Digital payments: Promising farewell to cash
We experience it every day: the smartphone replacing the traditional wallet, with digital payments increasingly taking the place of cash. This shift is a significant growth driver for the payment sector, as analyzed by Bertrand Born and Luca Menozzi. Moreover, the industry holds promise for investors interested in thematic funds focused on digitalization and the digital economy.
Bertrand Born and Luca Menozzi, Portfolio Manager
Digital currency advocates have reason to celebrate. Recently, the US Senate approved a long-awaited bill, the "Genius Act", which could regulate the use of so-called stablecoins (see info box below) and potentially pave the way for their widespread adoption. This development could have far-reaching implications not only for the crypto industry but for the entire payments ecosystem.
Stablecoins offer the promise of fast, cost-effective, and direct transactions, potentially bypassing traditional financial and payment service providers. The signs point to disruption.
This could accelerate the transformation in how we pay. Technological innovation in payments is already advancing rapidly: The combination of software, digital technology and payment transactions is driving new innovations and an expansion of value-added services.
Stablecoins – the future of digital payments?
Decentralised finance – DeFi for short – refers to a system of financial applications based on blockchain technology that does not require traditional intermediaries from the financial industry. Cryptocurrencies and their special application as stablecoins work according to this principle: these digital currencies are designed to maintain a stable value by being linked to a reserve value, such as fiat currencies like the USD, commodities like gold or baskets of assets.
Common stablecoins include Tether (USDT), USD Coin (USDC) and DAI. While they can be easily integrated into DeFi applications, stablecoins are considered less volatile and more practical to use than cryptocurrencies. As a means of payment, they could increase efficiency and reduce costs, particularly for international payments. However, they are still awaiting regulation. Technological risks, such as decoupling from the reference value or liquidity problems, could also stand in the way of widespread acceptance.
Digital Payments as a Prime Example of Digitalization
The rapid changes in the payment ecosystem should interest all investors focused on the long-term investment theme of digitalization. This transformation not only opens up growth opportunities but also exemplifies the trend towards convergence: in digital payments, financial services, technology, and fintech applications merge into a completely new offering.
This makes the payment industry a prime example of the trend towards the digital economy. Additionally, this transformation can significantly contribute to digital empowerment and financial inclusion, which is relevant for sustainability-oriented investors.
Fundamental Drivers in the Payment Ecosystem
In addition to technological innovation, other fundamental drivers are at work in the payment ecosystem:
- Decline in Cash Usage: The use of cash has been declining worldwide for years and is expected to continue decreasing significantly, with contactless payments acting as an accelerator. Analysts at Barclays (Barclays Global Cash Model, 2024) expect the share of cash in payments to drop to 20% by 2030. Card payments are most prevalent in the US, while cash and checks remain dominant in emerging markets like Latin America.
- Growth in Payment Transactions: The payment industry is expected to continue growing at a rapid pace. US payment processor Worldpay forecasts that transaction volumes will exceed USD 36 trillion by 2029, driven primarily by digital payments at points of sale (POS), e-commerce, and digital money transfers.
- Payments as a basic service are being digitized and serve as a starting point for ever-new complementary offerings. Examples include the integration of various payment systems like mobile and card payments or digital wallets, new services in international payments and currency exchange, and software for cybersecurity, fraud prevention, advanced analytics, and anti-money laundering.
Payment transactions growing at a rapid pace (in USD billion)
Which Companies Are Poised to Benefit?
To understand which companies are well-positioned to benefit from this long-term growth, it is worth examining the established structures of digital payments. A typical credit card transaction involves multiple parties: consumers, merchants, acquirers (who equip merchants with terminals), card networks like Visa or Mastercard, and issuers (banks or neobanks) who issue credit cards to consumers and manage their accounts.
Merchants pay a Merchant Discount Rate (MDR) to offer payment services, which is divided among acquirers, card networks, and issuers, with issuers receiving up to 70% as an interchange fee (see graphic below).
Digital payments: Who is involved in a credit card transaction?
New Services Offer Growth Beyond Digital Payments
However, this established relationship faces competition. Modern banking infrastructure enables instant account-to-account payments. Dominant online platforms seek to integrate digital payments, while modern smartphones can replace complex payment terminals. Cryptocurrencies, especially stablecoins, could become an alternative for money transfers in specific market segments like remittances or corporate payments. Meanwhile, fintechs and payment apps like PayPal, Apple Pay, and Klarna are entering the field.
Despite this, we believe that major card networks will continue to benefit from the growth opportunities in payment services due to their sheer importance to the global economy. Visa, Mastercard, and American Express process transactions worth over USD 20 trillion, which, according to research firm Bernstein (Bernstein Blackbook – Payments: the money machine, 2024), represents 20% of global GDP. These networks are now building future services: new payment flows and services like cybersecurity, data solutions, or consulting could become the main growth drivers for Mastercard and Visa, according to Bernstein.
Digital Payments as a Driver for Digital Empowerment
But it's not just card networks that can benefit from the increasing complexity of the payment ecosystem. Acquirers like Adyen and Fiserv are also well-positioned. Adyen simplifies the integration of payment solutions across multiple channels and regions into a single, cohesive system for merchants. Fiserv offers a range of e-commerce solutions that integrate payment processing with vertical-specific software, improving the customer experience. This enables SMEs not only to accept payments but also to increase efficiency in their overall operations.
From a sustainability perspective, such services can also act as catalysts for digital empowerment: the ability to make payments in multiple currencies and operate in numerous countries can support corporate clients in their global growth. Digital payment services, also via mobile phones, can reach populations previously excluded from the financial system, promoting financial inclusion and access to banking services.
To address both the rapid changes and sustainability aspects, a good understanding of business models in the payment sector is required. Expert-managed thematic funds can offer a solution: the sustainable equity fund "Swisscanto (LU) Equity Fund Sustainable Digital Economy" diversifies investment risk by investing in digital empowerment, digital infrastructure, digital environmental solutions, and digital security.
Investment theme «Digital Economy»: Insights
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Legal Disclaimer Switzerland and international
This document only serves advertising and information purposes, is for distribution in Switzerland only and is not directed at persons in whose nationality or place of residence prohibit access to such information under applicable law. Where not indicated otherwise, the information concerns the collective investment schemes under the law of Luxembourg managed by Swisscanto Asset Management International S.A. (hereinafter "Swisscanto Funds"). The products described are undertakings for collective investment in transferable securities (UCITS) within the meaning of EU Directive 2009/65/EC, which is governed by Luxembourg law and subject to the supervision of the Luxembourg supervisory authority (CSSF). This document does not constitute a solicitation or invitation to subscribe or make an offer to purchase any securities, nor does it form the basis of any contract or obligation of any kind. The sole binding basis for the acquisition of Swisscanto Funds are the respective legal documents (management regulations, sales prospectuses and key information documents (PRIIP KID), as well as financial reports), which can be obtained free of charge at https://products.swisscanto.com as well as at Swisscanto Fondsleitung AG, Bahnhofstrasse 9, CH-8001 Zurich (also acting as representative of the Luxembourg Swisscanto funds in Switzerland) or in all offices of Zürcher Kantonalbank. Paying Agent for the Luxembourg Swisscanto funds in Switzerland is Zürcher Kantonalbank, Bahnhofstrasse 9, CH-8001 Zurich. Information about the sustainability-relevant aspects in accordance with the Regulation (EU) 2019/2088 as well as Swisscanto's strategy for the promotion of sustainability and the pursuit of sustainability goals in the fund investment process are available on the same website. The sub-fund referred to in the document is subject to Article 9 of Regulation (EU) 2019/2088. The distribution of the fund may be suspended at any time. Investors will be informed about the deregistration in due time. The investment involves risks, in particular those of fluctuations in value and earnings. Investments in foreign currencies are subject to exchange rate fluctuations. Past performance is neither an indicator nor a guarantee of future success. The risks are described in the sales prospectus and in the PRIIP KID. The information contained in this document has been compiled with the greatest care. Despite professional procedures, the correctness, completeness and topicality of the information cannot be guaranteed. Any liability for investments based on this document will be rejected. The document does not release the recipient from his or her own judgment. In particular, the recipient is recommended to check the information for compatibility with his or her personal circumstances as well as for legal, tax and other consequences, if necessary, with the help of an advisor. The prospectus and PRIIP KID should be read before making any final investment decision. The products and services described in this document are not available to U.S. persons under the relevant regulations (in particular Regulation S under the U.S. Securities Act of 1933).
Data as at (where not stated otherwise): 11.2024
© Zürcher Kantonalbank. All rights reserved.
This document only serves advertising and information purposes and is not directed at persons in whose nationality or place of residence prohibit access to such information under applicable law. Where not indicated otherwise, the information concerns the collective investment schemes under the law of Luxembourg managed by Swisscanto Asset Management International S.A. (hereinafter "Swisscanto Funds"). The products described are undertakings for collective investment in transferable securities (UCITS) within the meaning of EU Directive 2009/65/EC, which is governed by Luxembourg law and subject to the supervision of the Luxembourg supervisory authority (CSSF).
This document does not constitute a solicitation or invitation to subscribe or make an offer to purchase any securities, nor does it form the basis of any contract or obligation of any kind. The sole binding basis for the acquisition of Swisscanto Funds are the respective published legal documents (management regulations, sales prospectuses and key information documents (PRIIP KID), as well as financial reports), which can be obtained free of charge at https://products.swisscanto.com/. Information about the sustainability-relevant aspects in accordance with the Regulation (EU) 2019/2088 as well as Swisscanto's strategy for the promotion of sustainability and the pursuit of sustainability goals in the fund investment process are available on the same website. The sub-fund referred to in the document is subject to Article 9 of Regulation (EU) 2019/2088.
The distribution of the fund may be suspended at any time. Investors will be informed about the deregistration in due time. The investment involves risks, in particular those of fluctuations in value and earnings. Investments in foreign currencies are subject to exchange rate fluctuations. Past performance is neither an indicator nor a guarantee of future success. The risks are described in the sales prospectus and in the PRIIP KID. The information contained in this document has been compiled with the greatest care. Despite professional procedures, the correctness, completeness and topicality of the information cannot be guaranteed. Any liability for investments based on this document will be rejected. The document does not release the recipient from his or her own judgment. In particular, the recipient is recommended to check the information for compatibility with his or her personal circumstances as well as for legal, tax and other consequences, if necessary, with the help of an advisor. The prospectus and PRIIP KID should be read before making any final investment decision.
An overview of investors' rights is available at https://www.swisscanto.com/int/en/legal/summary-of-investor-rights.html.
The products and services described in this document are not available to U.S. persons under the relevant regulations (in particular Regulation S under the U.S. Securities Act of 1933). Data as at (where not stated otherwise): 11.2024
© Zürcher Kantonalbank. All rights reserved.
