There is a huge global opportunity for digital payments, encompassing card, mobile and online, writes Rachel Winter.
When was the last time you paid for something in cash? If you're struggling to remember, you're certainly not alone. The UK has been one of the fastest adopters of digital payments, so it's no surprise that the shares of banknote printer De La Rue have fallen by more than 75% over the past two years.
The UK is considered to be one of the most cashless societies in the world, and it is easy to forget that other countries are far behind. Even the US, home of Big Tech, lags behind the UK in terms of contactless payments.
The upside is that there remains a huge global opportunity for digital payments, encompassing card, mobile and online. A quick glance at the top 10 holdings of the world’s largest momentum-focused ETF, iShares Edge MSCI USA Momentum Factor (MTUM), reveals that three payments companies, Visa, MasterCard and PayPal, account for more than 12% of asset value.
Data provider Nilson estimates that there were 22 billion credit, debit and prepaid cards in the world at the end of 2018. Nilson expects this figure to grow to 29 billion within five years, and that is before we even start to consider digital wallets (see chart). PayPal is the most popular wallet, with more than 295 million active accounts as of the third quarter 2019. Momentum is building. As more consumers choose PayPal, more merchants adopt it as a means of payment, which in turn forces more consumers to use it, and the benefits of scale become self-perpetuating.
Many physical stores now accept mobile PayPal payments, allowing users an easily accessible and safely stored range of preferred payment methods. The company’s most recent set of quarterly results highlighted total payment volume growth of 25%. PayPal has just expanded further after acquiring a Chinese payment business. The deal completed in November 2019 and made PayPal the first foreign payments company to be licensed to provide online payment services in China.
Mobile wallet use worldwide
Source: Mobile Wallet Trends Annual Report, GATE, April 2019
Big tech betting on digital payments
Further evidence of the opportunity in payments is the fact that Big Tech has established itself in the market. Apple’s digital wallet, Apple Pay, is accessible through an iPhone, and the company is soon to launch the Apple Card credit card in partnership with Goldman Sachs.
Google’s digital wallet is Google Pay, and the company is expected to launch a current account in partnership with Citigroup next year. Amazon has issued a credit card in conjunction with JPMorgan offering additional benefits for Amazon Prime subscribers.
Another great example of momentum in the digital payments space is India. Only three years ago, India was one of the most cash-dependent economies in the world. In a shock move in 2016, India’s prime minister, Narenda Modi, announced that high-value bank notes, accounting for 86% of the value of cash in circulation, would be cancelled overnight. The primary motive was to stamp out the black market.
The move was widely criticised, but it greatly advanced the take-up of digital payments. People had no choice but to deposit their cash in the banking system. Millions of them were forced to open bank accounts for the first time. In 2014, just 53% of adults had bank accounts, but that number has risen to more than 80%. Indian online payment provider Paytm quickly garnered 100 million users, rapidly turning it from a start-up into the market leader.
Most major payment firms are listed in the US, and it’s easy to invest directly in the shares of Visa, MasterCard and PayPal. The Chinese online payment market is dominated by Alibaba and Tencent; both firms feature among the top 10 largest listed companies in the world and can be purchased directly.
Many technology collectives are heavily exposed to digital payments. The Polar Capital Technology trust holds several firms mentioned, and the market capitalisation of the trust has risen by more than 35% in the year to date. Terry Smith’s renowned Fundsmith Equity fund counts PayPal as its second-largest holding.
In 2018, the World Bank estimated that 1.7 billion adults around the world were still without a bank account. This number is falling rapidly, further supporting the momentum in the digital payments revolution.
Rachel Winter is associate investment director at Killik & Co.