The banking sector has undergone a major transformation in recent years, with the internet changing the way that people use their accounts. For example, banking on your mobile or tablet is becoming increasingly popular and, looking ahead, it seems as though it is a product that will gain in use especially among the younger generation, many of whom may never have visited a bank.
It seems logical, then, for investors to buy a slice of a company which is focused on providing mobile and tablet apps for banking and payment solutions. Furthermore, the company in question has some major blue-chip clients such as RBS and HSBC, and its products are hugely successful, innovative and easy to use. In addition, it has the backing of major corporations such as Telefonica and Santander, which indicates that there is substantial potential for it to make a sizeable profit in the long run.
The Bottom Line
However, Monitise (LSE: MONI) (NASDAQOTH: MONIF.US) is underperforming in one key area: its bottom line. Under previous management, it had been expected to post a profit at the operating level (rather than at the bottom line) in 2016. However, with a new management team that is changing the companys strategy and switching its model to being subscription-based, it seems unclear when Monitise will begin to break even.
This is a real issue for investors in the company, since the mobile payments solutions space is extremely popular at the present time and, looking ahead, a disruptive technology could come along that takes over. In other words, Monitise should be making hay while the sun shines when, in reality, it is still struggling to turn a great product into a great business.
Clearly, Monitise remains a potential takeover target. Its systems and technology are robust and ready to be incorporated within a leading bank and, should it make economic sense to buy Monitise rather than a bank set up its own systems, then a leading bank could be tempted to make an offer for it.
The problem, though, is that a takeover approach may not happen. And, if it doesnt, then Monitise may not prove to be a strong investment play over the medium to long term. As such, a more traditional banking solution may be the best idea for individuals seeking to invest in the banking space, with a bank such as Lloyds (LSE: LLOY) (NYSE: LYG.US) providing excellent value and income potential.
For example, Lloyds currently trades on a price to book (P/B) ratio of just 1.25, which indicates that an upward rerating could be on the cards. Furthermore, it has a forward yield of 4.8%, which as well as offering superb income potential could also push the banks share price higher as demand for dividends looks set to increase. And, with Lloyds also having mobile and tablet payments solutions, it appears to cover all of the bases and is, in itself, future proof. As such, it appears to be a great buy on its own, while Monitise may be better suited to a watch list at the present time.
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Peter Stephens owns shares of HSBC Holdings, Lloyds Banking Group, and Royal Bank of Scotland Group. The Motley Fool UK has recommended HSBC Holdings. The Motley Fool UK owns shares of Monitise. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.