Markets & Economy

Successfully investing in today’s pandemic has been defined by winners and losers, and this holiday season is no exception.

Everyone can pick out the hot pandemic-driven trend of the day, or point out the suffering traditional retailer, but somewhere in the middle are a variety of overlooked companies that are neither the darlings of the day, nor the beaten down losers of the year.

In today’s blog post, we highlight an industry we believe remains resilient throughout it all, and it is in particular focus this holiday season: the payment processors. While the pandemic has both helped and hurt, we believe the story remains as strong as ever.

The Surge in Shopping Online

The trend from cash to card isn’t new, and the pandemic has driven a clear acceleration to the trend. For the payment processors, and the surge in eCommerce this holiday season has been a boon for the digitalization of payments.

In 2019, the Federal Reserve estimated that approximately 26% of all consumer transactions still occurred with cash. This is a huge remaining piece of the pie, and while we do not yet have 2020 data, undoubtably many of these transactions moved online this year and benefited the payment processors along the way.

Another emerging trend is the digital wallet. If you’ve shopped online with any large retailers this year, then you’ve probably noticed the mass proliferation of digital wallet services and other 1-click payment options. These new digital payment tools make the eCommerce shopping experience easier, faster, and more secure, and with few exceptions, almost all these services utilize the card networks as the backbone.

These tools make consumers more comfortable spending online as they only have to enter credit card information into one service to make purchases on multiple websites. The growth opportunities here are two-fold, benefiting both payment processors and the digital wallet services, including digitally-native payment providers.

Finally, one additional benefit to the shift online is regarding fraud. Like other card-not-present transactions, online purchases tend to be more susceptible to fraud than in-person transactions. While more fraud may seem like a negative, this too is a positive for the payment networks and processors.

The cost of fraudulent transactions is borne by merchants and banks that issue cards, and the desire to limit fraud gives payment processors the opportunity to perform and charge for additional fraud detection services. Today’s pandemic-driven shift to eCommerce has accelerated this revenue opportunity, too.

One Major Headwind

While the pandemic has been a tailwind for the payment processors in a variety of ways, one key area negatively impacted is in international travel.

While cross border traffic may seem unrelated, international payment processing is a huge profit center for the card networks. Fraud management and a variety of fees drive substantial revenue opportunities from international travelers. While some travel remains, it is badly diminished and has weighed on the business performance of most of the major card networks.

We are keeping our eye on the progression of the pandemic and the potential recovery of international tourism. As investors adjust their expectations in the months and years ahead, the eventual return of cross border travel and tourism may catalyze upside in the payment processors.

An Eye on Cryptocurrencies

Beyond the pandemic’s positive and negative industry impacts, one key remaining question is the disruption potential posed by cryptocurrencies. Their popularity has waxed and waned over the past decade, but with Bitcoin back near all-time highs, cryptocurrencies are becoming popular again.

While we remain technically impressed by what cryptocurrencies can do, they remain significantly hamstrung by what they can’t do. The major card networks are capable of processing tens of thousands of transactions per second, and they do so regularly. Cryptocurrencies struggle to process a tiny fraction of that number at a much greater cost. We believe they remain years, if not decades, away from being a realistic substitute for the payment processors.

We expect sentiment to continue to bubble up and down as people trade cryptocurrencies for speculative purposes and will keep our eye on the situation in the meantime.

At Manning & Napier, our active processes provide us the flexibility to adjust to a changing world. We consider emerging industry trends, individual business fundamentals, and the broader macroeconomic outlook in order to identify the best positive investment opportunities for the current market environment.

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This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.