Barita’s Weekly Newsletter: December 28, 2020

Analyst Insights

The payments industry has been severely changed since the onset of the COVID-19 pandemic. As the global economy recovers, the pandemic has accelerated some existing trends and created some new risks and opportunities. We have observed a pickup in the ongoing shift from cash, increased demand for online payments, a decrease in travel spending and an increase in small-business failures.

According to research done by Morningstar, “Numerous payments industry participants have said that they have seen a shift away from cash accelerate through the coronavirus pandemic, as handling cash is viewed as a potential way to spread the disease.” Their research has shown a sharp divergence between credit and debit. The gap between credit and debit growth is much wider now than it was in the 2009 recession, this suggests that the move from cash has started to take effect. International markets offer better opportunities to take advantage of the growth of electronic payments. In our local market, the pandemic has seen merchants and customers shy away from cash. The Bank of Jamaica has launched several initiatives to convert more Jamaicans to holding accounts to promote how much easier it is to order good, pay bills and transfer funds online. According to Heston Hutton a strategic advisor and financial specialist, “There still remains over 60 per cent of our population who do not have a banking relationship. There still remain more than 75 per cent of our population who does not have a debit card and there are more than 80 per cent of our population does not have a credit card”

The shift away from cash has increased the demand for e-commerce. As shopping on site now carries the risk of infection. While the payments industry only receives marginal benefits from this shift from cash to electronic payment, companies that focus on e-commerce transactions like Paypal have and will continue to benefit from this change. However, we believe that this shift from cash to e-commerce transaction caused by the pandemic will eventually revert to the norm as the pandemic subsides.

It should come as no surprise that the pandemic has led to a massive reduction in travel and this has also affected the payment industry in terms of travel spending. According to Visa, “travel-related cross-border spending dropped about 80% year over year at the start of the pandemic and remained about 70% down in October.” History has shown us that travel will ultimately recover. Historically, this has happened over a three-to-four-year time frame.

During the Pandemic, businesses across several sectors faced a difficult period. Small businesses especially appeared to be at risk. From an acquires perspective this presents a risk of resetting their client base at a lower level. Governments have helped to reduce the risk of small business failures with fiscal support. This can be seen as bankruptcies have risen in 2020, but only modestly and the level year to date doesn’t reflect the current unprecedented era we find ourselves in. We expect the risk of small business failure to reduce as normal consumer behaviour is likely to return as a vaccine has been created. While the pandemic has had a significant impact on the payment industry in the short to medium term, we don’t believe it will dramatically alter the long-term view that the payment industry will gradually return to the norm. For investors looking to benefit over the short to medium term, we suggest looking at stocks that directly benefit from the immediate changes within the payment industry such as Paypal or MailPac.

 

Written by Jonathan Cook, Research Analyst

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