The worldwide shift from cash to physical cards and then digital payments offers tremendous opportunities for investors, as it is driving strong secular growth in a number of different companies. Payment possibilities are evolving and increasing at a rapid pace with new providers, platforms, and tools launching on a regular basis. Minimal barriers to entry for merchants and consumers, ease of use, convenience, low cost, and high security are key drivers of the accelerating adoption of digital payments. In its Digital Payments Q&A secured, opens in New Window, Jennison Associates provides insights into the digital payments world and potential investment opportunities.
Landscape and differentiators
Digital payments can be anything related to digital commerce–mainly online shopping transactions or mobile POS (point-of-sale) payments, offline shopping using the latest digital payment technology, and peer-to-peer (P2P) payments. There are several types of players in this digital payment ecosystem with extraordinary potential: incumbents, players built on mobility, merchant acquirers, and up and coming disruptors. While these different players may chip away at each other’s terminal earnings value, the economic pie is also growing at a remarkable pace. The ongoing global adoption of smartphones and online shopping has led to the creation of many different payment options and should allow for many different winners in the digital payment revolution. For the incumbent players, card networks, and processors, there are multiple new opportunities to fuel growth. For consumers, who are clearly the biggest beneficiaries, there are more choices, more security, and more convenience.
Incumbent players, Mastercard and Visa maintain dominant positions in an industry with extremely high barriers to entry. They have business models with very high operating leverage that is defensible. Between the two companies, there are over five billion cards globally that are accepted at hundreds of millions of cash registers. They process about 25,000 transactions per second. The ongoing transition from cash to electronic continues to offer a long runway. There are significant benefits of scale inherent in the business model for these incumbents. There is very little cost to onboard a new merchant that starts accepting cards or a consumer that gets a new card, so fees generated by these new relationships flow directly to the bottom line, resulting in significant incremental margins and profitability.
Key statistics for industry leaders Mastercard and Visa
transactions per second globally
market share for U.S. credit card purchases
Source: Company websites.
Mobile innovation fueling the rise of cashless societies
Mastercard and Via are also at the forefront of mobile payments with Masterpass and Visa Checkout. Mobile payments can be initiated via SMS text message, mobile browser, App, contactless near-field communication (NFC), or quick response (QR) code. With these applications, they are able to reach new markets around the globe that historically were only available to credit card holders. Again, these are business models with boundary-less, highly profitable products with a global potential.
Diversified internet platform companies, Alibaba and Tencent are also leaders in digital payments, as they’ve been able to capitalize on the lack of traditional banking infrastructure and credit card services in emerging markets, especially China.
PayPal is another major player in the space and is the largest e-commerce payment enabler in the U.S and many other developing countries. Besides having its growth fueled by the natural expansion of ecommerce transactions, it also benefits from its “platform built for scale” allowing PayPal to easily and very profitably extend new services and products among its global, consumer, and business clients.
There are several newer entrants into mobile payments that could prove to be game changers. Take Square as an example, which is a payments leader with a differentiated offering designed to seamlessly integrate multiple aspects of financial, customer, marketing, and employee management into one cohesive ecosystem. Square is effectively locking in merchants by creating a one-stop solution – from point-of-sale to managing transaction data to incorporating all of this into running the overall business. Square is easy to obtain for merchants and starts adding value once the customer makes that payment/swipe. Through the on-boarding process, Square can offer modules that include inventory control, appointment software, employee payroll, marketing, and receivable-backed loans – a unique idea and one of its biggest potential vectors for growth. This business model is impressive with technology that will be difficult to duplicate. There are also high incremental margins, “sticky” customer engagements, and long duration recurring revenues.
Companies with innovative solutions, a strong, scalable platform, and the ability to execute globally are the type of business models that are needed to win. These types of companies have the potential for long-duration recurring revenue growth along with extremely high incremental margins. Economic value can be compounded by identifying and investing with conviction in those companies most poised to capitalize on this rapid change.
The views expressed herein are those of Jennison Associates LLC (Jennison) investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. This information is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services. This information does not constitute investment advice and should not be used as the basis for any investment decision. This information does not purport to provide any legal, tax, or accounting advice. Certain information in this material has been obtained from sources that Jennison believes to be reliable as of the date presented; however, Jennison cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. Jennison has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.
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1013018-00001-00 Ed. 12/2018 For compliance use only