Why scale matters in the evolving landscape of cashless payments

The coronavirus pandemic has undoubtedly accelerated the move to a cashless society. But while we believe this transition will create new investment opportunities, it also means fresh challenges and tighter regulation for companies operating in the space.

As we highlighted in June 2020¹ , the pandemic prompted a surge in cashless payments as consumers were driven online as a result of lockdowns. According to one report, the crisis accelerated the decline of cash by more than three years compared to previous expectations.²

Data has shown this trend has momentum as significant numbers of consumers have indicated they will continue to use digital payments when the pandemic is over. In fact, an analysis from PwC, found that cashless payment volumes are expected to increase by more than 80% globally between 2020 and 2025, from around one trillion transactions to nearly 1.9 trillion, and to almost triple that by 2030.³

Separately, a Capgemini study predicts that non-cash transactions will reach a record volume of 1.1 trillion by 2023, growing at a compound annual growth rate of over 11%.⁴ And a survey by card provider Mastercard found that 74% of people would continue to use contactless cards post-pandemic.⁵

Fundamental change

But while the pandemic has driven a surge in cashless transactions, there is also an underlying structural change at play. Financial and fiscal regulators are largely supporting the move to cashless payments, as tax evasion and black-market dealings are far more difficult to carry out in a cashless society.

This could partly explain why governments in some countries are offering incentives for cashless payments – in Japan consumers are offered cashback or reward points⁶ and in Italy there is a lottery for customers making cashless payments.⁷ Other countries, such as France and the UK, have increased the upper limit for making contactless payments, while the European Union has proposed a framework for a European Digital Identity to help make cashless transactions more secure and transparent.⁸

There are also benefits for businesses. Digital payments mean that cross-border payments can be processed more efficiently, allowing companies to sell more easily to customers overseas. And for specialist independent retailers who have embraced e-commerce, even before the pandemic, cashless payments have allowed them to reach far beyond their local community. Digital payments can even save companies money in the long run once the infrastructure is put in place, as there is less need for a lengthy cash reconciliation process – or a trip to the bank to pay it in – at the end of the day.

Investing responsibly in the digital transition

The transition to a cashless society is, of course, not entirely straightforward. Payments companies, and any business that accepts payments online, must take measures to protect their customers from fraud, and to protect their personal data.

As an asset manager, we need to ensure that the companies we invest in are in turn investing sufficiently in this space, whether that is via cybersecurity firms that are working directly with the financial services industry, like Palo Alto Networks and Zscaler, or the growing cybersecurity insurance sector, which offers protection to corporates against cyberattacks.

As responsible investors we are also highly cognisant of the issues around financial inclusion. There are concerns over a ‘digital divide’ as some groups are expected to remain reliant on cash. However, as the pandemic prompted more people to shop online for the very first time, more individuals than ever before have access to digital payments. That may be via online banking or using e-wallets like PayPal’s Venmo or Cash App (owned by Square), or through wearable devices like the Apple watch, which also supports contactless payments.

What’s more, a recent report by mobile payments group Boku, found that app-based mobile wallets have been a catalyst for enabling billions of new consumers to make cashless payments, many of whom were ‘unbanked’ – that is, do not hold traditional bank accounts.⁹ In this way, cashless payments have to some extent supported financial inclusion, allowing some of the world’s poorer or more vulnerable populations access to financial services that they did not have before.

Scale and breadth will be the winner

While we are generally sceptical about the role of cryptocurrencies in long-term investment portfolios¹⁰ , we are already seeing more companies, including Tesla and Microsoft, accept them as payment for their goods. Payment and card providers like PayPal, Square and Visa, meanwhile, have facilitated the use of cryptocurrencies for payments.

We believe the winners in this transition will be larger companies with full payment ecosystems, across the entire spectrum from peer-to-peer payments to consumer-to-business and business-to-business. Some may grow organically, and others may increase their scale via acquisition.

Visa’s recent buyouts include a European open banking platform called Tink¹¹ and fintech firm Currencycloud¹² that could allow it to build more tailored products and a wider range of services, for example enabling customers to gather all their financial services on one app to get a consolidated view of their finances. PayPal is developing a new digital wallet designed to be a ‘super app’ offering a whole range of consumer services¹³ similar to China’s WeChat and Alipay, and India’s Paytm.

Open banking – where third-party providers can access data from banks and financial institutions – will increasingly allow technology companies that can also access a breadth of consumers’ non-financial data to develop a range of services, from faster payments to credit scoring models. This gives them a potential advantage that could see traditional financial companies lose market share over the next several years.

This would likely have an impact on the broader financial system, so we expect authorities to step in and tighten regulation globally – as we are already seeing in China.¹⁴ As a result, the larger, more established digital payment providers which have already been historically active in the financial space, could potentially hold a significant advantage due to their experience of the regulatory landscape.

As consumers increasingly want a one-stop solution where they can manage their finances and pay for goods and services in whichever way they prefer, we believe that many ‘pure play’ payments firms are likely to be taken over or squeezed out, and it is the companies that can operate at scale to provide a seamless, secure and agile payments solution that will be the winners. What is also clear is that the transition to a cashless society is an exciting opportunity for investors – and we are still relatively near the start of this journey.