The world of payments is undergoing unprecedented, system-wide disruption. And, as is almost always the case, the key driver is technology.
The coronavirus pandemic accelerated a global shift towards “anytime, anywhere” payments, which had already started emerging in the face of the global ecommerce boom. As such, more of us than ever are adopting transparent mobile payment experiences enabled by smartphones and always-on internet availability.
In fact, the value of global digital payments transactions has increased from $3.4trn in 2017 to $7.5trn in 2021 and is forecasted by Statista to grow by 12.8% per year until 2026 reaching a total value of $15.8trn.
This digital shift is borne out of a need for underlying payments systems that are more efficient than those that currently prevail in our Western economies.
Systems that have been in place for decades and which are complex and multi-layered and create punitive costs for merchants and consumers. The digital wallets of the future will embed all this infrastructure into one “closed loop” that will not just be cheaper, more flexible and more transparent but also more practical, safe and secure.
The digitisation of our payment systems is also sustained by the desire of modern, digitally connected consumers to have payments systems that are more personalised and frictionless. After all, this is the sort of digital experience they have grown accustomed to in other areas of their lives in the past few decades.
This means adoption of new, exciting features such as buy now pay later (which enables customers to use more flexible credit options for online purchases) and invisible payments (where consumers can pay for goods in-store without ever touching a checkout counter). But it also means entirely new sectors such as digital currencies – the collective term for the increasing number of digital forms of money that are on the rise.
Still, although the shift from cash and credit to cashless systems is well underway, there remains a long road ahead before this structural theme reaches full maturity.
Consider, for example, that just 25.7% of adults in the US and 26.7% in the UK are going to use their smartphones at a point-of-sale terminal this year. That compares to 40.4% in China, where the likes of AliPay and WeChat Pay have become market-leading retail forces.
Or what about the fact that more than 45% of consumers plan to use cryptocurrencies and invisible payments over the next few years. That’s an enormous jump on the number using them today, which in each case is less than 10%.
Then there’s the shocking reality that close to a third of the world’s adults – some 1.7 billion individuals – do not currently have a bank account. That’s a huge untapped market waiting to be unleashed.
The good news for investors is that the long-term secular growth potential of digital payments will only be unlocked by innovation. And that innovation is being driven by a growing pool of digital payments focused companies, both old and new.
Here are two examples we think typify the scale of the investment opportunity on offer:
Visa
Citing Visa in an article centred around the changing face of payments may, at first glance, be surprising. The company is, after all, the operator of one of the world’s three major card payment networks and has been around for a very long time.
But what’s really exciting about Visa from an investment perspective is that it is truly embracing the wave of digitisation immersing its sector.
It has maintained an economic moat by leveraging its position as a traditional incumbent player to team up with firms in new-age payments and crypto. This includes everything from partnerships with credit card technology firm Deserve and cryptocurrency provider BlockFi to acquiring open banking platform Tink and cross-border payments player CurrencyCloud.
In taking such an M&A-heavy approach, the company has managed to swim at a time when it could very much have run the risk of sinking.
Take its recent third quarter earnings for example. The company grew across all its traditional metrics, with net revenue rising 19% to $7.3bn and net income jumping by nearly a third to $3.4bn – a whopping margin – and with both exceeding analyst forecasts.
But it also reported improvements around key payment sector-specific indicators, with payments volumes, cross-border volume total and processed transactions all rising significantly.
Marqeta
This company may be less well-known, but its role as a payment processor allows it to be a critical enabler of the digital payments revolution.
Specifically, Marqeta provides the world’s first open-API modern card issuing platform. In other words, it allows clients to issue cards in physical and virtual formats while also processing card payments through its platform.
Marqeta’s technology allows end-to-end integration across all sorts of different platforms and payment services. This enables the company to communicate far more effectively and, in turn, deliver a superior service to its clients and customers.
The company has already teamed up with buy now pay later giant Klarna to provide the technology that allowed the latter to control its entire transaction flow, from issuing cards to authorising transactions to real-time funding.
Likewise, the company recently partnered with Western Union to power a real time multi-currency digital wallet and banking platform that allows full remittance services to be offered online with monies dispersed to a physical or virtual card.
The road ahead
These are just two examples of a growing number of quality stocks powering today’s digital payments revolution.
As with any trend, the biggest returns are usually made by those who are early investors. And so, with digital payments technology becoming increasingly mainstream with each passing day, now could be an excellent time to get on board this global megatrend.
Rahul Bhushan is co-founder of Rize ETF. The views expressed above should not be taken as investment advice.