Investing in a World without Cash: Google, Amazon, Square

02/07/2018 6:00 am EST

Focus: STOCKS

Jon Markman

Editor, Tech Trend Trader, The Power Elite,and Strategic Advantage

Imagine never carrying cash again. I know; it’s crazy. Dystopian, even, depending on your point of view, writes Jon Markman editor of The Power Elite and Tech Trend Trader.

On Jan. 18, Alphabet (GOOGL) struck a patent swap deal with Tencent, the Chinese chat, gaming and payments leader. Many believe the deal is all about re-entering the Chinese market.

It’s more than that. Alphabet wants access to your payments data. And Tencent has already figured out how to do that.

On paper, the U.S. is the vanguard of tech innovation. MIT, Carnegie Mellon, Stanford and other top-tier schools are sucking up the brightest minds from all across the planet. Most of their students will end up in Silicon Valley, making cool things.

But 15 years ago, something weird started to happen. China began leapfrogging much of American ingenuity.

The most startling example is e-commerce. The Wall Street Journal reports that in 2016, China had $9 trillion in online sales. The U.S. had $112 billion.

To be fair, China has a distinct advantage. The country is governed by a single political party. One with a long history of trampling on individual freedoms.

That means the Chinese are much more willing to surrender personal data. Volunteering facial or fingerprint scans are common. In some places, you can’t buy a bucket of fried chicken with staring into a camera.

rust played a prominent role in the ascent of companies like Tencent.

In 2004, the company started experimenting with payments inside its popular WeChat mobile application. It was an instant success.

With no more than a simple QR (quick-response) code, merchants and individuals were able to exchange goods, services and money. No cash registers. No credit payment terminals. The only tool required was a mobile device.

QR codes are now ubiquitous. In China, cash is going away.

WeChat offers a quick tutorial on how to scan a QR code with your smartphone. Click here to watch.

Contactless payments might seem like a trivial business. Tencent charges miniscule fees. That is because the real business is data.

Tencent is collecting an unfathomable amount of information about its users. The company knows exactly what, when and where every purchase takes place.

All of that data is leading to other ground-breaking technologies. So-called mini-apps set the traditional mobile app business model on its head. Mini-apps require no download and no configuration. They’re merely a set of code fixed to a distinct physical point in space.

Think about street vendors or small shops. Smartphone users are able to walk by a physical location and have information magically appear on their screen. Cool, right?

Tencent launched the program in January 2017. It already has 117 million unique monthly users, and 580,000 operational mini apps.

Most apps are less than 10MB. They load instantly. And they have attracted international brands like McDonald’s (MCD), KFC (YUM), Coach (TPR) and Tesla (TSLA).

You can imagine how that technology might appeal to executives at Alphabet. Its instant apps launched in 2016 and went nowhere. The Tencent innovation is thriving.

Now, imagine those powerful tools coupled with everything Google knows about its users. The company would be able to make suggestions about stores and services … simply based on a customer’s specific knowledge graph and their physical location.

On Jan. 8 Pali Bhat, a product manager at Google Payments, announced the company was combining Android Pay and Google Wallet into a single product.

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Alphabet shares are up almost 40% year-over-year.

G Pay allows anyone with credit card information stored with Google to pay online or in stores, and to exchange payments with friends.

Bhat teased that bringing everything under one umbrella was just the first step.

Development with Tencent is the next logical step. And now the companies have a patent-swap agreement.

The deal comes as Amazon.com (AMZN) moves its contactless payment plan for physical storefronts out of beta development. For the past year, the Seattle online retailer has been working in-house on the ultimate convenience store concept. It replaces human cashiers with facial recognition, cameras, scanners and RFID tags.

Shoppers enter the store, pick up what they want and take their item(s) home. Their Amazon.com account is billed as they leave.

It is about removing friction. Amazon.com is making it easier for customers to buy products by eliminating the parts that slow down the process.

Contactless payments are a big deal. Most investors see the opportunity through the lens of transactions. This is the old business model.

In China, customers often buy their meals in advance. Restaurants can offer a discount because of reduced marketing costs. They can plan ahead, which helps them reduce waste.

This new business model would be impossible without contactless payments.

Amazon.com and Alphabet are also reimagining the transactional model. One is making the experience more like online shopping. The other is building a model that uses collected data to make informed suggestions to the seller. It is a lot like advertising.

I have been telling my Tech Trend Trader members to buy and hold shares in both Alphabet and Amazon. They are longer-term winners in a huge market most investors can’t even imagine.

But there will be other winners, such as the upstart and fast-growing payment processor Square (SQ). Companies that make the sensors and software underlying these technologies will fare very well, too. And the time to invest is now.

Best wishes,

Jon D. Markman

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