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Fool Mailbag: What's the Better Position in Digital Payments?

In this segment of the Motley Fool Money radio show, host Chris Hill asks Million Dollar Portfolio's Jason Moser and Matt Argersinger and Supernova and Rule Breakers' David Kretzmann for their views on one philosophical business question: In the war on cash, is there a competitive advantage for smaller, nimble companies like Square (NYSE: SQ) and PayPal (NASDAQ: PYPL) that give all their attention to that one arena, or does size and ubiquity outweigh that, giving Apple (NASDAQ: AAPL) and Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) the true edge?

A full transcript follows the video.

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Chris Hill: Sam Waterbury, longtime listener with a question about the war on cash, writes, "One question I have is about Alphabet and Apple, whose Google Wallet and Apple Pay services seem to be competing with the likes of PayPal and Square. Does the size of these tech giants give them an advantage over smaller players? Or are the more payments-focused companies better positioned because they aren't concerning themselves with creating phones, computers, cars, etc.?" It's a great question.

Matt Argersinger: It is a great question, Sam, because there's two sides to the argument. One, I would say, of course a company like Apple and Alphabet in particular has a tremendous advantage because it's the platform that's in your hand.

Hill: Oh, I thought you were going to say they have a tremendous advantage called mountains of cash.

Argersinger: That too. But, I think in terms of the phone itself and being the ease of going into most places now and using your phone to pay for things, that's a tremendous advantage. It's an easy hurdle for a lot of customers to do. At the same time, Apple has the hardware, but it doesn't necessarily have the network size that the credit card companies have or PayPal has. So, I feel like, in a world with a war on cash, those two sides can certainly exist and win battles here and there. I do think Apple does have an advantage, and if Apple Pay becomes more significant, they could have a major leg up.

Jason Moser: I think one of the things we try to do in investing is identify either short-term catalysts or long-term trends or value that's going to be created. Clearly, they payments market is one of the biggest long-term trend opportunities out there, I think. So, that's great for identifying it. I think, to take it one step further, there are going to be multiple winners. I think we've harped on that before on Market Foolery. Looking at it from the perspective of finding a basket, a collection of some of the companies that you think are going to benefit the most, and it can range all the way from the big dogs down to smaller, riskier plays to help mitigate that risk a little bit. Just, a great opportunity to always keep an eye on.

David Kretzmann: The more I look at this, the harder it is to see Visa or MasterCard getting disrupted any time soon. I feel like they win out, no matter whether you're using Apple Pay, PayPal, whatever platform it is. And they have a global network. So I think they're in a dominant position to win out, regardless of which of those platforms actually gains an edge.

Argersinger: Yeah. And I would say, don't discount the idea that there could be consolidation in this market further. We talk about technology companies like PayPal, Square. Those could be nice fits for companies like Apple, Alphabet, even a company like MasterCard that has lots of cash to put to work. There could be some acquisitions that could really shake up this war on cash.

Hill: One of the things I like about this question is, we see this dynamic play out in other industries, where there are opportunities for investors that are essentially pure play, and it's a company or business that's entirely focused on one thing. Then, you have the usual suspects of behemoths out there that have a footprint in it as well, whether it's Alphabet or Microsoft or insert-name-of-tech-giant.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Chris Hill has no position in any stocks mentioned. David Kretzmann owns shares of Alphabet (C shares) and Mastercard. Jason Moser owns shares of Apple, Mastercard, PayPal Holdings, Square, and Visa. Matthew Argersinger owns shares of Alphabet (C shares) and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Mastercard, PayPal Holdings, and Visa. The Motley Fool owns shares of Square. The Motley Fool has a disclosure policy.