The coronavirus pandemic has accelerated the move away from cash which presents a big opportunity for investors
Thursday 02 Jul 2020 Author: Steven Frazer

In 2020 you are no longer faced with the dilemma of fumbling around in your pocket for change to pay for your coffee as the train readies to leave. Instead you can simply tap your debit or credit card, or even your phone or smartwatch, on the machine and get on your way.

This is the modern world of cashless, digital payments. It might not be what we want all of the time, but there is safety and convenience that most people appreciate.

In this article we examine this fast growing industry and explain why ordinary investors might want to gain exposure to the theme.

We also highlight some of the industry’s most significant players, emerging names, and offer a selection of companies and funds that will give you exposure.

DIGITAL PAYMENTS LANDSCAPE

The rise of digital cashless transactions is hardly new. People have been paying for more stuff electronically for years, usually with debit or credit cards. But the increasing shift to online shopping, technology improvements, such as better smartphones and smartwatches, and the emergence of digital wallets has created a boom in the digital payments industry.

This has drawn interest from lots of fund managers, from mainstream global growth funds, like the JPM Global Unconstrained Equity Fund (B235QT6) and the Liontrust Global Equity Fund (3067916), to thematic specialists, such as tech investor Polar Capital Global Technology Fund (B42W4J8) and Robeco Global Consumer Trends Equities (BZ1BV36), which does what it says on the tin and backs consumer growth stocks.

The global Covid-19 pandemic has greased the wheels of transition and accelerated the switch for millions, says Stephen Yiu, chief investment officer at Blue Whale Capital and lead manager of the Blue Whale Growth Fund (BD6PG78), with payment platforms and merchants using dirt cheap debt to pay for digital investment.

People are using digital payment options to avoid contact and the spread of infection that direct cash handling risks, while it has also made social distancing easier to manage during these testing times. But it is the mass closure of shops during lockdown that really pushed people online and, in many cases, use digital payments for the first time.

For example, at the end of April Amazon revealed itself as one of the big winners of the coronavirus pandemic.

It announced revenue of $75.4 billion in the first three months of the year as millions of consumers used the platform to buy healthcare and antiseptic products, bits and pieces for odd jobs around the home, food and other necessities and much else during lockdown.

That meant a better than expected 26% year-on-year revenue jump, and was calculated at more than $33 million of sales an hour.

Black Friday sales in November 2019 showed an 82% global increase in purchases made with mobile wallets compared to 2018, according to data compiled by Research & Markets.

The preference for cashless payments online and one-touch payments offline is changing the e-commerce landscape. Buyers want to be able to pay anytime, anywhere and with minimum hassle.

According to Verdict data, around 720 billion digital transactions will be made in 2020, up from 641 billion in 2019. That could be worth more than $4.4 trillion this year, if market and consumer data firm Statista is right. Compound average growth is forecast to run at 17% a year over the next five years, projecting nearly $8.3 trillion of digital payments by 2024.

By then, Verdict estimates that we’ll be making in excess of 1.1 trillion transactions globally, over smartphones and other connected gadgets.

PUSHBACK ON CASHLESS

Plenty of people still prefer to use cash. It is often the best, and sometimes only, way to shop at street markets or buy items in small stores like your local newsagent or corner shop.

There has also been push back from consumers and campaigning organisations that digital payments can be a challenge for vulnerable groups like the elderly, those with poor credit histories or simply the less tech savvy.

In Sweden for example, which leads the world in cashless payments, there is a growing feeling that the pace of change to cashless is moving too fast.

In Stockholm’s Odenplan square, at the heart of the city centre and a hotspot for visiting tourists, you’ll struggle to buy a cup of coffee and a bun with cash today. You can't pay for you weekly groceries shop in cash, while you can no longer use coins or notes to hop on one of the capital’s buses, just like in London.

According to Riksbank, Sweden’s central bank, cash retail sales transactions in the Scandinavian nation have dropped from around 40% to below 15% over the past decade. Data such as this has led Swedish National Pensioners’ Organisation to lobby the government on behalf of its 350,000 members to force shops, cafes and other businesses to accept cash in Sweden for as long as people have the right to use it.

Despite these issues, governments around the world continue their push towards cashless societies. Ostensibly, having a digital paper trail for all transactions would decrease crime, money laundering and tax evasion. 

This is driving favourable regulation, which seeds greater adoption. According to data from digital payments researcher Mordor Intelligence, electronic payments in the UK have ‘experienced constant and sustained growth,’ with debit cards overtaking cash as the most popular form of payment in recent years. In 2016 about a quarter of in-store payments were made digitally, but that is now well over 50%, says Mordor.

What is a digital wallet?

A digital or e-wallet is a way of electronically storing all your payment details in one place. They can make it safer and simpler for you to make cashless purchases online and in-store.

As well as storing your payment details for online payment systems, like PayPal, Google Pay and Apple Pay, digital wallets can also connect with traditional bank accounts and store your credit and debit card information.

According to Blue Whale’s Stephen Yiu, data shows that having someone’s financial details recorded on a digital wallet increases the chance of a customer completing an online purchase by 50%.


STOCKS TO PLAY A CASHLESS SOCIETY

In simple terms there are two types of digital payment provider; the Mastercard/Visa duopoly, or the digital wallet providers, such as PayPal, Apple Pay, Amazon Pay, Google Pay, Shopify, Square, Worldpay and a long list of others. Our top stocks to buy are Mastercard, Visa and Paypal.

MASTERCARD (MA) $289.34

VISA (V) $189.27

According to Blue Whale’s Stephen Yiu, Mastercard and Visa are the lower risk ways into this growing space with one or the other appearing on the front of any of the debit or credit cards sat in your wallet or purse. Visa, which has the larger market cap of the two ($403 billion versus $290 billion), has a greater
US domestic and debit card slant, while Mastercard has a modest advantage in credit cards.

Both make their money by taking tiny percentage charges every time a one of their cards is used. But with billions of transactions every year across millions of merchants, that small cut on card payments really adds up.

Revenue this year is forecast at $15.6 billion (Mastercard) and $20 billion (Visa), with net income of $6.5 billion and $11.1 billion estimated respectively. Operating margins run at more
than 50%.

The stocks trade on 12 month price-to-earnings multiples in the region of 35-times, and while they admitted transaction volumes slowdown during lockdowns (travel spending has been very hard hit), Yiu believes extra online shopping will have offset much of the decline this year.

PAYPAL (PYPL) $170.87

PayPal is the dominant digital wallet provider, and our top pick, with more than 20 million online merchants signed up. To put that into perspective, Facebook has only half that number of merchants advertising across its ecosystem, Square says it has about 2 million merchants while Worldpay has 400,000.

PayPal was the first digital payment company of scale, and it is probably the most familiar to readers. This is an intensely competitive space with new entrants emerging all of the time. For example Stripe, the private digital payments provider popular with start-ups, was only set up 10 years ago by Irish brothers Patrick and John Collison, but was valued last year at $35 billion.


THREE GOLDEN RULES FOR DIGITAL WALLETS

Easy to use

Competitively priced

Trusted by consumers

Source: Stephen Yiu, Blue Whale Capital


PayPal has used its first mover advantage to good effect by continuing to evolve by investing in the business. This has created a network effect, a virtuous circle where the company gets bigger by attracting more merchants to its platform, which makes it more attractive to new merchants, and so on.

Yiu believes there are three factors more important than any others when considering digital payment platforms; ease of use for consumers, cost to merchants and, above all else, trust. When it’s your bank and credit card details on the line, you need to be sure that your information will be held securely and used responsibly. That’s another advantage for PayPal.

But competition does cap profit margins, at 23.2% for PayPal last year. They are creeping higher, largely thanks to its current dominant position, with 25% predicted over the coming year or two, but PayPal is never likely to match the 50%-plus of the card giants. Still, the business has the capacity to grow much faster as the share of cardless digital transactions escalates.


FUNDS TO PLAY A CASHLESS SOCIETY

For investors looking to use funds to get exposure to the rapidly growing digital payments space, here are three good options:

Trojan Global Equity (B0ZJ5S4)

% of portfolio: Visa 5.6%, PayPal 6.8%

Invests globally with a longer-term remit of at least five years, is tech heavy and includes American Express, Google Pay-parent Alphabet and UK-listed credit checker Experian (EXPN). Run by joint managers Gabrielle Boyle and George Viney, the Trojan fund has outstripped its Investment Association Global benchmark over one, three and five years by some margin, 98.7% versus 59.3% on the five year measure.

Allianz US Equity (B4N1GS7)

% of portfolio: PayPal 2.3%, Mastercard 2.3%

The Allianz fund prefers large companies with good prospects for increasing profits in the years ahead and which trade on attractive valuations. That valuation caution possibly explains its lukewarm performance in rcent years, where it has struggled to beat its IA US benchmark. The fund draws from healthcare and other consumer sectors but is currently most exposed to finance and technology, with stakes in Alphabet, Amazon, and Apple alongside several of the big digital payments specialists.

Blue Whale Growth Fund (BD6PG78)

Stakes: Mastercard, PayPal, Visa (all in top 10 holdings 31 May)

This is a portfolio of technology-based growth companies where manager Stephen Yiu hopes to pick out best-in-class ‘winners’. This is a very concentrated fund of about 25 stocks in the US and Europe which it follows daily, although that makes it fairly high risk. It’s a young fund, set-up in 2017 but it has smashed its IA Global benchmark in each of the past two years, with 18.2% and 19.9% returns respectively.

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