Investing For a Post-Cash Future: Visa Inc (V), Mastercard Inc (MA) and More

Credit Cards

Credit card companies like American Express Company (NYSE:AXP) and Discover Financial Services (NYSE:DFS) are also benefiting from the move away from cash, and they are trading at much lower valuations tha, the debit cards companies. While investors need to pay a forward P/E ratio of 18.8 and 17.1 for Visa and MasterCard, respectively, American Express trades at a forward P/E of 11.3, and Discover Financial at an even lower ratio in the area of 8.6.

But they don´t have the same kind of scale and global reach that make debit card plays so compelling, and they provide lending to their clients, which makes their business much more risky and volatile. As we can see from the chart, debit card companies have shown more resilient revenues through the last recession, and their growth rates are far superior.

None of these means that credit cards companies can´t outperform, especially if the economy collaborates. Consumers will one day decide that they´ve already had enough deleveraging and that it’s time to start using their credit cards again, and credit card companies are attractively valued to benefit from a recovery scenario.

But from a long term perspective, the debit card companies look like stronger bets on the demise of cash due to their bigger networks and low risk business model.

The Frontrunner

Many tech companies have been riding the online payments boom, from innovative startups like Square and many others, to gigantic corporations like Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL). But the one player that looks specially promising among these alternatives is eBay Inc (NASDAQ:EBAY).

PayPal has emerged as a leading electronic payment system, and it has plenty of room for growth over the next years. eBay recently reported that PayPal has now nearly 123 million active accounts; it added around 2 million accounts a month in the fourth quarter. Net total payment volume (TPV) increased by 24% annually in the last quarter of 2012.

PayPal is already accepted by more than 60 of the top 100 online retailers in the U.S., and it processes more than 25% of online retail transactions in the country.  Mobile payment volume reached nearly $14 billion in 2012, up more than 250% over the prior year, as consumers are increasingly using smart phones and tablets to pay online.

The same network effect that benefits Visa and MasterCard is in play for eBay and its PayPal business. The more users it has – both among customers and merchants – the more valuable and trustworthy the payment method becomes. PayPal is ahead of the pack in online payments, and this is a tremendously valuable competitive advantage which bodes well in terms of future growth prospects.

Bottom Line

One of the most interesting ways to make money over the next years will be betting on the companies which benefit from the demise of cash. It may sound a bit ironic, but that doesn´t make it any less profitable.

The article Investing For a Post-Cash Future originally appeared on Fool.com and is written by Andrés Cardenal.

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