By: Phil Kernen
Last year we wrote a post about four investing themes we are following. One of these addressed the increasing use of digital payment options when shopping on and offline. Digital payment alternatives have been around since the mid-1990s, but adoption was slow in the U.S. at first for reasons related to security and difficulty of use. As we addressed those twin challenges and more of our financial lives move online with the global explosion of mobile phone usage, consumers have taken up digital payments. The factors that supercharged e-commerce growth in 2020 are the same forces driving greater use and acceptance of digital payments. Investors would do well to stay up to date.
Few pure plays
In reviewing a list of leading digital payment platforms, many of the most heavily used are large technology companies for whom digital payments are growing but remain a small part of their total revenue stream. Amazon has experimented for years with online payment options but launched Amazon Pay in 2013. Apple Pay was introduced in 2014, followed in 2015 by Google Pay and Samsung Pay. Facebook took a different route in announcing Libra, a new cryptocurrency, though plans are changing following months of intense regulatory pressure.
It should be no surprise that credit card issuers like American Express and Mastercard are also making progress as they fight to stay relevant alongside shifting consumer tastes. Visa, already the largest credit card issuer, announced last year they were buying Plaid, a small firm that provides the technical infrastructure supporting an array of next-generation financial applications. The deal collapsed after the Justice Department challenged it, arguing that owning Plaid would only serve to eliminate a threat to Visa’s business and diminish competition.
Looking beyond the diversified giants, there are examples of publicly traded companies whose primary business focuses on offering digital payment options for merchants and consumers. Since 2015 when Paypal spun off from eBay and Square went public, both companies have competed directly, developing products and services to expand their payment offerings. In addition to their merchant focus, Paypal owns Venmo, which allows account holders to transfer funds via a mobile phone app. Paypal even announced last year they would begin accepting Bitcoin and other cryptocurrencies on its platform.
Development of new payment options.
Growing e-commerce markets drive greater acceptance of digital payments, but it works in the other direction too. Every year new payment solutions are created or reach critical mass to degrees that stimulate e-commerce growth. Consider biometric authentication, which includes fingerprint scanners, facial recognition, voice identification, or eye scanners. In 2018, biometrics authenticated an estimated $124 billion in payments. A study from Juniper Research estimates that by 2023, 1.5 billion phones will have facial recognition, and biometrics will authenticate more than $2 trillion worth of purchases.
All this adds up to a rapidly developing electronic payments market where large and small companies are battling for the broadest merchant and consumer acceptance. Growth leading up to 2020 was strong, but a pandemic and an accelerating embrace of online purchase methods driven by improved user experience supercharged both the opportunity and growth potential for companies and investors alike.
*The reader should not assume that an investment in the security identified or described was or will be profitable. Any reference to a specific company does not constitute a recommendation to buy or sell that company.