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The Digital Wallet's Future Is Now

Tickers in this article: AAPL EBAY GOOG MA V

NEW YORK ( TheStreet) -- Technology has shaped the way we live in nearly every facet of life. One aspect that's poised to have the most impact, though, is the digital wallet.

Consumers are transitioning from paying with credit cards and cash to using whatever is easiest and most convenient for them, potentially saving a few dollars or earning rewards in the process. Companies like eBay(EBAY) , Square, and potentially Apple(AAPL) , are changing the way we pay for everyday goods and services.

Mobile payments are destined to be a key component of the evolving "digital wallet," and investors need to be aware of this emerging market. Battle lines in the war for market share are already being drawn.

According to data from Ernst & Young , mobile payments are expected to be big business, with the market reaching a massive $245 billion by 2014. The shift is coming rapidly, as payment methods are moving away from credit cards, debit cards and cash to smartphones, tablets and other mobile devices.

What isn't clear yet is what this market will look like, Sterne Agee analyst Greg Smith wrote in a recent research note. "We found contrasting views as to how the mobile payments landscape will evolve, and in particular, whether NFC Near Field Communication or cloud-based wallets will ultimately dominate," he explained. Smith did note that NFC will eventually increase rapidly in numbers, as will cloud-based mobile payments, and perhaps that's why PayPal is taking an agnostic view towards its approach and keeping it in the cloud.

NFC, a swiping technology that is used for mobile payments, has attracted plenty of attention recently. There were rumors, for example, that NFC would form part of Apple's iPhone announcement last year, although this did not materialize.


Even though non-traditional payments companies are entering the space, firms like Visa(V) , and MasterCard(MA) are not going to go down without a fight, perhaps part of the reason why Visa made an investment in mobile payment specialist Square last year.

Channing Smith, portfolio manager of The Capital Advisors Growth Fund (CIAOX) believes that Visa's infrastructure is not going to be dismantled or displaced by others, and that companies such as Apple and Google(GOOG) will "increasingly rely on Visa and MasterCard's infrastructure as the mobile payments trend transitions to mass adoption." Smith is long both Visa and Apple.

Square, led by CEO Jack Dorsey, is the 800-pound gorilla in mobile payments, thanks to its sleek Square card reader, and its partnership with Apple (The iPhone maker sells Square readers in its Apple Stores).

Square is thought to be doing roughly $5 billion in payments per year, as more merchants adopt the readers to cut down on credit card costs. The San Francisco-based company charges 2.75% per swipe for Visa, MasterCard, Discover and American Express (AXP) , lower than the fees the credit card companies charge to process payments.