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Key Points
- Cash is still king; but it’s losing its grip around the world as Fintech payment options gain more interest with consumers.
- Most industries are implementing Fintech solutions for consumers.
- E-commerce adoption drives more Fintech innovation.
To listen to my recent interview with a Fintech specialist investor Warren Fisher from Manole Capital, click the link below and choose episode #6 of Mega Brands.
Episode 6: An epic Fintech conversation – The Mega Brands Podcast
Cash is Losing its Appeal Around the Globe & the Trend is Just Beginning
As thematic investors who assess global consumer spending trends, we have so many exciting secular trends to explore. One of the largest and most prominent consumption trends is the dramatic rise in Fintech innovation and the slow but steady death of cash as the primary method of transactions. Cash used as a percent of total global purchase transactions is estimated to be roughly 70% so it’s still very large. In 2006, however, that number was about 86% so cash is losing to other forms of payments on a steady trajectory (source: Fintech specialist Manole Capital Management). The trend away from cash is most clear in developed markets and they tend to set the long-term trends that emerging markets follow. Mastercard recently highlighted the opportunity from a big picture perspective. Roughly 58% of all purchase transactions are done in cash in the developed world but about 90% of transactions in emerging markets are still via a cash exchange. As emerging markets evolve and more of the populations in these regions joins the middle class, embracing mobile technology and the freedom it offers, the transaction data will converge in the direction of developed markets. That’s a very large and growing opportunity for Fintech innovators focused on offering consumers a better way to transact versus using cash.
Fintech is a very broad category so let’s flush out the primary categories. For our purposes, Fintech includes massive industries like personal investing, insurance, digital payments, crypto currencies, and alternative finance businesses. The Fintech revolution has not gone un-noticed by the legacy banks, many of these behemoths are also innovating alongside the disruptors. For now, the equity markets are rewarding the pure-play Fintech brands with much higher valuations than the traditional banks that have silos of innovation embedded inside them. The below quote from Jamie Dimon on January 15, 2021 should give you some idea how important the Fintech threat could be if legacy players do not innovate organically or through M&A. In my opinion, Jamie Dimon is the most impressive bank CEO and if he’s scared, just think how the average bank management teams feel.
A broad basket of “Fintech” companies has offered significant rewards to investors over the last decade as high valuation growth stocks outperformed value stocks. To be sure, some of the emerging brands playing in Fintech will never really eat into the market share of some top financial services brands but the best brands that remove as much friction from adoption seem to have bright futures ahead. In this category we have Square, PayPal, Mercado Libre (Latin America), Sea Limited, Alibaba, TenCent, JD.com in Asia to name a few. One very important category within fintech is the “buy now, pay later” thematic. Allowing a consumer to spread out the payments for a purchase simply removes all the friction from making the purchase. Peloton would never have done as well as they did in 2020 if they had no “buy now, pay later (BNPL)” partner in Affirm. This category has massive growth ahead, I can easily see a world where consumers have the ability to choose the BNPL option for airline tickets, hotel stays, durable goods, etc. The current leaders in the BNPL thematic are: Afterpay, Klarna, FuturePay, Paypal, Affirm and Quadpay. I would be absolutely shocked if Visa, Mastercard, and American Express didn’t roll-out a similar solution via a partnership or acquisition. The theme is too important for consumption spending trends to ignore.
Here’s a great info-graphic from Manole Capital that highlights the key categories within the Fintech ecosystem. Some of these companies are still private and have significant valuations and others are public and very well-known brands with stellar balance sheets and financial metrics. As you can see, there’s a significant amount of investment happening in the space.
Fintech Solutions are Everywhere
Whether we like it or not, technology, artificial intelligence and data science is an unstoppable force. Robo-Advisors offer cheap, broadly diversified investment portfolios and 401k plans. There’s digital banks and investment-only brands like Robinhood.
When you take an Uber or Lyft to the airport you never have to open your wallet. When you’re driving on the highway and need to go through a toll-booth, there’s an E-ZPass transponder available for you to utilize. Because of COVID-19, millions of merchants offered contact-less payment systems for safety. Amazon is opening Amazon-GO stores that automatically scan products we want and withdraw money from your account without ever going through a cashier. You go out to dinner with friends and pay with your Marriot Rewards Visa card and your friends Venmo you their portion of the bill. When you eat at your favorite restaurant now, they have no menus, just a QR code for you to use that opens the menu on your phone. These amazing innovations are everywhere we look and they are primarily tied to the one device we truly never leave without: our mobile phones. The ability to transfer money or pay for merchandise with just a few clicks while being offered flexible payment schedules can add significant consumption capacity as the friction from action is reduced or removed.
E-Commerce Adoption is an Unstoppable Force for Fintech Adoption
I have written many times about the massive pull-forward of e-commerce adoption caused by the COVID pandemic. Millions of people all over the world have been brought into the e-commerce flywheel never to leave. Since your phone and computer doesn’t take cash, mobile payments and the technology driving these payments will continue to thrive. The leading credit card processing brands stand to benefit and are tremendous businesses. Visa, Mastercard, and American Express are perceived to be slow moving but a look under the hood reveals there’s real innovation in the leaders too. Visa and Mastercard are accepted in over 200 countries around the world. These two Mega Brands are among the most recognized and trusted brands across the globe. So much of emerging Fintech is bolted onto Visa and Mastercard’s technology stack because these two brands are so deeply embedded into the payments system.
Visa can process 65,000 transactions per second (Manole Capital), just think about that for a minute. That’s the ultimate economic moat. Consumers all over the world trust Visa and Mastercard to process their purchases, offer them fraud insurance, and allow them to accumulate rewards points for future leisure activities. The future for Fintech seems very bright indeed.
Bottom Line:
- Cash as the primary medium for transactions is slowly losing its preferred status.
- Fintech solutions are reaching into every industry and sector and it’s a global theme.
- E-commerce continues to be a primary driver for Fintech innovation to continue its growth trajectory.
Disclosure:
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.
