By Rahul Bhushan, co-founder of Rize ETF
If you went to Starbucks 15 years ago and tried to pay for your latte with your phone, you’d probably get some funny looks. Do it today and no one bats an eyelid.
Technology has certainly made large strides over the past 15 years. The reason tapping our phones on a card reader works is because of a revolution in how our front-end payment interfaces handle payments — the one-click-buy phenomenon that’s taken the world by storm.
Ecommerce has played a crucial role too. Thanks to its unprecedented rise during the coronavirus pandemic, our use of transparent, data-driven payment platforms is today peaking at all-time highs.
In the West, mobile payments have become as ubiquitous as the smartphone itself but adoption rates in many parts of the world are still lagging. Some 1.6 billion adults around the world, for example, still don’t have access to a bank account.
This affords this still-nascent industry much room for growth. Opportunities for investors across the digital payments spectrum have been on the rise in recent years. And as the world evolves, this digital infrastructure of tomorrow presents ample prospects for those willing to invest in the right trends.
Here are some of the key payment trends we’re witnessing today.
An outdated system in need of a makeover
The scale of today’s digital payments opportunity stems from an almost perfect paradox.
While our most recent technological revolution has given consumers charming digital front-ends to engage with merchants and dealers, the back-ends that principally govern how we pay for and receive payments in the digital economy haven’t changed at all in the Western world.
We still rely on age-old technology built decades ago.
While it may take just a few seconds to pay a barista when using a credit or debit card, behind the scenes, there’s a complex web of transactions that engages multiple banks, card networks, payment gateways and processing houses and recipient banks alike.
The result is an “open loop” process (illustrated above) that is far too complex and fragmented, fraught with security concerns and crucially also costly and inefficient for both merchants and consumers.
Consider just how many merchants refuse to accept American Express cards. It’s just too expensive.
At the core of the future of digital payments, therefore, lies a processing model that is able to smooth out these inefficiencies. We believe the future of digital payments is centred around an alternative “closed loop” system that embeds all of the infrastructure required for an open loop transaction to take place in one location — a digital wallet.
The digital wallet acts as a de facto bank for users which they can use seamlessly across their electronic devices — from their phones, wearables or even – dare I say it – implants.
And through its more integrated approach, a digital wallet offers a safer, cheaper, and, perhaps most importantly, frictionless route than can be adapted into a more personalised and engaging customer experience.
The rise of China‘s digital payments economy
In China, nearly 70% of the population has already ditched cash (and to a much lesser extent, cards) in favour of digital wallets like Alipay and WeChat.
A similar transition is now underway in the West – where digital wallet users still mostly use preloaded plastic cards – and the rate at which digital payments, as a whole, are now being embraced is truly impressive.
Due to the pandemic and ongoing ecommerce adoption, penetration rates for mobile payments in the UK over the past year alone have risen from 15.3% to 26.7%. In the US, meanwhile, they’ve risen from 15% to 25.6%.
The appetite for digital payments is becoming clearer. More than 80% of survey respondents in Statista’s recent Global Consumer Survey stated they had used PayPal in the past 12 months. Hot on PayPal’s heels were the likes of Venmo, Google Pay and Apple Pay.
The value of global digital payments transactions has grown from $USD 3.36 trillion in 2017 to nearly $USD 5 trillion in 2021 alone.
Global ecommerce sales are now expected to reach over $USD 7 trillion in 2025 and some sources put these figures even higher. As such, a key driver of the digital payments transition remains steadfastly in place.
Beyond this, “anytime, anywhere” payments are primed to become an even more appealing aspect of making payments online (and doing commerce in the real world) as integration between our physical world and the digital world continues.
This means an ongoing evolution towards a closed loop systems in the West, increasingly resembling what already exists in China. But it also means the assimilation of emerging technologies like Buy Now Pay Later, biometric payments (where features like voice recognition technology add security) and invisible payments (where customers can pay for goods without even touching a Point-of-Sale terminal).
Add to this the fact that close to a third of the world’s adults don’t yet have access to financial services, and a vast, untapped market for digital payments emerges.
Getting exposure today
The innovation needed to drive this growth is being propelled by both established and new companies operating in areas such as card payments, payment processing, payment infrastructure, payment services and even crypto payments.
As the sector continues to evolve, so too will the most successful of these businesses, many of whom are listed or are coming to market. In fact, S&P and MSCI even recently announced a revision to the Global Industry Classification Standards in 2023 that will see “Transaction and Payment Processing Services” become a sub-category under the Financials sector.
We believe that getting exposure to a diversified range of these companies can represent a compelling investment opportunity for today’s smart investors.