Digital Payment Grows-Everybody Wants Some!

The Economist March 27th 2021 pp65-66|Finance & economics|Digital payments|”Scaling the peak” “America used to be behind on digital payments, not any more”



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Summary of the article

Back in 2015, before digital payment start-ups like Square, Stripe and Adyen came along, Ant Financial (Chinese) and PayPal essentially had equivalent market capitalizations each at about $28bn. As of March 23rd their market capitalizations* are approximately $285 bn for PayPal, $228 bn for Ant, $114bn for Stripe, $85bn for Square and $42B for Adyen. For the listed digital payment firms, investors have recognized the opportunity as well. During the period since January 2020 the S&P500 index is +20%, while PayPal is +120%, Adyen is +190% and Square is +250%.


The digital payment firms still do have some level of specialization but going forward experts believe they will be converging in terms of expanding-their offerings and -their customer base. Currently, these dedicated digital payment firms have about half the market with the other half being shared by the traditional credit cards like Visa and MasterCard.


Digital payment firms are called acquirers and can be thought of, in the purest sense, as firms that transport the consumer transaction to subsequent steps in the payment chain. The rest of the payment chain acts to fulfill debit or credit payment through networks of banks and other financial institutions. Each step in the transactional process is price per transaction. If properly scaled, for billions of transactions, each step is highly profitable. For these reasons, all companies in the space are striving to capture a fuller spectrum of the payment chain. Such a drive will put these digital payment firms more and more in direct competition with the likes of Visa, MasterCard and their networks of national banks, regional banks and other financial institutions. There’s a sense that the traditional credit card companies won’t be able or willing to compete as well on price and on an international basis. Making matters worse the relatively expensive cards like VISA stand accused of making it ..."difficult for merchants to process transaction through cheaper [digital payment] alternatives." American anti-trust regulators are currently investigating the business practices of VISA. For these reasons, it is predicted that the traditional credit cards will continue to lose share to the group dubbed as the “fantastic four”-PayPal, Square, Stripe and Adyen.


The continuing growth of digital payments has been and is driven by; the growth in e-commerce, the greater adoption of cash alternatives and the efforts of digital payment companies to build the infrastructure for managing the enormous number of transactions. Even worse for the credit card companies and troubling for the digital payment companies as well are the increasing efforts by Walmart, Target, Google and others to enter the space.


*private company market capitalization are estimated