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15 December 2020

Touch and Go

It seems as though many of the technological advances the 21st century has brought us have enabled us to do one thing faster, easier, and more efficiently - spend money. Physical cash, in effect, is perhaps nearing its demise; the rise of contactless card payments, as well as Google Pay and Apple Pay on smartphones, coupled with the potential rise in cryptocurrency payments, may eventually render cash useless. Companies such as Amazon and eBay have allowed almost anybody to pay for almost anything either over the internet or on their phone, revolutionising the payments market. Card companies, however, have not been left behind.
 
Visa and Mastercard, two companies which dominate both the card and payment gateway markets, forming perhaps one of the best-known duopolies, have benefited from the steady transition away from cash and into card-based payments. Both firms are characterised by their vast number of small fees that, when added up over millions of transactions, stacked up to produce a combined revenue of nearly US$40bn in 2019.
 
This is not to say, however, that both companies have not been affected by the COVID-19 pandemic. With revenues closely linked to consumer spending, demand for both companies’ products were initially adversely affected as shoppers were forced to stay at home, causing marked declines in demand for their products in retail outlets. Despite the increase in online sales fuelling demand for their payment gateway systems, both firms have also been heavily affected by the reduction in air travel. In fact, in 2019 Mastercard attributed 22% of its revenues to cross-border transactions, a division that, at its lowest point, saw volumes fall 55% in mid-April, severely hampering the firm’s financial performance. This has continued, with the reduction in air travel proving a drag on business for both firms as they grapple with lower revenues, despite surprisingly robust domestic consumer demand.
 
While a Biden presidency may not initially seem as though it may affect either business, the potential knock-on effects of a small number of his policies could impact both payments firms. Despite only recently having been confirmed as the 46th and next President of the United States, he has already taken steps to build his teams and strategy, employing a Coronavirus taskforce consisting mainly of top medical personnel. This may further push the call for local, state or even national lockdowns, impacting the ability for people to travel and purchase non-essential items, in effect restricting both payment companies’ revenue in the process.
 
The future is not all doom and gloom, however. Mastercard was given the green light to establish a bank card clearing business in China earlier this year, three weeks after the phase one US-China trade deal was signed. This will allow the firm, along with its domestic partner, NetsUnion Clearing Corporation, to tap into the US$27tn Chinese payments market, with Visa aiming to follow suit. While this process has taken some time, with China dragging its feet in order to protect domestic businesses and in response to Donald Trump’s aggressive foreign policy, progress could pick up under Joe Biden. He will inevitably aim to complete the US-China trade deal and his likely softer touch in negotiations could provoke fewer retaliatory measures from China, helping the card companies access Chinese markets more quickly.
 
While the firms clearly do face significant short-term hurdles, they are exposed to positive structural changes within the global economy. The shift to card-based and online payments, something that has only been accelerated by the COVID-19 pandemic, as well as the long-term increases in consumer spending, will help both Visa and Mastercard well into the longer term.
 
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
 
Touch and Go
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