Digital payments: Dethroning cash as king

Virtually everybody has been exposed to digital payments by now. Perhaps you pay your bills online or use Zelle, or Venmo to split the cost of a meal, or even perhaps to settle a bet. It may seem that this shift away from physical money has come all at once, but it really hasn’t.

Digital payments are actually a fairly old industry, albeit one that has undergone a rapid evolution in recent years. Back in 1958, the Bank of America² issued the first general purpose credit card, called the BankAmericard. Today, it’s known as a Visa card. These days you might pull out a credit card to buy a bottle of water, but it wasn’t like that many years ago, when it was more common to pay for things like gas and groceries with cash or even a check.

How the internet and digital natives are adding fuel to the fire

The development of the internet created the possibility for e-commerce to develop and the opportunity for digital payments to expand beyond a traditional credit card. 1998 saw the foundation laid for what we know as PayPal,² which was the first payments platform of its kind. It was launched by Peter Thiel and several partners under the name Confinity.

In March of 2000, Thiel merged his company with another Palo Alto company working in payments, ‘X.com,’ that was owned by Elon Musk. That combined company became what we know today as PayPal. And when Steve Jobs introduced the iPhone to the world in January of 2007, a new era in digital payments using mobile devices was launched.

The Nilson Report¹, which reports news and analysis on the credit and debit card industry, notes that the world market for credit and debit payments is $34 trillion globally, and nearly all of it flows through legacy platforms. I believe that’s apt to change.

It has been said that if you want to understand the consumption patterns of a 30-or 40-year-old in the future, it’s best to study people who are 20 and 30 years old today. Young people are, of course, digital natives and have been the earliest adopters of modern digital communications and payments. They will lead the way.

Opportunities in digital payments

As we see the industry unfold in front of us, the Global Focus portfolio management team sees a handful of businesses in the digital payments realm that have built some formidable advantages that we believe make them well-positioned for the future.

Two of them are fairly obvious — Mastercard Inc. and Visa Inc.² occupy some very privileged ground. They provide some of the most essential digital pipes and rails that make our contemporary payments system work quickly, efficiently, and securely on a global scale.

Though there are regular complaints from retailers about their cost, the two are incredibly hard to replace. That may be possible someday, but we don’t see it happening soon. The security, reliability, and scale they bring is hard to dislodge, and most forms of digital payments route through them.

Another beneficiary of the structural trend towards digital payments is likely to be Adyen NV², we believe. In our view, Adyen is the leading technology player in the world in omnichannel payment acquisition and processing. It’s cloud native – not a mere adaptation of legacy technology and it can handle everything from the point of sale to a handoff to Visa or Mastercard.

Established in 2006, Adyen provides companies, such as Uber Technologies, McDonalds Inc., Meta Platforms Inc., and L’Oreal, among many, many others, with a full payment toolkit, regardless of whether the payment comes online or in a store.² It also provides tools that optimize card authorization and minimize fraud. Adyen offers the most complete solution of its kind, and the world is moving in its direction.

Other companies that we believe have sound competitive positions and quality technology include Block Inc. and PayPal Holdings Inc. But at present, for various reasons, we own neither of them in the Invesco Global Focus Fund.

The runway for digital payments is a long one and advances in technology are accelerating it forward. There are some firmly established players which we believe can grow significantly as the use of digital payments advances across the world. Digital payment options are replacing cash nearly everywhere in the world, and I believe that is a very big, very long-tailed structural theme, which has a long runway ahead of it.

Randy Dishmon is the co-lead manager for the Invesco Global Focus Fund.