The origin of FinTech and the modern take on payments
Our introduction of our new payments basket requires a bit of history background. Today’s fast-growing payment companies are the ones that really ignited the concept of FinTech (Financial Technology) and opened the floodgates from venture capital firms. However, the expression FinTech goes back all the way to the early 1980s, when it was used by Peter Knight, the editor of the business newsletter in the Sunday Times.
Square (part of our payments basket) and Stripe are both founded in 2009, and the popular payments company Klarna was founded in Sweden in 2005. AfterPay which has just been acquired by Square for $29bn was founded in 2014. The newer payments companies are all a phenomenon of around the Great Financial Crisis years and the years following that event. Just like ApplePay, none of these newer payments companies want to have anything to do with the messy infrastructure part of issuing credit cards and process payments in addition to collecting debt. That is why all these newer payment companies are focusing on innovation around the consumer experience in terms of making it easy to pay and store relevant information without duplication (ApplePay). Square’s initial success came through innovating the POS (Point-of-Sales) terminals for smaller merchants such as restaurants.
The core infrastructure the global payments system is complex network of old mature companies such as Visa, Mastercard, American Express, and all the banks that provide distribution and auxiliary services around credit cars integrating them into banking accounts etc. PayPal is not a credit card issuing payment company but it has its own infrastructure with credit risk and debt collection features.
The payments basket
The payments theme basket consists of 25 companies with a good mix of old and new companies, and a good geographical split although the US is overrepresented, but that should not surprise anyone since the world is based on a US centric financial system with the USD still being the world’s reserve currency. Out of the 25 companies in the basket, 11 companies have listed publicly within the past five years. The reason why AfterPay is not in the list is that we expect the acquisition from Square to be approved by all regulators.
|PayPal Holdings Inc||315,896||24.1||43.5||22.2||605.8|
|American Express Co||128,801||-10.0||28.9||12.9||167.1|
|Fidelity National Information Services Inc||83,042||8.3||15.7||22.3||79.9|
|Global Payments Inc||48,862||19.6||33.1||35.1||124.5|
|Discover Financial Services||38,673||-2.9||95.5||3.7||149.3|
|FleetCor Technologies Inc||21,350||-3.4||3.2||19.1||54.2|
|Pagseguro Digital Ltd||18,730||38.8||10.6||20.0||NA|
|Affirm Holdings Inc||17,146||79.0||NA||10.0||NA|
|Lightspeed Commerce Inc||13,172||83.8||-101.0||23.5||NA|
|Western Union Co/The||8,903||2.3||8.1||17.9||24.6|
|GMO Payment Gateway Inc||9,350||27.6||23.6||12.2||459.5|
|Shift4 Payments Inc||6,606||37.8||144.2||34.3||NA|
Source: Bloomberg and Saxo Group
Our table above also shows that Visa is by far the number one leader in the payments industry. The old guard of Visa, Mastercard, and American Express have hardly grown revenue in the past 12 months compared to the previous 12 months. Of the payment infrastructure companies, PayPal is the only one that is growing at double-digit growth rates. Square and Adyen are the two biggest payments companies among the innovative new class of payment companies growing extremely fast as the numbers suggest. Square’s revenue growth is currently 171% and Adyen is a 51%.
Outlook for the payments industry
Square’s recent acquisition of AfterPay provides a peek into the future of the emergent payment company of the future. The buy-now-pay-later (BNPL) model of AfterPay was a gift to millennials that do not like credit and interest rates as they could buy something and then be charged interest-free every two weeks in four installments. The numbers suggest that this easy of use for Millennials drive more purchasing and merchants liked the deal of paying a small fee on top of processing fees. But the time value of the installments does create an overall credit risk and we do not know the full business cycle risk of this BNPL model. But the move by Square could potentially be copied in Europe with Adyen buying Swedish Klarna. Industry analysts believe these combinations will unlock a lot of value for consumers and shareholders.