No more splashing the cash - payments go digital

Posted by Liz Rees in Latest insights category on 09 Jan 20


When stocking up over the festive season, the chances are that you paid with a swipe or tap rather than the increasingly outmoded cash or cheque. The rapid growth in digital payments has provided growth opportunities for providers with superior technology and service offerings.

The way we pay

According to McKinsey & Company, global payments companies’ revenues are forecast to reach $2.7 trillion by 2023.

The shift away from cash is the biggest driver. In the UK, cards overtook cash payments in 2018 as contactless transactions became more popular. Cashless payments now account for 65% of all transactions. There is still room for growth as in some Scandinavian countries, over 80% of purchases are now cashless whereas in China it is only a third of payments.

Companies that process payments used to be considered unexciting low-tech businesses but the adoption of digital money has transformed them, with Mastercard, Visa, PayPal and Amex all thriving.

The online opportunity

It has become easier to transact online with businesses offering a broader selection of goods, faster delivery, secure payments and 24-hour trading. Internet retailing is expected to grow rapidly over the next five years.

The digital economy includes social media, apps, search engines and web portals that all rely on digital payments.

New leaders

Traditional payments companies are consolidating while fending off competition from technology start-ups. The industry has seen significant merger and acquisitions activity.

Last year, Fiserv acquired payment processor First Data for $22bn. Soon after, Fidelity National Information Services agreed to buy World Pay for around $35 billion, the biggest deal to date.

A third mega-merger saw Global Payments takeover of Total System Services for $21.5bn. Total System is a bank card issuer and processes payments, whilst Global Payments enables merchants to accept different payment types across a variety of distribution channels. In addition, Earthport, a UK business, was acquired by Visa whilst PayPal bought iZettle.

In China, Alibaba’s Alipay and Tencent’s WeChat Pay control much of the digital payments market. Most consumers and businesses use these two mobile networks, which handled more than $37tn in mobile payments last year, although still represented only 2% of bank deposits in China.

Digital payments in India are expected to grow by over 20% per annum in the next 4 years, the fastest in the world, showing the huge potential of a country where only 25% of people own smartphones. Citizens have been encouraged by the government to embrace mobile banking.

Losers too…

It’s good to back winners but also important to avoid companies which lose out to disruption. For some, digital has decimated demand. Many retailers (and their property landlords) have lost out due to the ease of shopping online.

Last November De La Rue, best known for printing banknotes, cheques and passports suspended dividend payments and warned shareholders that there is ‘material uncertainty’ about its future. Oversupply in the market for banknotes has put pressure on prices and profits.

Technology evolving all the time

New technology companies are emerging all the time. There will be failures but others may be the success stories of the future. Most start-ups are currently backed by private equity investors but some are likely to list on the stock market.

Facebook’s ‘Libra’ project is developing a new global digital currency that aims to shake up the global payments market and make it virtually free for users to send each other money. With 2.7bn users of their site, this offers considerable potential. Up to 28 payments companies have backed the project, including Visa and Mastercard, and will each commit $10m.

The US Federal Reserve, however, has warned that digital currencies pose regulatory challenges and even risks to the financial system.

Outlook

As the shift from cash to digital is finite, we are likely to see further consolidation with leading companies snapping up smaller players to increase their market share.

Many companies will continue to benefit from the digital payments evolution, from card providers to the developers of software that make the process secure and safe from fraudsters.

Nevertheless, scammers stole £1.2bn in 2018 (according to a UK Finance report) by accessing cards and accounts illegally. The payments industry is also vulnerable to cyber-attacks; a brief outage in Visa Europe’s operations caused chaos for millions.

Which funds are embracing digital?

Global funds with exposure to payments companies, include Morningstar gold-rated Fundsmith Equity (PayPal and Facebook) and silver-rated Rathbone Global Opportunities (Mastercard, Visa, PayPal and Global Payments).

Silver-rated US fund T.Rowe Price US Large Cap Growth Equity invests in Facebook, Visa and Global Payments. For investors preferring to back companies in higher growth Asian markets, silver-rated Fidelity Emerging Asia has large positions in Alibaba and Tencent.

Technology funds may invest in the innovators in payments. Polar Capital Global Technology holds Alibaba and Facebook. Specialist fund AXA Framlington Fin Tech has the greatest exposure to the payments industry with PayPal, Fidelity National Information Services, Global Payments, Visa, American Express, Worldline and Alibaba all featuring in its top 10 holdings.

Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.