The growth in digital payments

Article #644 by Edward Rizzo - Published Weekly

While the COVID-19 pandemic hampered consumer spending across the world due to various lockdown measures adopted in most countries, it is leading to many more people adopting digital habits thereby boosting e-commerce sales.

There have been several articles published in the international media highlighting the strong increase in digital payments and the shrinkage in the usage of cash at a much faster pace. The growth of e-commerce transactions indicates that cards are taking a greater share of overall transaction values as opposed to cash. Despite these two powerful trends, a recent study conducted by the management consultancy firm McKinsey & Co., indicates that the number of cash transactions worldwide has fallen only slightly over the past few years, to a little under 80% of all global transactions.

McKinsey & Co. also reported that the number of e-commerce transactions in Italy, one of the worst-hit by the pandemic in Europe, soared by 81% since the end of February. Meanwhile, another article indicated that cash withdrawals at ATM’s have dropped by more than 50% in many European countries. Moreover, a former director of the US National Economic Council wrote in the Financial Times that the coronavirus is speeding up the disappearance of cash.

Some of the major companies involved in the digital payments sector and those that stand to continue benefitting from the boost in e-commerce recently reported their financial results and provided upbeat assessments on these emerging trends during the pandemic.

The Chief Product Officer of Visa Inc was recently reported as having stated that 13 million Visa cardholders in Latin America made e-commerce transactions for the first time ever in March. He explained that the company is experiencing “a massive acceleration toward e-commerce adoption” as the pandemic helped accelerate trends that were already starting to form in the payments industry. Visa is one of the largest card providers in the world with 3.5 billion cards issued in total connecting more than 61 million merchants. Visa’s revenues grew to USD23 billion in 2019 on a total value of transactions of nearly USD9 trillion. The company opined that it did not believe that the COVID-19 crisis will fundamentally challenge the long-term nature of its business.

Visa’s main competitor, Mastercard Inc, also highlighted that despite the decline in overall volumes due to the economic slowdown, the pandemic is accelerating the shift towards online spending and contactless card payments, which help card companies increase their market share from the cash economy. Mastercard have 2.6 billion cardholders across the world and in 2019, it processed USD6.4 trillion worth of transactions with overall revenue rising to USD16.9 billion in 2019 from only USD9.7 billion in 2015.

Similarly, Paypal Holdings recently reported very strong growth during the month of April and the company’s CEO explained that on 1 May, the company recorded its largest daily number of transactions. The CEO also highlighted that the traffic on 1 May was “larger than last year’s transactions on Black Friday or Cyber Monday”.

The share prices of the major payment companies initially suffered a steep decline in March due to the anticipated impact on revenue and profits from the severe economic disruption resulting from the lockdown of most, if not all, developed economies. For example, the share price of Visa tumbled from a record high of USD214.17 to a low of USD133.93, representing a drop of 37.5% between mid-February and the third week of March. Likewise, Mastercard saw its share price skid by 42.4% from its record high of USD347.25 to just under USD200 also during the same period.

Notwithstanding the strong increase in digital payments and e-commerce transactions being experienced during the pandemic, payments volumes are still expected to decline in 2020 as a result of lower economic activity mainly from the classic point-of sale system in part due to the huge decline in tourism and closure of conventional retail outlets. As most economies around the world are now slowly opening up following the lockdown measures imposed and following evidence of the strong growth being registered in digital payments, the share prices of these payment companies rallied significantly from their March lows in line with the strong recovery in the international equity markets especially in the US.

The share price of Visa surpassed the USD190 level again in recent days having rallied by almost 42% from its March lows. Mastercard’s share price almost regained the USD300 level representing a recovery of 50% from its recent low.

Likewise, in the e-commerce space, recently reported a 26% increase in Q1 revenue to USD75.5 billion following a significant increase in order volumes which required the hiring of 175,000 additional workers to cope with the rising demand. Last week, Amazon again indicated that in India it will be employing 50,000 workers on a temporary basis to meet a surge in online shopping in the country which is also the second most populous in the world.

Walmart Inc also reported last week that it experienced a 74% rise in online sales between February and April. Moreover, last Friday, Alibaba Group Holding Ltd reported a better-than-expected financial performance for the fourth quarter of its financial year to 31 March in part due to the 19% growth in the e-commerce business as people stayed indoors and traditional stores remained shut during the health crisis. Moreover, revenue at its cloud computing division rose about 58% during the 3-month period to 31 March.

The shift to cashless economies was already taking place slowly in many countries across the world over recent years. However, as consumer behaviour changed rapidly due to the pandemic, the digital payment revolution is gathering momentum at a more accelerated pace. Despite the evident increase in digital payments recorded in recent weeks, the large majority of global transactions still take place via cash or cheque and therefore the strong growth rates experienced by payment processing companies in recent years could only be the start of a longer-term trend amid the more evident signs of the strong concerted effort by consumers worldwide to do away with physical cash.

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This article was produced by Edward Rizzo, Director at Rizzo Farrugia, which is a company licensed to undertake investment services in Malta by the MFSA under the Investment Services Act, Cap. 370 of the Laws of Malta and a member of the Malta Stock Exchange. The company’s registered address is at Airways House, Fourth Floor, High Street, Sliema SLM 1551, Malta.