5 Best Stocks For Digital Payments

Best Stocks For Digital Payments: Consumers have been moving away from cash for more than a decade, but the transition has been gradual. Each year, the percentage of cash transactions drifts downward by a few percent, while use of debit cards, credit cards, and digital payments goes up. 

The most accurate research on this topic comes from the FDIC. Unfortunately, it runs about two years behind. As of 2017, 30 percent of payments were made with cash and another 27 percent were made with debit cards. Credit cards accounted for 21 percent of transactions during that period. 

It is safe to assume that the decline in use of cash continued through 2018 and 2019 – and it is absolutely certain that cash saw a dramatic drop in popularity throughout 2020.

While consumers were already choosing debit cards, credit cards, digital payments, and contactless payments in higher numbers at the start of 2020, the percentage of non-cash transactions rose exponentially as COVID-19 took over.

Consumers turned to e-commerce for essential and non-essential purchases. When they had to visit a brick-and-mortar store, they tried to avoid cash if at all possible. 

There are a variety of companies offering digital payment services, each with a slightly different value proposition. That makes it tough for investors to determine the best stocks for digital payments. However, most analysts agree that these five are top contenders. 

Square Has 30 Million Active Monthly Users

One of the most exciting companies in the digital payments space is relative newcomer Square.

Founded in 2009, Square (SQ) took merchant services into the digital age. Instead of costly accounts with traditional merchant services providers – and bulky equipment that required electric and phone connections – Square created accessories that allowed sellers to accept credit card payments using their mobile devices. 

Square held its IPO in November 2015, and rapid growth followed. The company acquired a collection of subsidiaries to expand its business, including web designer Weebly and several takeout delivery services. 

In 2013, Square introduced Cash App, a mobile payment service that makes peer-to-peer cash exchanges possible. There are also options for saving and investing included in the app.

In the seven years that followed its launch, the app attracted more than 30 million active users, seven million of whom own a Cash Card.

Square recently announced its purchase of Credit Karma’s tax preparation service, which will round out the app’s goal of providing end-to-end financial support. 

Square had an exceptional 2020, despite some early concern that use of merchant services tools would drop due to pandemic-related business closures. Use of the tools did drop, but Square quickly recovered by transitioning users to online sales. 

The company is just on the cusp of moving from the rapid growth stage of a startup to the more profitable stage of an established company. So far, Square stock has increased approximately 250 percent year-to-date, and analysts believe that it could reach $250 per share in the next 12 months. 

PayPal Processed Over $700 Billion In Payments

PayPal (PYPL) was one of the earliest companies to pursue digital payment solutions. It started its life as Confinity in 1998, then became PayPal in 2002.

From 2002 to 2015, PayPal was owned by eBay (EBAY). Since then, it has operated independently, facilitating an astonishing $712 billion worth of payments for 305 million users in 2019.

That’s almost double the volume and active users at the time of the split from eBay. 

Those figures have steadily increased in 2020 as more people moved to e-commerce in an effort to avoid COVID-19.

Third quarter results came in strong, showing total active users at 361 million. Payment volume increased 38 percent year-over-year for a quarter total of $247 billion.

In the third quarter, revenues rose to $5.46 billion – a 25 percent year-over-year increase – and adjusted earnings per share came in at $1.07. That’s an increase of 41 percent as compared to the same period in 2019. 

PayPal’s stock price has been on a steady upward trajectory since the March market crash, and industry experts agree there is still plenty of room from the company to grow. It’s subsidiary, Venmo, is adding users and volume at a rapid rate, and PayPal (PYPL) isn’t even close to saturating the market.

After all, even if PayPal processes $1 trillion in transactions this year, that’s just a drop in the bucket. In the US alone, cashless purchase volume hit $7.27 trillion for 2018, and that figure is expected to reach $10 trillion in 2023.

Considering PayPal operates in 200 countries worldwide, there is clearly opportunity for the company to expand. 

Green Dot Helps Unbanked Households Bank

Every year, the FDIC surveys the US population to determine what percentage of households are “unbanked”. That means these individuals and families deal in cash, and they don’t have basic products like checking accounts, savings accounts, and debit cards.

In 2019, the number of unbanked households came in at 7.1 million. 

That’s a problem, because this group tends to be low-income – and being unbanked carries costly disadvantages. For example, cashing checks means using high-fee check cashing services, and bills have to be paid with money orders.

Green Dot was founded in 1999. It’s original goal was to make it possible for teens to access online services though they didn’t own credit and debit cards.

It was immediately apparent that teens weren’t the only demographic in need of access to low-fee plastic. Green Dot revised its mission and set out to reach the unbanked.

Green Dot was first in the country to offer prepaid debit cards, and business grew at a rapid rate from there. In 2010, Green Dot held its IPO, and today, it has a market cap of $2.8 billion.

It’s newest innovation, GoBank, has transformed the landscape of financial services for low-income families by offering a banking solution that is managed entirely through mobile app. 

Green Dot reported its third-quarter results on November 4, 2020. For that period, the company grew revenue by 22 percent year-over-year to $279 million, with adjusted earnings per share of $0.25.

Management noted that they have made significant moves in 2020 to streamline operations and reduce expenses. As a result, they expect to see an increase in overall profitability throughout the next 12 months.

Visa Is The World Leader In Payments

Visa is far-and-away the world leader in merchant services and payment processing. While it doesn’t issue cards directly, it licenses the Visa logo to a long list of financial institutions. That branding makes it possible for debit and credit card holders to make payments in more than 200 countries and territories worldwide. 

There are more than 3.3 billion Visa cards in global circulation, and they are used to make approximately 45 percent of all general-purpose card purchases. That adds up to roughly half a billion transactions every day.

Visa earns its revenue by facilitating those payments – a portion of every purchase goes to Visa’s top-line results.

In October, Visa announced that it was joining the contactless payment revolution with new Tap-to-Phone technology. This allows merchants to accept Visa card payments through a mobile app. It is a big win for Visa, as it promises to keep the company in its industry-leading position.

Contactless payments were the one product that competing companies could use to differentiate themselves. Visa plans to use this technology to expand its merchant services solutions to small and micro businesses in communities that have – until now – been shut out of the credit and debit card economy. 

It’s true that Visa had a tough 2020. It relies heavily on cross-border transactions and brick-and-mortar purchases to generate revenue, both of which went down considerably as the year wore on.

Nonetheless, Visa hasn’t struggled much on the financial side, as its net profit margin runs around 50 percent. 

For the quarter ending September 30, 2020, payment volume grew by 4 percent year-over-year, which is unusually low. This is credited to the 29 percent decline in cross-border transactions. Consumers simply aren’t traveling this year. That led to a 17 percent drop in revenue, as well as a 29 percent decline in net income. 

Investors and analysts have no real concerns about Visa’s future. This year is an anomaly, and the dip will pass when the pandemic ends. Those who already own Visa shares and those who buy in now are likely to see returns at normal levels by late 2021.

Mastercard Is Second To Visa But Still A Powerhouse

Mastercard might not have the size and scope of Visa, but it is holding strong in the second place position.

Cards with the Mastercard logo were used in nearly 25 percent of all general-purpose card purchases, and Mastercard is in the top 15 largest US companies.

Some industry experts predict Mastercard will enter $1 trillion market cap territory by 2023.

The most recent quarter brought a 14 percent drop in revenue as compared to the same period last year, and adjusted net income went down a total of 27 percent year-over-year. Despite those uninspiring results, share prices are up 11 percent year-to-date, demonstrating investor and analyst faith in Mastercard’s ability to recover and thrive. 

As with Visa, Mastercard has had some challenges in 2020, but no one has indicated concerns for the company’s future long-term.

Part of its strategic plan includes exploring other fintech services, perhaps focusing on data security to increase the safety of Mastercard purchases. 

Best Stocks For Digital Payments: The Bottom Line

The trend towards cashless payments got an unexpected boost from the pandemic, but it is unlikely that incline will reverse once COVID-19 has been extinguished.

The coronavirus simply compressed the timeline for the transition to digital payment solutions. Each of these five companies is in the right place at the right time to drive the digital payment revolution, making any of these stocks a smart addition to your portfolio. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.