Summary
The wide scale lockdown and social distancing measures in the fight against COVID-19 have triggered significant changes in consumer behaviour. Whilst some of these changes might be temporary, others are expected to have important, long-term repercussions. From the workplace, to the classroom, to consumer spending, anything digital has seen a considerable tailwind as people were confined to their homes. Online shopping and food delivery are obviously not new trends, however lockdown would have necessitated participation from even their biggest opponents. Increased awareness and wider acceptance will have a meaningful and lasting impact on these services likely well beyond the current pandemic.
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Hidden behind these obvious developments is another digital trend: digital payments. Slowly but surely, many economies are increasingly moving away from cash payments. In the current crisis, digital payments have not only seen a tailwind from the switch to digital but also because of health concerns surrounding the physical handling of banknotes and coins. Whilst it is not perfectly clear whether the virus can be transmitted via physical money, the Bank of Thailand suggested in a Twitter announcement to disinfect banknotes and coins by soaking them in a soap solution.1 Elsewhere, the Federal Reserve introduced a 10-day quarantine for dollars returning from Asia and Europe.2 In contrast, the European Central Bank later stated that ‘banknotes do not represent a particularly significant risk of infection compared with other kinds of surface that people come into contact in daily life’3 . However, this ‘not particularly significant risk’ could result in a preference for contactless payment methods over physical money in the longer term.
Again, ‘digital payments’ is not a new trend but it might receive additional tailwind because of the current situation. Already well before the current crisis, Sweden expected to become the first cashless society within the next few years.4 Electronic payments are increasing rapidly. Four out of five purchases in Sweden are made electronically and many Swedes have stopped carrying cash altogether.5 Supported by high internet and smartphone penetration, mobile payment app Swish, founded by six Swedish banks in 2012, has become so hugely popular that ‘swishing’ now simply stands for making a payment on the Swish app. Users simply scan a QR code to transfer money to businesses and people alike. In a next step, Swish wants to enable contactless instore payments with a mobile phone using a Bluetooth module, similar to the ‘tap and pay’ of some credit or debit cards using near-field communication technology.
However, Sweden might be particular to a certain degree as many shops and restaurants are no longer accepting cash payments, asking customers to pay either by card or mobile app. Even banks have fully digitalized branches that will simply not accept cash.6 This is different to other countries where the currencies are legal tender and stores can’t refuse acceptance according to the law. But even there, it can be noted that with the proliferation of the internet and smartphone, cash as a means of payment is losing in popularity. In China, mobile wallets of Alipay and WeChat Pay occupy a large part of the huge e-commerce market. Both are supported online and in-store. New alternative payment methods such as ApplePay are making a global market entry.
Against this structural growth of non-cash payments, digital payments service providers are experiencing huge tailwinds. These companies provide various financial and technical services and systems that allow the acceptance of any noncash based payment. They generate revenues through charging a service fee to the payee for service subscription or hardware renting/leasing, a service fee to the payers for providing payment instruments like for example annual fees for payment cards, and finally by taking a small fee for each transaction.
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Leading countries ranked by retail e-commerce sales from 2014 to 2019 (in bn USD) Leading retail e-commerce markets worldwide 2014-2019 |
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| Source: eMarketer; https://www.statista.com/statistics/377624/leading-countries-retail-e-commerce-sales/ * Forecast. **Excludes Hong Kong. Includes products or services ordered using the internet via any device, regardless of the method of payment or fulfillment; excludes travel and event tickets. |
On the consumer side, the increasing shift away from cash as well as the shift in the consumption mix towards digital commerce, which is intrinsically 100% non-cash, are the main drivers as discussed. On the merchant side, businesses are looking to maximize acceptance in a rising complexity of payment instruments at optimal transaction costs including the cost of fraud. Businesses are also interested in value added services for easier and cheaper operations and to enhance sales prospects. Payment company Adyen estimates that ‘57% of British consumers say queuing is their biggest frustration, and it will drive four out of five US shoppers out of a store’. Online, users are frequently experiencing issues with the final step of their shopping as their preferred payment options might not be available and/ or offered payment options can’t be met - not everybody has a credit card after all. According to Adyen, ‘45% of shoppers in the UK have abandoned a purchase because of a payment issue’.7
Despite the very strong growth experienced over the past years in non-cash transaction volume, the usage of cash is still high. In Europe, cash represents close to 80% of all transactions in volume and more than 50% in value.8 This is why there is still substantial growth potential ahead. Growth rates will vary from country to country and region to region with meaningful growth rates in Europe and other developed regions but even more significant growth in emerging regions, albeit coming from a lower basis. With the rising complexity of payment instruments, payment service providers are highly needed to help merchants dealing with the emergence of alternative payment methods. The COVID-19 crisis has not created this trend but has provided a further impulse.
Megatrends influence how consumers and businesses see the world today
At Allianz Global Investors we recognise that we live in a world that is constantly evolving. To stay ahead as investors we must engage with a rapidly changing landscape, understand the drivers behind this change, and assess its impact. Looking beyond the ebb and flow of political and economic news cycles, we have identified four megatrends that are producing major long-term shifts: Technological Innovation, Demographic Change, Resource Scarcity, and Urbanisation. Through our thematic range of investment solutions we aim to identify the investment opportunities that arise from these structural shifts by investing in the themes best positioned to benefit from these long-term fundamental changes. Thematic investing is a way of tuning out the noise, identifying the underlying long-term patterns and helping our clients to benefit from them. Digital paymentsDigital payments form part of what we call the ‘Digital Life’ theme within the Technological Innovation megatrend, a megatrend that explores automation on the production side and use of online services on the demand side. We focus on investable themes with the best outlook over a five- to twenty-year time horizon. Digital Life and in particular Digital Payments is one of the investable themes that we have identified. A note on WirecardEach stock in our concentrated thematic portfolios of stocks undergoes thorough and robust analysis to ensure it meets (and continues to meet) our strict criteria for investing. One company within the Digital Payments space which has recently been making headlines, for all the wrong reasons, is Wirecard. In this case our analysis raised flags early on as a result of a series of news articles and our own Governance focused discussions with the management team. As a result, Wirecard was subject to downgrades from an ESG standpoint on our investment platform and was deemed not to meet our standards for investment. Our exposure to cashless payments was therefore not impacted at all by recent movements in the company’s stock price. |
1Daily Mail Australia: ‘How to clean your cash to rid it of coronavirus‘, 7 April 2020
2Reuters: ‘Fed quarantines U.S. dollars repatriated from Asia on coronavirus caution‘, 6 March 2020
3The ECB Blog: ‘Beyond monetary policy – protecting the continuity and safety of payments during the coronavirus crisis‘, 28 April 2020
4Sveriges Riksbank: ‘Payments in Sweden 2019‘, 7 November 2019
5Sweden.se: ‘Cash is no longer king in Sweden‘, 11 September 2019
6KTH Royal Institute of Technology: ‘Cashless future for Sweden?‘, 14 October 2015
7Adyen: ‘Payments 101 for fast-growing businesses‘, 2019
8G4S, World Cash Report 2018
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