According to The Nilson
Report, credit and debit payments accounted for 46% of personal
consumption in the
United States in 2010 up from 38% in 2005 (see chart below). This trend is less
established overseas, for example in India 90% of consumer payments are made in
cash and even in developed economies such as Japan 80% of payments are made in
cash. The move to electronic payment is a global trend though exposure to Chinese
spend is more difficult. Much like the internet China’s payment network is its
own market with UnionPay being China’s only registered payment network.
Launched only ten years ago UnionPay is now the world’s third largest payments network.
Source Nilson Report
V and MA are basically the
middleman, they process payments between the merchants and the financial
institutions. V and MA authorise, process and settle transactions. Importantly
they do not issue cards or extend credit to consumers. They derive revenues by
taking a cut of payment volumes.
EBAY is becoming better
known for its payment services paypal which is now 40% of overall revenue. Last
year PayPal processed more than $100 billion of payments online though this is
a drop in the ocean compared to V’s worldwide transaction volume of $3.7
trillion. EBAY and the payment networks (V and MA) have a strange relationship as
they are both competitors but also customers. Paypal essentially bypasses their
networks in the same way paper checks are processed but paypal balances tend to
be funded through V and MA cards making paypal one of their largest customers.
These companies will benefit
from the opening up of small retailers to more card and electronic based services.
There are approximately 8 million merchants in the United States that
accept electronic payments. Based on data provided by the U.S. Department of
Commerce and The Nilson Report there are another approximately 20 million
small businesses that currently do not accept electronic payments. Newer technologies such as square and paypal here are enabling
small businesses to accept cards with devices such as phones and ipads that do
not require expensive point of sale systems. (See video below for more on how Paypal here works). V is a shareholder in Square, they
believe Square to be more of an opportunity than a threat as Square gives them
access to small business customers which were previously too hard to reach.
An opportunity for all is to provide real time offers and
alerts to consumers. These companies have data on user’s current location and
previous purchases. Instead of just transacting payments they can help retailers
to get customers to transact by offering deals and marketing based on users
past behaviour.
Conclusion
These companies benefit from a number of secular trends. The shift
from cash/cheque to card, the opening up of smaller retailers to electronic
payments and the ability to provide other value added services such as deals to
consumers based on past purchasing behaviour. These trends are underpinned by the explosion in smart phones that allow users to shop anywhere online not just in front of the computer. For anyone who remembers those
great MA ads these companies are showing that they are priceless.
Disclosure:
Decisive is long V and EBAY
The material
in this article is for informational purposes only and in no way constitutes a
solicitation of business or investment advice. The material has been prepared
without regard to any client's or other person's investment objectives. Before
making an investment decision you should consider the assistance of a financial
adviser and whether any investment or service is appropriate in light of your
particular investment needs.
