Pay-by-Phone Is Heating Up

09/24/2012 8:00 am EST

Focus: STOCKS

Dialing it in has a whole new meaning these days, as more companies are either accepting payment by smartphone or building the software and hardware to facilitate the transactions, notes Chloe Lutts of Cabot Wealth Advisory.

Before leaving my house, I always look in my purse to make sure I have three things: phone, wallet, and keys. Thousands of people do the same thing every day.

Some day soon, though, my checklist may be one thing shorter, as "wallet" becomes just another function of my phone (which has already absorbed the functions of the watch, datebook, notepad, address book, camera, and music player).

Before that day, I'm sure there will be a gradual (and probably fairly long) transition during which I'll pay for some things with my phone, and some with a credit card or cash. I haven't actually paid for anything with my phone yet, but I expect I will soon, as more and more stores make it an option.

One of the leaders on that front is Starbucks (SBUX), which recently partnered with mobile-payment startup Square to introduce its technology to Starbucks stores. The coffee giant made a $25 million investment in Square earlier this month, and will soon begin using Square technology to let customers pay with their phones in 7,000 Starbucks stores.

Starbucks already has its own app that customers can use to pay for their coffee; it processes a million transactions a week. And Square is already well-known for its namesake product: a little white square that plugs into a phone's or tablet's headphone jack and lets (mostly small) merchants swipe customer credit cards.

Last week I bought a cappuccino and croissant at a Brooklyn bakery that has replaced its cash register with an iPad and Square plugin. After swiping my card through the Square device, the cashier pivoted the iPad so I could sign the screen using my finger. Square also processes the credit-card transactions for the merchant, using the iPad or phone's Internet connection, for a small fee.

In the Starbucks partnership, Square will process the transactions, increasing its scale significantly. But don't expect to see the little white Square devices at your Starbucks. According to The New York Times, Starbucks will begin letting customers pay with Square's mobile payment app simply by telling a cashier their name.

The customer is technically paying with their phone, but they don't have to wave it in front of a machine, show it to the cashier, or even take it out of their pocket or bag. Instead, the cash register automatically detects when a customer with the Square app on their phone walks into the store. Their information, including a photo, pops up on the register's screen.

When they get to the register to pay for their purchase, the cashier can ask for a name, compare their picture to their actual face, and then simply click their profile to process the payment. Then Square charges the purchase to the credit card the customer has linked to their account (using the app).

Of course, Square has competition. McDonald's (MCD) confirmed just yesterday that customers at 30 restaurants in France can now place their order and pay using a mobile app.

That payment system is powered by PayPal, which has apparently been trying to make the jump from the online world (where paying with PayPal is very common) into the real world for some time: it has also teamed up with 15 other retailers, including Home Depot (HD) and Office Depot, to let customers pay with their PayPal accounts in stores.

Google (GOOG) is also eager to be a force in the mobile payment space. Google Wallet users with a compatible Android phone can pay with their phones at retailers with NFC readers (near-field communications, like MasterCard PayPass readers). They just wave their phone in front of the reader and the credit card connected to their Google Wallet account is charged.

At this point, it's anyone's guess which system will become dominant. Square's seems most elegant at the moment, but PayPal and Google both have powerful alliances, including with VeriFone (PAY). And of course PayPal is owned by eBay (EBAY).

EBAY may actually be the best investment leveraged to mobile payments at this time; the stock is strong. (I still like PAY's story, but the stock is dead in the water for now. Square is private.)

And EBAY was recommended in the latest Investment Digest, in a follow up from Wall Street Stock Forecaster Editor Patrick McKeough. McKeough's EBAY recommendation was originally in the Investment Digest in January, with the stock around trading $31. Earlier this month, he wrote an update on the stock, now trading around $46, writing:

"In the three months ended June 30, eBay's revenue rose 23.1%, to $3.4 billion from $2.8 billion a year earlier. Revenue rose 26.5% at PayPal and 9.1% at the auction sites. Earnings rose 15.7%, to $730 million from $631 million. Per-share earnings rose 16.7% on fewer shares outstanding.

"The stock has gained 39% since we first recommended it at $31 in our December 2010 issue. It now trades at 20.8 times eBay's projected 2012 earnings of $2.07 a share. That's still a reasonable P/E ratio in light of its rising earnings and PayPal's growth. eBay is a buy."—Patrick McKeough, Wall Street Stock Forecaster, August 2012

Of course, you can also participate in the move to mobile payments by signing up for the Pay with Square app, Google Wallet or PayPal and trying it out at a store near you. If you do, let me know how it goes!

Subscribe to Cabot Wealth Advisory here...

Related Reading:

2 Quietly Emerging Growth Stories

Surprise! Analysts Got This One Wrong

Opportunities in Cloud Computing

Related Articles on STOCKS

Keyword Image
11 Reasons to Buy Microsoft
12 hours ago

For our latest recommendation, we revisit one of the world's most prominent technology companies, Mi...

Keyword Image
A Trio of Top-Tier Biotechs
12 hours ago

We hold three biotech stocks in our growth portfolio — Biogen (BIIB), Bioverativ (BIVV), and R...

Keyword Image
Saudis, Oil and ETFs
12 hours ago

Under the guise of clamping down on “widespread corruption,” Prince Mohammed bin Salman ...