In payments, we think economic moats remain the strongest at the center of the ecosystem, where Visa (V) and Mastercard (MA) maintain massive networks of banks working on their behalf to add consumers and merchants. The role these companies play in setting standards is becoming more important as payment options proliferate. On the other hand, card issuers are competing heavily for spending volume, merchants are taking back control of loyalty and rewards, and software is replacing hardware at the point of sale. This leaves issuers like American Express (AXP) and hardware providers like Verifone (PAY) in a difficult position. American Express' strong corporate business, reputation for superior customer service, and direct connections to merchants and cardholders give the wide-moat firm time to adapt.

We separate our payment coverage into three categories. The growth leaders, Visa and Mastercard, possess immense competitive advantages and should experience volume growth and increasing profits for years to come. The change navigators, encompassing most of our narrow-moat payment coverage along with American Express, are adapting to an evolving competitive environment, require closer monitoring over time, and are worth lower multiples. The value traps--Verifone and Square (SQ)--are closely tied to the declining hardware industry and could be dangerous for long-term investors.