.
Paying for products and services is as easy as tapping a card with an embedded chip, or waving a smartphone over the dedicated reader.
In the second quarter of 2018, Moneris, a leading transaction processing firm, reported nearly half of all transactions in Canada were contact-less, the highest share ever. Dollars spent and the number of transactions surged 33.9% and 31.8% respectively.
Visa Europe notes 3 billion contact-less payments were completed during 2017. The processing company says 3.2 million contact-less POS terminals are now active in Europe.
Bringing NFC enabled terminals to Costco is a giant step into the mainstream. The warehouse shopping clubs have become emblematic of middle class suburban culture. When shoppers discover they can pay for Kirkland signature pre-cooked bacon and toilet paper by simply tapping, there is no turning back.
Apple will get the headlines, but Alphabet (Alphabet is an Action Alerts PLUS holding) is poised to cleanup.
The company bet early on NFC. It played the long game. While Apple focused on selling the hardware around the sensor, Alphabet concentrated on collecting data, the most valuable commodity in the age of information technology.
Today its software is capable of routing commuters around traffic jams, or recommending the best time to visit restaurants, shopping malls and museums. The root of this innovation is the anonymized data it collects continuously from a billion Androids and iPhones.
Now the company that made Google a verb, is on the cusp of collecting transaction information from its global army of Android smartphones. Think about what is possible when its software engineers add geo-located payments data to all the company knows about its users.
Alphabet will be in a position to make sense of worldwide consumption trends and correlations. It will be able to build anonymized profiles of consumer tastes and habits. Its algorithms will be able to analyze global supply chains in real-time. And these are only the most obvious applications.
This data is valuable. It can be packaged and used to build new products for marketers.
It is a bit ironic.
Alphabet lives in the long shadow of Apple. Although its Android operating system commands 85% worldwide market share, Apple wins all of the operating profits from smartphones. Although Android is often first to the market with innovative features, like mobile wallets, iPhone wins all of the praise for simplification.
In the ongoing smartphone platform war, declaring Apple the victor is easy, and common. This assessment is too simplistic. For Alphabet, the long game has always been about the data, and building new business platforms.
Alphabet shares do carry inherent investment risks. Privacy concerns abound. However, my guess is investors will awake to the possible data use cases before users revolt. If they ever do.
Use any weakness to buy Alphabet shares.
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