The pandemic has only been impacting the United States economy for some seven months, but the effect that the coronavirus has had on innovation and change has been remarkable.
The payments system in the US had been changing, but with the change in habits resulting from the coronavirus, even more opportunities for innovation have arisen.
“Contactless” transactions are becoming more and more common, and with the growth of this ability, banks and other financial institutions will find less need for things physical.
I wrote about all the changes that were taking place in the payments system in the United States. Of particular interest at that time was the consolidation that was taking place as the industry grew and prospered.
The overview of the industry was described in these words,
Payment services has become one of the most important and vital parts of the financial system and will play a growing role in the future of the finance industry.
The payment services area used to be dull, dry and, to a large extent, ignored.
Now, however, innovators and investors have focused in on this industry realizing that this area is the key to the financial system and whoever dominates this space is going to play a very important role in the future of finance.”
Then, along came the pandemic!
The Times They Are A-Changin’
As we have seen in many other areas of the economy, people are adjusting their habits and, as a consequence, opportunities are opening up in ways that experts had expected they would, but the pace of transformation has accelerated beyond what one could have imagined.
As a consequence, lots and lots of opportunities are opening up that will ultimately change the way the US economy is structured.
I have tried to lay out in many different cases some of the changes that are taking place in the US economy. And, I have tried to emphasize that some investors believe that “The Investment Environment Is Among The Most Compelling Of Our Careers.” There are opportunities rising up all over the place, and investors need to be on the look-out for what seems to be happening.
The world is moving on, even with all the pain and sorrow people are experiencing.
One just needs to know where to look.
The World of Banking Is Changing
A lot of the future of the banking system is going to depend upon what eventually evolves in the payments system.
With respect to the payments system, people are changing their behavior. And, this change of behavior is even impacting more mature (older) Americans.
Look, for example, at what is happening at PayPal Holdings, Inc. (NASDAQ:PYPL). Telis Demos writes in the Wall Street Journal,
“The digital-payment company grew rapidly in the first quarter despite a big decline in important spending categories like travel and events. The continuing shift from cash and in-store card spending to digital and e-commerce shopping is more than making up for continuing weakness in that kind of spending.”
In June, PayPal experienced the fastest-growing month in terms of volume since it separated from eBay (NASDAQ:EBAY) in 2015.
PayPal has seen a substantial increase in its “core user base”, and it has “more net new active users in the quarter than it did in all of 2016.” PayPal also added 1.7 million more merchants who accept PayPal in some form.
PayPal Is Not Alone
Square (NYSE:SQ) also has reported some very interesting results from the second quarter.
As reported by Telis Demos in the Wall Street Journal, the gross profit of Square rose by 28 percent from a year earlier, but
That growth was driven largely by the company’s Cash App, its digital wallet for consumers, where gross profit was up 167 percent. By July, Cash’s gross profit was up around 200 percent from a year earlier….”
What is so important to me in all this activity?
Well, “online gross payment volume was up 50 percent from a year earlier” and “online is where you want to be in payments these days, with many stores and shoppers shifting to virtual.”
Mr. Demos, to stress the importance of this, states that
“Card networks like Visa have been reporting double-digit non-physical-card payment growth in the US in July, while physical-card payments are still down from a year ago.”
Mr. Demos adds,
Contactless is something Square has always emphasized in its hardware….Square noted that while only 1-in-12 of its sellers were cashless in March, now one-quarter are.”
Investors have priced Square’s value “at an enterprise value of around 170 times forward EBITDA.”
Many see a company like Square as the picture of the future.
The Future
As argued earlier, payment systems are the future of the financial system, not just the banking system. And, payment systems have moved into the lending space, into investing, and into bitcoin buying.
This whole pandemic thing is just accelerating the movement into the future. And, besides PayPal and Square, Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) are not that far behind, if they are behind at all.
Money is just information, and as we see, information can be stored and transferred in ways that were unimaginable even a decade ago. One must build this transformation into the view of the future and the view of where our investments should be going.
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