The managers of the Henderson Global Growth Strategy seek to identify long-term secular trends that they believe are underappreciated by the market. One such trend is the rise of paperless payments over time and a shift away from cash as a medium of exchange. Ian Warmerdam, Head of Global Growth, and Portfolio Manager Gordon Mackay explain why they believe this trend, which has been supportive for a number of portfolio holdings in recent years, has further to run.
While cash still dominates when it comes to global payments, the increasing adoption of card-based payments looks set to continue. Key factors supporting increased use of cards include the growth of online retailing, innovations such as mobile point of sale technology and the growing use of prepaid cards.
Penetration of card payments
The penetration of card payments as a proportion of total global personal consumption spend was around 41% in 2015, up from 26% in 2007, as shown in chart 1. Penetration levels vary by country with generally higher adoption in developed markets such as Canada (72%) and the U.S. (57%) whilst emerging economies such as Mexico and Russia have penetration rates of only around 10%. Interestingly, card penetration rates remain relatively low in Europe at around 33% with Spain, Germany and Italy all large underpenetrated countries. Over the long term there seems little reason why penetration rates cannot rise towards 60-70% given that some countries are already at these levels.
Source: Bernstein, Global Payments report, October 2016
Chart 1: Growing card penetration of global purchases
Source: Nilson, World Bank, International Monetary Fund and Bernstein analysis, October 2016. E=estimates Growth of ecommerce
One clear factor driving an accelerating rate of conversion from cash to card payments is the growth of ecommerce (online sales), as shown in chart 2. Card payments account for almost 90% of global online transactions and, therefore, further growth of online retailing will drive greater use of cards. Whilst many may assume that ecommerce is already well penetrated, the fact is that even in developed markets the actual share of online retail remains low compared to offline. In the US, for example, the proportion of total retail sales from online retailing is just under 10% leaving plenty of scope for growth.
Chart 2: E-commerce sales growth looks set to continue
Secondly, merchant acceptance of cards as a form of payment has been a limiting factor to growth, particularly but not solely in developing economies. For example, the US has five to six times the number of electronic point of sale terminals per capita than the rest of the world and thus there remains a good opportunity to drive penetration higher in other regions as the number of terminals expands.
Mobile point of sale (mPOS) technology
This trend is accelerating due to innovation in mobile point of sale technology, as shown in chart 3. This allows retailers to receive payments via tablets and other mobile devices that have the appropriate software. Such technology can be a game changer for merchant acceptance globally due to its low cost and ease of use for small to medium-sized retailers.
Moreover, the number of companies developing low cost mobile payment platforms has grown rapidly in recent years. At the end of 2016 there were estimated to be around 330 such companies worldwide compared to only a handful as recently as 2010. With around a third of those companies focused mainly on emerging markets it is likely that both merchant acceptance and the use of cards will continue to grow at a healthy rate.
Chart 1: Growing card penetration of global purchases
Source: Nilson, World Bank, International Monetary Fund and Bernstein analysis, October 2016. E=estimates Prepaid cards
Finally, the increasing prevalence of prepaid cards is also contributing to growth of paperless payments. Pre-paid cards can exist in a physical form such as retail store gift cards or pre-funded debit cards but can also exist in the form of virtual wallets such as those used by Starbucks where the customer stores credit on a mobile phone.
According to the World Bank, approximately 38% of the global adult population does not have a bank account while even in the US it is thought that around 7% of households lack access to basic banking facilities. Therefore, there is a clear opportunity for pre-paid cards to help bridge that gap and consumers are becoming increasingly aware of the alternative options available to them.
Global Growth stocks in focus
The breadth of factors supporting long-term growth of paperless payments as a medium of exchange should be beneficial for a number of companies that the Henderson Global Growth Strategy has invested in, such as Visa and American Express.
Visa is the larger of the two main global payments networks and in our opinion very well placed to benefit from the gradual shift towards paperless payments. The company has unrivalled brand recognition across merchants globally but despite its size continues to grow at a double–digit rate due to increasing rates of card penetration and rising personal consumption expenditure. The business generates significant levels of surplus cash that can be returned to shareholders yet still appears attractively valued and we believe it can continue to be a high-quality growth company over the long term.
Similarly, we believe that the strategy’s holding in American Express should benefit from the structural growth in paperless payments. American Express (Amex) is unique amongst peers in that it owns and controls the network that its proprietary cards operate on, thereby allowing the business to retain all of the economic value. This is important as it allows Amex to offer more attractive member rewards than competitors, which in turn encourages card holders to spend using their Amex card and earn more rewards rather than use alternative cards. This reinforces the strength of the network. The business has demonstrated a high level of earnings power over many years and has consistently returned surplus cash to shareholders through dividends and share buybacks. Valuation also remains attractive in our view given its favourable longer term prospects.
Overall, we believe that the increasing use of paperless payments over time and a continuing shift away from cash as a medium of exchange offers long-term investors attractive growth opportunities.