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Investors tap into cyber space to grow their wealth

  • September 17 2021
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Investors tap into cyber space to grow their wealth

Promoted by Citi Group

Combined, our daily spending adds up to opportunities for investors on a global scale.

Investors tap into cyber space to grow their wealth

Promoted by Citi Group

Combined, our daily spending adds up to opportunities for investors on a global scale.

Investors tap into cyber space to grow their wealth

The payments industry has always been large but it has not always been on the radar of investors. That’s because it was largely a bank run industry that worked in the background to enact large transactions for institutions.

But over the past decade the decline of cash and cheque transactions and proliferation of micropayments, smartphones, tap and go and other retail and online instant transactions, and the listing of public companies operating and growing in this space, has transformed the industry and placed it solidly within the investor universe.

For those that had yet to catch-up with the evolution of the payments industry, it was thrust into the spotlight in August when US payments giant Square bid $US29 billion for ASX-listed pioneer ‘buy now-pay later’ operator Afterpay.


Further consolidation in the industry is expected as incumbent players, new entrants and fintech’s jostle for a slice multi-trillion-dollar global industry 

Investors tap into cyber space to grow their wealth


Consumers want instant, invisible payments

For the consumer it’s all about convenience and speed, with the shift to a truly cashless society given a boost by the preference for cashless transactions by most retailers and the shift to even more online sales as a result of impact s from COVID-19. 

Globally, the payments sector was impacted by closed borders and little travel, with McKinsey expecting 2020 payments revenues to fall $US140 billion or about 7 per cent compared to 2019. With global revenues of about $US2 trillion, the industry has roughly doubled in size over the past decade, and increased its share of banking revenue from 28 per cent in 2010 to 39 per cent in 2019, according to McKinsey. 

It should be noted, retail spending in the payments sector has continued to rise throughout the pandemic as shoppers go online for their needs, from groceries to electronics and gifts. When international borders reopen the payments sector is likely to get a significant boost.

The shift to cashless payments is driving changes amongst traditional incumbents, and it’s occurring in Australia. In the first half of 2020 the big four banks closed 175 branches and removed 2150 ATM’s, according to the August 2020 edition of ATM Marketplace. Like all banks, the big four are ramping up efforts to take their operations digital.

The drive to digital and cashless is not a genie that can be put back in the bottle, and the scope for growth is a long-term upward trend. The proliferation of payment-enabled devices is driving a future of smaller transactions and almost invisible payment flows. 

Increasingly, the most valuable asset in payments is data: Digital payment processing allows financial institutions to better understand their customers. To offer customised services to clients, firms need data, which is only possible to get through updated payment-processing systems. In the financial systems of tomorrow, data-driven personalisation will lead to better experience and service, ultimately leading to larger numbers of customers and revenue. 

There are a number of players worth examining for the opportunity they represent in gaining exposure to this rapidly growing and innovating sector. We highlight three companies our research has focused upon, starting with impacts of the Square acquisition of Afterpay.


Square Inc (SQ) 

SQ builds tools to allow businesses and individuals to participate in the economy digitally. Sellers use Square to reach buyers online and in person, manage their business, and access financing. Individuals use Cash App to spend, send, store, and invest money. And TIDAL is a global music and entertainment platform that expands Square’s purpose of economic empowerment to artists.

SQ has been keen to add additional buy now, pay later’ (BNPL) capabilities, which the Afterpay acquisition achieves. For Cash App, we think Afterpay helps improve both user growth and more importantly engagement, as more than 90 per cent of Afterpay’s transaction volume is driven by repeat users.

The deal also helps accelerate Square’s international expansion ambitions. For Afterpay, the deal significantly improves the business’s competitive position adding millions of new merchants and 70 million Cash App users. Risks to closing the deal include a potential competitive bid, which we cannot rule-out but see unlikely, and a lengthy approval process, particularly in the U.S. 

SQ was already a sought after investment before the Afterpay acquisition. From our perspective:

We’re a believer that SQ’s secular growth opportunity is too big to ignore.

The stock has rebounded sharply from its COVID lows, mostly resulting from an acceleration of user adoption/engagement of Cash App, as well as on improving consumer spending data.

New products (consumer credit) and international expansion on the horizon, and perhaps synergistic M&A that accelerates user growth, we find it difficult to see the upside narrative reversing from here.


Risks include: 

Increasing competition from disruptive new entrants and/or from well-entrenched traditional players with more resources.

Exposure to heightened merchant fraud risk and exposure to credit losses could lead to an uptick in credit losses.

Any sharp uptick in shareholder dilution associated with Square’s large employee stock option plan.

Driving scale isn’t cheap, but we think the company will be better positioned to drive incremental margin expansion exiting 2021, which in turn will help investments remain proportional and allow for potentially faster scale-ups beyond 2022.


Visa Inc 

Founded in 1958 the well-known Visa brand operates in over 200 countries and has a vision to be the best way to pay and be paid in a seamless and secure payment experience. 

We highlight Visa’s many positives, including: 

A strong market position with barriers to entry.

Pricing power.

Operating leverage potential.

Secular growth tailwinds, e.g. global shift to electronic payments, digital commerce, emerging payments channels and B2B growth.

Proven ability to beneficially use solid balance sheet and cash flow. 

The pace of global consumer and corporate post-pandemic spend recovery remains a consideration. However, spending improvement is generally progressing. Continued momentum can lead to outsized earnings growth over the next couple of years, particularly with gradual improvements in cross-border travel.



At the edge, more investors seem worried about the rise of likely payment alternatives to traditional credit – while Visa often has investments in these areas, it is clearly an area of higher competitive risk.

Regulatory activism can be an episodic threat/risk.

Taking these positives and risks into consideration, we believe an expectation of upper-single-digit to double-digit top-line growth and a mid-to-upper-teens total return over the longer term is reasonable. We believe this and a prospective intermediate-term recovery is attractive, especially for a mega-cap name like Visa.


Paypal Holdings Inc

PayPal has remained at the forefront of the digital payment revolution for more than 20 years. By leveraging technology to make financial services and commerce more convenient, affordable, and secure, the PayPal platform has amassed more than 400 million consumers and merchants in more than 200 markets globally.

We like PayPal’s exposure to the rapidly growing digital commerce landscape (off a larger base as a result of the COVID pandemic), and believe it is positioned well to sustain upper-teens or better net revenue growth over the next 2-3 years.

We believe PayPal’s scale, new product introductions and mobile transaction trajectory can sustain a growing network effect. Additionally, use of cash presents M&A optionality to inorganically expand the platform – for continued bolt-on acquisitions for incremental use cases or larger transformative acquisitions that support a holistic commerce-enabling platform.

Major risks include but are not limited to rising competition given the proliferation of payment choices, execution risk (new product rollouts, partnership ramps, etc.,) and importantly also the management of expectations, given the current valuation levels.

Considering these opportunities and risks together, we note that recent results and commentary support the idea of continued robust secular growth at levels that in the near-term could be higher than PayPal’s traditional structural growth rate.


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This document is distributed in Australia by Citigroup Pty Limited ABN 88 004 325 080, AFSL No. 238098, Australian credit licence 238098. Any advice is general advice only. It was prepared without taking into account your objectives, financial situation, or needs. Before acting on this advice you should consider if it's appropriate for your particular circumstances. You should also obtain and consider the relevant Product Disclosure Statement and terms and conditions before you make a decision about any financial product, and consider if it’s suitable for your objectives, financial situation, or needs. Investors are advised to obtain independent legal, financial, and taxation advice prior to investing. Past performance is not an indicator of future performance.

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