Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
A welcome return to our little high street over the weekend was the community market. I stopped to buy some homemade jam from a lovely elderly lady, who promptly pulled out a contactless payment tile and emailed me the receipt.
The ZZ Top lookalike at the craft beer cabin did the same thing - he said he felt much safer not holding cash and it was just easier to manage. When digital innovation hits the pop-up stalls it’s quite a good indicator that times have pretty much changed.
In recent years, debit cards have overtaken cash as the UK’s most popular payment method, with more and more retailers choosing to go cashless. For businesses taking the leap it’s about added security, the ability to connect to users online as well as real life, and much more efficient book-keeping. Lockdown has prompted even more companies to at least ask customers to have only their cards ready, if not pre-pay before they even arrive.
And the companies helping firms put their cash in the cloud are tackling it from all angles. The likes of Square and iZettle produce and manage the tile devices, Worldpay operates the card machines we’ve got used to tapping, and the likes of Visa and Mastercard give us the cards to tap them with, not to mention a host of challenger banks building propositions around a world without physical cash.
Why invest in the sector?
The big opportunity for investors here is in the transaction and software elements of payments and accounting. Making payments easier for small businesses who want to be cash light, and taking a small cut along the way, means facilitating future growth for both parties. What’s more, with the rise of contracted employment, firms are popping up to manage the back-office accounting that entrepreneurs often find daunting or just want to outsource. And that’s just scratching the surface of the wider ecosystem.
With remittances overseas from UK workers totalling £21 billion in 2017, transaction processing firms are lining up to make things simpler and cheaper for consumers fed up with lengthy, expensive bank transfers. And then there is the market for peer to peer money movement with payments apps like PayPal subsidiary Venmo allowing easy transfer between friends.
What to look out for
The danger with investing in the space is thinking that these firms should be grouped under ‘financials’ along with banks, asset managers and insurers. In fact, that’s how the market still tends to see them sometimes and they can often move in line with the sector despite sharing relatively few similar characteristics. In reality, they are much more aligned with tech companies and should be treated as such - these ones just happen to deal with money.
That said, the raison d’être for these tech firms is clearly to disrupt traditional banking facilities as much as possible. Arguably the next step is for the processors and administrators to become account aggregators, bringing all your existing relationships together, optimising your entire financial life.
One-stop shop firms providing easy payment processing, accounting, and access to lending at price points that suit all levels of business seem to be the holy grail of the sector - miles away from the card payment companies many of us associate with the space currently.
How to invest in the world of invisible cash
The FTSE is home to some popular European firms with accounting software companies like Sage and multi-channel payment provider PayPoint, however the US and China still lead the way with offerings like Intuit.
On the Select 50, BNY Mellon Long-Term Global Equity features Mastercard among its top holdings, with Merian North American Equity holding Visa alongside Mastercard, making sure they are exposed to advancing technology through two of the industry’s biggest firms.
James Thomson follows suit in the Rathbone Global Opportunities Fund, stocking up on PayPal (owner of iZettle) and Chinese conglomerate Tencent, operator of TenPay. While not strictly a payments company, Tencent’s app is China’s leading online payment platform meaning it’s already at the heart of daily life for hundreds of millions of people.
Fidelity Asian Special Situations holds Tencent along with Alibaba, operator of payment app Alipay which boasts 870 million users.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
Are corporate earnings strong enough to sustain markets?
Companies have significantly bettered expectations so far
Is now the time to buy for dividends? | A new commodities supercycle
This week, after a tough year for income hunters are UK dividends at last in …