Shifts from cash to digital payments driving opportunities in global equities

Kieran Moore

Companies that enable digital payments are set to grow their earnings in a meaningful way in the medium to long term, according to partner and portfolio manager at Munro Partners, Kieran Moore.

The shift from cash transactions to digital transactions in the form of a card, credit or debit, has taken off in the past several years, presenting compelling investment opportunities.

Moore says that there are four drivers of digital payments on a global scale. They are tap-and-go payments, e-commerce, emerging markets and business-to-business transactions.

“The proliferation of tap-and-go payments has caused an inflection point in the evolution of digital payments, with consumer behaviour towards cashless transactions changing markedly.

“Previously, consumers tended to use cash to settle payments for small transactions such as buying a coffee or paying for parking. This is no longer the case and the digital payments have expanded markedly,” says Moore,

“The growth of e-commerce has also driven this change. The move from offline to online has provided these digital payment providers with another source of revenue as consumers shift to online shopping.”

Moore says digital payments in emerging markets have yet to meaningfully take off, but it is only a matter of time before they do, and this will be an area of future growth.

“Emerging markets are still predominantly cash societies, and like we have seen in other markets such as Australia, over time these markets will begin to adopt digital payments on an increasing scale.

“Business-to-business transactions, as well, have yet to be fully tapped into by digital payments, providing another potential area for future growth and expansion by digital payment companies.

“In the business world there are trillions of dollars in business-to-business transactions of which only a small fraction are currently digital.

“There is a lot of room to grow these earnings for those digital payment companies that can enable these business-to-business transactions to happen in their environment,” says Moore.

Moore say both Visa and Mastercard are stocks that Munro Partners continues to hold as they have been able to grow their revenue at double digits, and grow earnings at mid-teen levels for a long period of time.

“We believe they can keep growing their earnings in the mid-teens in the medium to long term.

“Every new dollar that enters the digital space that is processed on the Visa or Mastercard rails has an almost 100 per cent incremental margin, or in other words, for Visa and Mastercard, there is very little cost associated with taking on new digital payment volume.  And that is their role in making that transition from cash to digital possible,” says Moore.

Other digital payment players such as PayPal and Block are also supporting the infrastructure for this transition to happen.

“Today, for a young person entering the financial system, it is possible to by-pass a bank and set up your entire financial life outside of a mortgage in a digital account or wallet.

“Take for example PayPal. It allows users to buy goods and services online, make transactions in local and foreign currency and even get paid a salary, like a standard bank account.

“As these digital payments evolve, we believe that over time banks will lose more and more market share as the world shifts to going cashless,” concludes Moore.