Morgan Stanley IM outlines the future trends of digital payments, which in the medium term could grow in volume for over 12% per year
Payments are emerging as one of the most promising areas of the Fintech, also thanks to the powerful acceleration of the abandonment of cash driven by the change in habits induced by the Covid-19 pandemic. Before the crisis, around 50% of global transactions were made in cash. The pandemic has forcibly moved many online transactions previously carried out in person, also because banknotes and coins are potential vehicles of contagion. And once consumers have become accustomed to the convenience of digital payments, the move away from cash should remain a structural trend, with volume growth likely to exceed 12% per year in the medium term.
THREE CATEGORIES OF OPERATORS
The forecast is formulated in the “Global Equity Observer” section by the experts of the International Equity team of Morgan Stanley Investment Management. The study is dedicated to future of payments, a complex universe that sees the participation of different types of operators with different roles and value propositions, in which three main categories can be distinguished: card issuers, payment networks and merchant acquirers. The former are mostly banks and credit card managers and retail or wholesale debt, the latter provide the infrastructure and rules for the exchange of authorizations and money, while merchant acquirers connect physical or online stores that accept payments via networks.
ISSUERS SEEM BETTER POSITIONED, BUT THE NETWORKS ARE MORE INTERESTING
At first glance, it would appear that issuers are positioned in the most profitable segment, but in reality part of the commissions are transferred to consumers in the form of incentives such as airline miles, cash withdrawn at the time of payment or reduction of currency conversion costs. Morgan Stanley IM experts recall, among other things, that in the past, payment networks represented the most interesting part of the entire payment ecosystem, and still represent the most resilient area of the system: Visa e MasterCard, the two main global players, have been able to maintain stable and often dominant market shares in a growing market, given the structural shift towards card payments.
THE GROWTH OF THE ACQUISITION BUSINESS
The acquisition of merchants is instead carried out mainly by banks, but also by independent commercial operators, who can choose between two strategies: consolidate the merchant infrastructure in one place by creating synergies thanks to the optimization of systems and costs, or use a only integrated technological solution. Companies like Adyen, Stripe e PayPal they followed the second strategy and recorded very sustained growth rates at attractive costs, which rewarded the stocks.
ISSUERS RELATED TO BANKS
Finally, the issuers, inextricably linked with banks and credit institutions, even though processing activities are sometimes outsourced in order to generate economies of scale. The actual activity of issuing cards instead remains within these structures, generating very attractive returns, which are then subtracted direct or indirect incentives that are variable. In most cases, however, these are activities that do not reach such dimensions as to determine the economic performance of the company.
DATA IS THE FRONTIER OF THE FUTURE
Morgan Stanley IM’s study points out that data is also the frontier of the future in the payments business, where success will be determined by who will be able to generate the highest quality data. This requires the integration of the retail and commercial bank, as well as a radical modernization of existing systems. Card networks have far more detailed data, but their central role places them in the position of arbitrators between buyers and issuers, while some merchant acquirers are offering value-added services. As for the banks, the authors point out, the organizational architecture will be fundamental for success and operators with a single technological stack will be favored.
THE IMPLICATIONS IN AN ESG
Even the payment sector and the ongoing transition from cash to digital has its implications from an ESG perspective, underline by Morgan Stanley IM, as it could lead to the financial exclusion of sections of the population without access to the banking system, especially in emerging markets. Visa, for example, is aware of the risk and has long been helping those without banking services to access electronic payments, aiming to reach 500 million people by 2020. The move to digital also raises security problems, and Visa has always invested massively in data security, obtaining the maximum rating at the Cybersecurity 2019 edition of Gartner Consulting and avoiding fraud for around $ 25 billion thanks to the use of artificial intelligence.
AS INVESTORS, GREAT INTEREST FOR NETWORKS
The managers of Morgan Stanley IM’s International Equity team, as investors oriented towards quality and downside protection, have always looked with interest to the payment network sector, given the solidity of business models and economies of scale. Banks e credit card company instead, they are excluded from their global portfolios due to low returns and high leverage. The merchant acquisition branch is seen as more interesting, even if operators with integrated technology stacks have very high ratings.