In a few previous articles, we’ve talked about the concept of finding great industries for investment, and on the flip side, looked at one industry that is NOT so attractive to invest into.
So today, lets investigate one of those “golden bucket”, “green dot”, highly attractive industry segments for investment.
In many cases, these kinds of industries have numerous attractive companies within them. Investors can usually do well fishing in these ponds. The same great characteristics often apply to all players.
The industry we are going to take a look at is Payment Processing. Why is it so great? Let us count the ways…
Payment Processing Is Predictable
Payment processing is an excellent example of a “toll booth” business model.
Think of it – every car, truck, or motorcycle that passes over the Golden Gate Bridge has to pay a fee. And if road-based travelers or transports want to enter San Francisco expeditiously from the north, there is no other option than to use the bridge.
If you think about, that is a pretty great business model. Transports will gladly pay the fee for the convenience, often many times daily. The toll authority can rely on steady and recurring cash flows, and can even raise them occasionally with little worry of losing business. Sure, those transports could use an alternative like driving around to the Bay Bridge, or using a ferry… but what a huge pain for little gain! Realistically, those tolls are not going anywhere.
Payment processing is pretty similar. It provides a way for consumers to pay for goods and services electronically (through a debit or credit card, or even a phone). Electronically is the only way to pay online, and far easier than cash in most instances. On the flip side, processing providers allow businesses to accept payments electronically, handling things such as card validation, payment clearing, fraud protection, and so forth.
For the privilege and convenience, these processors earn revenues from those businesses in a few ways. One, they charge an initial setup fee. Two, they frequently charge a fixed-rate, monthly service charge. And three, they take a small percentage of every sale they process – generally in the 2-3% range. Additional revenues can come in the way of add-on services (like micro-loans, consumer credit, software integration products, etc.).
