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Sector watch: Online payments

Daniel Lane

Daniel Lane - Fidelity Personal Investing

Over the weekend I stopped at a stall 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 village fête it’s quite a good indicator that times have pretty much changed.

Last year, debit cards overtook 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.

And the companies helping them 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 couldn’t care less about. And that’s just scratching the surface of the wider ecosystem.

With remittances overseas from UK workers totalling £21 billion last year, 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 transfer.

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 sector.

How to invest in the space

The FTSE is home to some of the popular European firms with accounting software firms like Intuit and Sage, along with multi-channel payment provider PayPoint, however the US and China still lead the way.

Both BNY Mellon Long-Term Global Equity and Merian North American Equity feature Mastercard among their top holdings, making sure they are exposed to advancing technology through one of the industry’s biggest firms.

James Thomson follows suit in the Rathbone Global Opportunities Fund, part of the Select 50, stocking up on leading names Visa, Mastercard, Paypal (owner of iZettle) and Tencent all in the top ten holdings. While not strictly a payments company, Tencent’s Tenpay 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 over 500 million users.

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. 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.