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Thanks to improvements in smartphones, mobile networks and payments technology, the traditional bank-centric payments system – based around cash and plastic credit cards – is increasingly being disrupted by faster, cheaper and often more secure mobile-based systems.
Across emerging markets, and among the young within developed markets especially, many are already ‘leapfrogging’ traditional payment systems and embracing the growing array of innovative alternatives.
Investors can now consider the BetaShares Future of Payments ETF (ASX: IPAY), which has been designed to provide exposure to leading companies innovating in the global payments sector.
The rise of innovative payment systems
There are several drivers behind the revolution in the payments system.
For starters, growth in smartphones worldwide is encouraging technological innovation to also turn them into handy payment devices – avoiding the need for cash or credit cards. Development of Near Field Communication (NFC), for example, provides for contactless communication between devices, which in turn has seen ‘pay-wave’ capabilities flourish.
Storing credit card information on a smart phone payments app – or ‘digital wallet’ – is an early example of the revolution underway in the payments system. Digital wallets allow users to make contactless payments with their phone, without the need for a separate credit card.
At present, these systems still tend to rely on credit card information stored within smartphones, which in turn are linked to established banks. But in time it’s conceivable that mobile-based payment systems could start to bypass traditional banks and credit card companies altogether.
Indeed, many users not yet engaged with traditional bank-centric payment systems – such as in emerging markets and among younger populations in developed markets – are already technologically ‘leap-frogging’ into the new payment systems.
In emerging markets, for example, McKinsey estimates that two billion individuals and 200 million small businesses today lack access to savings and credit. These individuals and businesses do not participate in the formal financial system, operating primarily in cash. The mobile money market is a gateway for providers to access these untouched markets.
Apart from youth and emerging markets, as the convenience, cost-saving and security of new payment systems evolve, it seems likely that broader adoption will also become evident.
As it stands, banks and credit card providers have been able to charge significant fees to handle transactions, to the detriment of small business and consumers. Quicker and cheaper mobile/digital payment systems may well attract more users over time, in turn placing downward pressure on bank and credit card fees – and forcing these traditional businesses to innovate as well.
Another avenue of payments innovation has been in the ‘buy-now-pay-later’ or BNPL space, with innovative companies such as Affirm in the U.S. operating in this space.
Reflecting both the growth in online commerce and the rise in mobile/digital payments across both online and offline payments, the adoption of innovative payment solutions is projected to grow strongly in the years ahead. According to Allied Market Research, global mobile payments are expected to grow from around US$1.5 trillion in 2019, to US$12.1 trillion by 2027 – implying compound annual growth of 35% p.a. over this period1.
Projections by WorldPay suggest the share of digital/mobile wallet payments could jump from around 25% of total point of sale transactions in 2020 to 33% within the next three years.
Source: WorldPay, Global Payments Report, 2021.
Exposure to leading global innovators
The index which IPAY aims to track provides exposure to up to 50 of the leading digital and mobile payment companies around the world, including companies with exposure to:
- Card networks: companies that provide services for controlling where cards are accepted, and facilitate transactions between merchants and card issuers. Example companies include Visa and Mastercard.
- Infrastructure and software: companies that provide hardware or software services for transacting payments across various channels, such as point-of-sale, mobile, and online. Example companies include Fidelity National Information Services and Global Payments.
- Processors: companies that handle front-end and back-end transactions and processing from various channels, such as credit cards, debit cards, point-of-sale payments, or buy-now-pay-later (BNPL) services. Example companies include Paypal and Square.
- Solutions: companies that provide products and services for accepting payments by a variety of payment methods. Example companies include Fiserv and Worldline.
Top 10 Companies in IPAY’s Index: 10 January 2022
|AMERICAN EXPRESS CO||6.4%|
|PAYPAL HOLDINGS INC||6.2%|
|GLOBAL PAYMENTS INC||5.7%|
|DISCOVER FINANCIAL SERVICES||5.2%|
|FIDELITY NATIONAL INFORMATION||5.1%|
|FLEETCOR TECHNOLOGIES INC||5.1%|
The transition from traditional cash and plastic credit card payments to an array of more innovative alternatives only seems likely to accelerate in the years to come, suggesting opportunities for investors wanting to tap into this emerging growth thematic.
The BetaShares Future of Payments ETF (ASX: IPAY) aims to provide a cost-effective and easily accessible way to gain exposure to some of the world’s leading digital and mobile payment companies.
1. Allied Market Research, Mobile Payment Market Outlook – 2027