Monday, November 23

The revolution in how we pay for things continues

Over the past few months, clients have asked me how the current environment has transformed the direction of structural change in the global economy. My reply is always that I don’t see a lasting impact on the direction of structural change, but I do see the crisis accelerating many of the structural changes that I’ve already been long invested in – e-commerce, working from home, telemedicine and digital payments, to name a few. Let me dig into digital payments to illustrate what I mean.

Long before the effects of the COVID-19 pandemic, the global payments landscape was experiencing fundamental transformation. Over the past few years, customer expectations and behaviors have been changing, the impact of technology has been tremendous, global demographics have evolved, and the market has been reshaped by both traditional and new types of payment providers. These changes and the overall digitization of payments had been unfolding gradually. When the pandemic hit, these trends accelerated at a pace few could have predicted. In fact, the adoption of such digital payments, which had been expected to play out over 3-5 years, occurred in 3-5 months.

A surge toward “digital first”

The pandemic caused the world to move from physical to digital overnight, and across almost every industry: entertainment (streaming), health care (telemedicine), restaurants (online ordering and takeout), retail (e-commerce), and education (remote learning). And this surge toward a “digital-first” world served as an incredible tailwind for electronic payments and the companies that excel in that space, like PayPal. The fund I manage has owned PayPal for a number of years, and I continue to be impressed with how its managers run their business and how the company continues to evolve as a leader in technology and digital payments. PayPal recently recorded its best quarter ever with remarkable Q2 results.

Let me give you a few of their figures to demonstrate how drastic this transformation has been. PayPal registered 21 million net new active accounts [up 137% year-over-year (YoY), recorded total payment volume of $222 billion (up 30% YoY) and had 346 million average daily users (up 21% YoY). They also posted record revenues of $5.26 billion (up 25% YoY) and added 1.7 million new merchants during the period. In addition, the PayPal-owned app, Venmo, saw tremendous growth and now has over 60 million users.1 Whereas the app’s main utility used to be for transactions like splitting a restaurant bill, the current environment has revealed a whole host of new use cases, such as sending donations or paying your barber.

The pandemic also accelerated online payments engagement from new cohorts and industries, notably seniors, small local businesses and online fitness services. Seniors, who were perhaps reluctant in years past to engage in digital payments, were essentially left with no other option but to shift to e-commerce for their goods and services while they sheltered in place. Similarly, local businesses that historically did not offer digital payment options, had to quickly get on board to enable their customers to order and pay online. Lastly, with the closure of gyms and other fitness centers, trainers and gym owners created accounts for clients to engage in virtual sessions.

Not only has there been a shift to online payments, but there has also been a move to contactless payments in-store. To protect the health of their employees and customers as retail shops open, contactless payment is now a necessity. While changing behavior at the point of sale had been a gradual shift over time, the change has now been immediate. More and more consumers say they no longer want to handle cash. They also don’t want to handle a shop’s pen to sign a receipt or use a touchscreen. Companies have been responding quickly and offering things like tap-and-go that allows you to simply tap your card against the machine you would have inserted your card into, and no PINs need to be entered. In the US, 84 of the top 100 merchants accept contactless payments and small businesses have also been making the shift to provide a safe and efficient experience for their customers.2 

Majority of consumers have changed the way they pay

According to a recent Visa study, 78% of consumers have made changes to the way they pay, whether that be from shopping online, not using cash or using contactless payments.3 Visa is another company the fund owns that has a massive network and is well-positioned, in our view, to benefit from the payments evolution. In the first half of 2020, Visa issuers distributed 80 million contactless cards, as tap-and-go transactions are embraced as a much easier way to pay and have proved to increase card usage. It’s also worth noting that Visa’s recent numbers also reflect the boom in e-commerce due to the lockdown. Its card-not-preset volume rose almost 40% from the same period a year earlier.4 (Card-not-present transactions occur when a card isn’t physically presented, such as with online or phone orders.)

The dramatic transformation in the world of payments in 2020 has been exciting to watch, for both investors and consumers. I believe several of the trends we’ve witnessed this year will persist well into the future. As we look even farther out, the innovation within the payments industry has a long way to run – from even faster payments to the incorporation of payments through virtual reality to blockchain technologies and the Internet of Things. An example of the latter would be your refrigerator detecting that you are low on milk and automatically ordering and paying for a replacement from your online grocery delivery service. We certainly have a lot to look forward to. 

1  Source: All data on PayPal from PayPal Q-2 20 Investor Update, 7/29/2020

2  Source: Visa, “Tap to pay with Visa,” 7/7/2020

3  Source: Visa, “The great digital migration: 78% of consumers are changing payment methods,” 8/7/20

4  Source: Visa, Q3 2020 Earnings Call Transcript, 7/28/20

As of 6/30/20, Invesco Oppenheimer Global Fund had 3.36% of its holdings in PayPal; 1.15%, in Visa.

About this series

People have a remarkable capacity for adapting to change, but COVID-19 changed everything at once: How we live and work. How we shop and play. In this series, Invesco experts explore what the world may look like over the next few years. Join us as we imagine the possibilities together.

Important Information

Blog header image: Sergey Filimonov / Stocksy

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

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The opinions referenced above are those of the author as of September 10, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

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