What's Really at Stake for Payments Processors?


Move over, Google Wallet -- eBay (NAS: EBAY) is taking its mobile payments service to the next level. If you haven't yet heard, PayPal sealed a deal with Discover Financial Services on Wednesday that will bring its digital payments platform to 7 million U.S. retailers next year. The partnership is a big win for eBay in the war to digitize your wallet, particularly since only 16 merchants currently accept in-store payments from PayPal customers.

With the transition from credit card swipes to digital currency now under way, let's take a look at which companies have the most to lose.

Market gains and losses
It is no coincidence that industry giants such as Google, Amazon.com, and Starbucks (NAS: SBUX) all want a piece of the burgeoning mobile transactions pie. Consider this: Research firm Gartner expects worldwide sales from mobile devices to total more than $171 billion this year. For comparison, that's a 61% boost from last year's figure of $105 billion.

Already a leader in online payments, eBay's PayPal unit has been gaining ground in the mobile arena since last year when it began testing its mobile point-of-sale system in nearly 2,000 Home Depot (NYS: HD) stores nationwide. Even McDonald's (NYS: MCD) wants in on the action. The fast-food chain jumped on the PayPal beta bandwagon earlier this month when it began testing a payments service from the eBay-owned company that lets customers in France buy food using their smartphones or tablet devices.

Today, the online marketplace says that its PayPal point-of-sale service is available in about 3,000 locations. Together with Discover Financial Services, PayPal could see its footprint more than double in size by this time next year. eBay CEO John Donahoe already expects PayPal and eBay Mobile to jointly process about $20 billion in volume this year. But with the help of Discover's broad network of merchants, eBay shouldn't have a problem pushing its mobile transaction volume to record highs in 2013.

Smart partnerships
However, the freshly inked deal between eBay and Discover Financial Services is hardly the only strategic partnership among big names in the space. In fact, earlier this month, Starbucks teamed up with upstart payments processor Square. About 7,000 Starbucks locations will now let customers pay for purchases using Square's mobile app. In addition to the credibility boost that this partnership gives Square, Starbucks is also investing $25 million in the tech start-up.

The global coffee chain's bold move offers further proof that traditional credit card processors such as Visa (NYS: V) and MasterCard are quickly losing favor. And why shouldn't they? These companies have dominated the payments industry for decades -- gradually raising transaction fees on the retailers they serve.

Strong consumer demand for smartphones along with advances in mobile technology are changing the game. These new digital purchase offerings are disruptive to the payments business because they offer merchants a cheaper way to do business. In fact, ongoing litigation between MasterCard and Visa versus major U.S. retailers offers a textbook example of this.

A power struggle
, Target, and Home Depot are among the big names suing credit card companies and large banks over unfair interchange fees. For years MasterCard and Visa have forced retailers to pay them rising "swipe" fees. Making matters worse, the credit issuers agreed to a possible settlement deal that includes a special fee, which would be levied on shoppers paying with credit cards (which, as far as my friends and family are concerned, is most of us).

Alternative payment options from PayPal, Square, and others offer consumers and retailers an escape from the high commissions charged by credit processors. And their timing couldn't be better. If customers paying with plastic start getting hit with an extra charge fee, I suspect it will accelerate the adoption of mobile payments.

Still, Visa and MasterCard see the writing on the wall. They may be losing the battle with merchants, but they won't be shut out of the mobile space completely. The duopoly didn't waste time latching on to ISIS, a joint venture between mobile carriers that provides in-store transaction terminals that, like Google Wallet, run on near-field communications technology to process payments.

The biggest losers
The credit card issuers like Visa and MasterCard have the most to lose. These companies have enjoyed the view from the top for too long now, and I'm not sure they're fully prepared to take on developing innovations in the payments marketplace.

For any of these new technologies to really gain a foothold in the emerging payments space, they need to earn the trust of the consumer. In that regard, eBay's PayPal has a winning lead on rivals in the space. With more than 50 million active U.S. accounts, PayPal has built a brand that people know and trust.

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The article What's Really at Stake for Payments Processors? originally appeared on Fool.com.

Fool contributor Tamara Rutter owns shares of Starbucks. Follow her onTwitter, where she uses the handle@TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Google, McDonald's, Starbucks, and Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of Starbucks, McDonald's, Visa, Google, The Home Depot, eBay, and Amazon.com.Motley Fool newsletter serviceshave recommended writing covered calls on Starbucks. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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