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Disruptor Alert: These 4 Companies Are Changing the Financial Industry

Matthew Frankel, CFP, The Motley Fool

There is a war on cash going on all over the world. Cash is constantly becoming less convenient to use, and cashless technologies like person-to-person (P2P) payment apps, mobile payment solutions, and more are evolving rapidly.

To be fair, the entire financial industry could benefit from this transition. For example, even brick-and-mortar banks could see profits rise, as mobile deposits and other technology-assisted transactions are far more cost-effective than paying a teller to assist customers. Having said that, there are a few companies that have the potential to be especially big winners. Here's a great group of four disruptive companies, which I'll collectively refer to as the "war on cash" basket (thanks to my colleague Jason Moser), that are leading the transformation of the financial industry.

Person using Square Cash app on a smartphone

Image source: Square.

Could this be the bank of the future?

Square (NYSE: SQ) has already done a lot to transform the financial industry. Its core business of producing affordable payment processing solutions has helped make credit card acceptance more widespread than ever before, and in places you would have never thought possible just a few years ago. For example, I used to have to make a trip to the ATM before visiting my local craft market, but Square has helped make such a trip unnecessary.

In addition, Square Capital has made it easier for businesses to meet their funding needs, and Square Cash has made person-to-person payments easier and also introduced a new subset of the population to bitcoin and the idea of a cryptocurrency.

Going forward, there are two major reasons I'm excited about Square. First, the company plans to reapply for a banking license. Not only would this make their existing lending business more profitable by cutting out the middleman, but it would also open the door to lots of new possibilities -- like a personal lending platform, perhaps.

Second and most significantly, the Cash App and its millions of active users haven't really been monetized yet. Square has said that it would love to become an all-in-one financial services company for its customers -- think deposit accounts, investment products, loans, and more. The company already has millions of potential banking customers in its ecosystem.

The two major payment processors still have lots of runway

I'm grouping payment processing giants Visa (NYSE: V) and Mastercard (NYSE: MA) into the same section because I consider them to be about 95% the same investment. There are some small differences, but for the most part, the answers to the questions "What does Visa do?" and "What does Mastercard do?" are largely the same.

It's tough to argue that any companies have had more of an impact on the financial lives of Americans over the past few decades. In fact, I'd bet that almost everyone reading this has a Visa- or Mastercard-branded credit or debit card in their wallet right now.

It might surprise you to learn that both companies are still growing impressively. During the third quarter, Visa's payment volume was up 11% and revenue grew by 12%. In Mastercard's case, the growth was 13% and 15%, respectively, for these two metrics.

At this point, Visa and Mastercard still have a lot of potential to disrupt the financial industry internationally. While Americans are used to near-universal credit card acceptance at this point, that's simply not the case in many parts of the world. Many areas of Asia and Latin America still don't widely use card payments. This is why cross-border transaction revenue is up by 17% year over year for both companies, and I don't see this figure slowing down as long as the war on cash is still going on.

The leading person-to-person payment platform and a whole lot more

PayPal (NASDAQ: PYPL) has certainly come a long way since it was a subsidiary of eBay that simply facilitated online payment transactions. As if its original function wasn't disruptive enough, PayPal has continued to change the way consumers pay for things online, especially in regards to mobile and in-app payments.

If you think PayPal's growth has peaked, think again. In the third quarter of 2018, PayPal's total payment volume increased by 24% year over year, fueled by a massive 45% jump in mobile payment volume and 78% growth in the company's ultra-successful Venmo P2P payment platform.

Now, even looking beyond Venmo, PayPal is certainly a competitor to Square in many ways, such as its acquisition of iZettle (often known as the "Square of Europe") earlier this year, and its free Funds Now feature for merchants, which is an obvious effort to compete with Square's Instant Deposit. However, it's important to realize that the cashless payments industry is massive. There's plenty of room for both companies to grow tremendously from their current size.

Buy one or buy the whole basket?

On The Motley Fool's Industry Focus: Financials podcast, host Jason Moser and I often collectively refer to these four stocks as the "war on cash" basket. In a nutshell, the idea is that there's a ton of room to grow for all four of these stocks, so it could be smart to invest in all four instead of banking on the success of just one. There's a clear trend toward a cashless society all over the world, and these four companies are likely to be big winners.

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Matthew Frankel, CFP owns shares of Square. The Motley Fool owns shares of and recommends Mastercard, PayPal Holdings, and Square. The Motley Fool owns shares of Visa and has the following options: short January 2019 $82 calls on PayPal Holdings and short January 2019 $80 calls on Square. The Motley Fool has a disclosure policy.