2 Companies Leading The Digital Payments Revolution

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. More of us than ever are now adopting transparent payment experiences enabled by smartphones and “always-on” internet connectivity.

The value of global digital payments transactions increased from $USD 3.4 trillion in 2017 to $USD 7.5 trillion by the end of 2021. The same value is now forecasted by Statista to grow by 12.8% YoY to reach a total estimated value of $USD 15.8 trillion by 2026.[1]

This digital shift is borne out of the need for underlying payments systems that are more efficient than those which currently pervade Western economies. Systems that have been in place for many decades and which are unnecessarily complex and multi-layered creating punitive costs for both merchants and consumers. Systems that are also distributed in ways that don’t solve for customer experience but rather for large, established banking monopolies.

In the future a new system is going to pervade Western society; one which solves for the customer experience and one which leverages a device we all have: the smartphone. These “digital wallets” of the future will embed all of the payments infrastructure that exists separately today into one “closed loop” system that will not just be cheaper and more flexible and transparent but also more practical, safe and secure.

The digitisation of our payment system is sustained by the desire of today’s modern, digitally-connected consumers to have experiences that are more frictionless. After all, these are the sorts of experiences they’ve grown accustomed to in almost all other areas of their lives.

Adoption of new payment modes like 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) are therefore attractive. But we’d also extend this to new areas like digital currencies, where an increasing number of digital forms of money are on the rise.

Still, although the shift from cash and credit to truly mobile modes is well underway, there remains a long road ahead before this structural theme can achieve full maturity.

Consider, for example, that just 26% of adults in the US and 27% in the UK are going to be using their smartphones at a Point-of-Sale terminal this year. That compares with 40% in China, where payments experiences powered by the likes of AliPay and WeChat have already become the norm. But the percentages in Western are expected to catch up. We’re already seeing them catch up.[2]

Consider that more than 45% of consumers plan to use cryptocurrencies and invisible payments in the next 1 to 2 years.[3] That’s an enormous jump in the percentage from those using them today, which in both cases is less than 10%.[4]

Then there’s the reality that close to a third of the world’s adults – some 1.7 billion individuals – don’t yet have a bank account.[5] That’s a huge untapped market waiting to be unleashed not just for digital payments but also for digital currencies.

The good news for investors is that the long-term secular growth story for digital payments is likely to be unlocked by innovation. Our investment theme as of writing covers 69 companies across five subsectors which are Card Payment Networks, Payment Processors, Payment Infrastructure Providers, Payment Services and Solutions Providers and Digital/Crypto Currency Pioneers.

These are leaders and innovators driving the transition towards tomorrow’s digital-first payments economy. Innovation is at the core of these businesses. Here are two that we believe epitomize this innovation.

1) 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 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 cryptocurrencies. 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.[6][7][8]

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 Q3 2022 earnings for example. The company saw growth across all its traditional metrics, with revenue rising +19% to $USD 7.3 billion and net income jumping by nearly a third to $USD 3.4 billion – a whopping margin – and with both exceeding analyst forecasts.[9]

But it also reported improvements around key payment sector-specific indicators, with payments volumes, total cross-border volume and processed transactions all rising significantly.

2) 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.[10]

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.[11]

The road ahead

These are just two examples of companies powering the digital payments revolution.

As with any trend, the biggest returns are usually made by those who are early investors. With digital payments technology becoming increasingly mainstream with each passing day, now could be an excellent time to get on board this global theme.

Related ETF

PMNT: Rize Digital Payments Economy UCITS ETF

References

[1] Statista Digital Payments Outlook 2022. Available at: www.statista.com

[2] Ibid

[3] Cryptonews, “Almost 1 in 2 Respondents Plan Use Crypto For Payments In 2 Years – Survey”, October 2021. Available at: https://cryptonews.com/news/almost-1-in-2-respondents-plan-use-crypto-for-payments-in-2-years-survey.htm

[4] Ibid

[5] Forbes, “1.7 Billion Adults Worldwide Do Not Have Access To A Bank Account”, September 2018. Available at: https://www.forbes.com/sites/niallmccarthy/2018/06/08/1-7-billion-adults-worldwide-do-not-have-access-to-a-bank-account-infographic/?sh=3a61b0a64b01

[6] Bloomberg, “Visa Bets on Deserve After BlockFi Crypto Credit Card Success”, October 2021. Available at: https://www.bloomberg.com/news/articles/2021-10-27/visa-bets-on-deserve-after-blockfi-crypto-credit-card-success

[7] VISA, “Visa Completes Acquisition of Tink”, October 2022. Available at: https://investor.visa.com/news/news-details/2022/Visa-Completes-Acquisition-of-Tink/default.aspx

[8] CryptoPotato, “Visa Acquires Ripple Partner CurrencyCloud for $925 Million”, December 2021. Available at: https://cryptopotato.com/visa-acquires-ripple-partner-currencycloud-for-925-million/

[9] VISA, “Visa Inc. Reports Fiscal Third Quarter 2022 Results”, July 2022. Available at: https://s1.q4cdn.com/050606653/files/doc_financials/2022/q3/Q3-2022-Earnings-Release.pdf

[10]Marqeta, ” Marqeta powers new Klarna Card”, June 2022. Available at: https://www.marqeta.com/blog/2022/06/02/klarna-card  

[11] Marqeta, ”Marqeta partners with Western Union in Europe”, June 2022. Available at: https://www.marqeta.com/blog/2022/06/06/western-union