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It's Early Days in One of the Biggest Tech Shifts in a Generation

By Larsen Kusick, analyst, Phase 1 Investor
Tuesday, May 31, 2011

After more than a decade of attempts, companies are on the verge of separating consumers from their wallets.
Last Thursday, May 26, tech giant Google unveiled its first "digital wallet." The concept is simple – users can pay for things with their cell phones. Using its Android operating system installed on the latest smartphones from Sprint, Google is making a big push to establish itself in the emerging "digital wallet" space.
In simple terms, a digital wallet aims to make your wallet obsolete. You can "swipe" your smartphone at any store and skip the cash or credit cards. A little further down the road, your driver's license and passport could end up stored on your phone as well.
This may sound more than a little crazy. I don't think I'm ready to make the switch yet. But it's going to happen. And there are TRILLIONS of dollars at stake...
Whether you think it's a good idea or not, the "digital wallet" is inevitable. The exploding smartphone market is part of the huge, long-term "gadget boom" I've highlighted over the past year. Every day, millions of people are relying more and more on their smartphones for tasks ranging from e-mail to tracking their bank accounts.
The other main reason the digital wallet is a "sure thing" is the amount of money at stake. The payment processing industry is bigger than most people can imagine.
Take Visa, the market leader in consumer transactions, for example. Visa's total transaction volume was $1.38 trillion during the last quarter alone. Visa takes only a tiny slice of each transaction – less than a penny on average. And it logged more than $2.2 billion in revenue last quarter. In 2012, the company is expected to crack $10 billion in revenue.
Research firm Gartner expects global mobile payments to grow at a 70% annually over the next five years. In the world of trends, that's about as good as it gets.
The U.S. is running behind the rest of the world in mobile financial activity. According to research from Credit Suisse, 61% of consumers in the Asia/Pacific region use mobile banking services. In Europe, it's 45%. In the U.S., that number is below 20%. That leaves plenty of room for growth.
And big, well-funded companies are grabbing for their piece. Google's digital wallet relies on a technology known as "Near Field Communication" or "NFC." Apple has already filed eight patents focused on NFC functionality in its products. Right now, Visa is testing NFS-based services. It plans to roll out its own digital wallet this fall in the U.S. and Canada.
Behemoths like Verizon, AT&T, MasterCard, Bank of America, and Barclays are also pushing projects related to the digital wallet boom.
This is a huge opportunity for investors over the next few years. The profits from this trend won't materialize for companies until 2012 or 2013. But as the picture becomes clearer today, investors will start anticipating higher earnings for the companies that capture market share. That means higher stock prices for the winners.
Right now, the safest way to play this developing trend is by buying Visa and MasterCard. Neither company takes on any credit risk. They simply take a small piece of every transaction. And they are the two "World Dominators" of the payment industry. There's almost no chance they get left out of the evolving mobile payment industry.
But I expect a lot of companies in multiple sectors to eventually benefit. Network operators like Verizon and AT&T will get a piece of the profits. Also, more smartphone features means more demand for semiconductors – another industry I've highlighted in recent months.
We're just getting started on this massive trend. Expect to read a lot more about it over the next year.
Good investing,

In The Daily Crux
Market Notes
U.S. dollar and euro both fall to new record lows vs. Swiss franc.
Natural gas prices jump more than 10% in two weeks... Westport Innovations up 20%.
Safe gold play Royal Gold hits fresh all-time high.
Ag boom continues in smaller fertilizer names... CF Industries and Terra Nitrogen break out to 52-week highs.
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