MasterCard Inc. and PayPal have positioned themselves as companies with “the best current opportunities in the payment space,” according to Morningstar Financial Services.

MasterCard’s “robust cash flows” and global presence through financial inclusion initiatives should result in continued double-digit earnings, the Chicago-based investment research firm cited in a report on the payments industry this week.

“MasterCard seems to be very level-headed about developments in payments and has good success in working with other governments on the financial inclusion side,” says Jim Sinegal, Morningstar senior analyst for banks and payments, in an interview with PaymentsSource.

Because the established payment networks, such as MasterCard and Visa, connect consumers' financial institutions with merchants' acquiring banks, they will continue to have significant value for authorization, clearing and settling. From that standpoint, Morningstar says MasterCard’s network should allow it to function as “a tollbooth on both online and offline spending for years to come.”

Even if interchange rates were to come down through regulation or mobile wallet disruption, the networks are likely to stay strong because they deliver security and ease for consumers, Sinegal, author of the “Slicing the Payment Pie” report, says.

By the same token, PayPal, the payments unit of eBay Inc., continues to expand its payment options through technology and integration partnerships, parlaying those efforts with its large customer base to become a frontrunner in the digital wallet race, the report states.

PayPal’s recent acquisition of mobile payment technology provider Braintree Inc. illustrates the company’s desire to stay in the forefront of current payment advancements, Sinegal says.

In the eyes of investors, PayPal has not enjoyed explosive growth in the past, so the market generally underestimates the potential value of what the online payment giant brings to the table, Sinegal says.

“PayPal brings a lot of positive optionality going forward,” Sinegal says. “In general, the merchant side, or merchant acceptance side, is easier to attack, and PayPal has some interesting advancements in geo-location at the point of sale.”

For nearly two years, PayPal has made pursuit of being an option at the physical point of sale a priority for the company and its new president David Marcus. PayPal’s partnership with Discover to accept PayPal payments at the physical point of sale took effect in April.

Mostly, Morningstar views the payments landscape as one in which current network powerhouses and disruptors can co-exist.

“There is not a need [for companies] to destructively compete in this market,” Sinegal says. “There is value to be added [to payments schemes], rather than be disruptive.”

The report says “upstarts” have an opportunity to create value-added digital wallets, giving merchants better opportunities to launch marketing programs and offer deals to consumers. In doing so, those companies could follow an “American Express-like model,” in charging slightly higher fees to merchants in exchange for vastly improved marketing opportunities, the report adds.

“I think there is room for both — the current payment networks and a value-added product,” Sinegal says. “Merchants have room to fund better promotions and it could be a win-win for everyone.”

The retailer-driven Merchant Customer Exchange poses a potential major disruptive threat to the current payment system because it could possibly offer lower costs to merchants and better deals to customers, the report says. But MCX remains in its early planning stages and “sidestepping the established networks completely will be no easy feat,” the report adds.

In a signal that indicates MCX understands the magnitude of trying to create an entirely new payment system, executives have most recently said the company wants to develop relationships with bank partners. It has also encouraged merchants not to rush into a mobile payment strategy until the technology smoke clears.

Other new payments entrants, like Google Wallet and Isis, face a similar dilemma.

“Does a company like Google really want to take the trouble to displace a current payment provider?” Sinegal asks. “It would be far better to work with them.”

Payments are not broken at this time, and consumers generally feel that swiping a payment card at the POS is easy and reliable, Sinegal adds.

“In a lot of ways, the existing system is doing a better job on some aspects [of customer service] than PayPal does,” he says.

Investors can expect the payments industry to face more regulation in the future, which will level the playing field a bit. “You can see it already, with some crackdowns on bitcoin,” Sinegal says.

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