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09/22/16 05:00:34 PM
TECH KNOWLEDGE

SECTORS: DIGITAL PAYMENTS SEEN APPROACHING A TIPPING POINT

An increasing number of consumers choose digital payment methods for in-store purchases, as highlighted by trends in the second-largest shopping season of the year (back-to-school), according to S&P Global Market Intelligence. This drives a shift in strategy for merchants, we think, as they implement hardware/software overhauls to assimilate new developments. With enhanced security provisions (tokenization), and the need for a greater breadth of electronic payment applications, we think this creates a runway of growth for select companies that cater to evolving e-commerce trends.

With back-to-school season upon us, as disputes on which trendy apparel and super hero lunchboxes to purchase remain thick in the air, S&P Global Market Intelligence sees a shift in preferences in how some consumers are paying for goods, given the development of contactless offerings, or radio-frequency identification (RFID) and near field communication (NFC). More consumers are leveraging mobile devices to cut down time trudging through stores, as nearly 90% of people utilize their smartphone for school shopping, while 50% (up from 40% last year) of back-to-school searches were done through smartphones, according to a recent survey from PYMNTS.com (a content provider devoted to payments). Mobile device payments continue to rise, now totaling 30% of all transactions. While some might consider consumer uptake modest thus far, we think this still continues to push the transition of traditional commerce (card stripe) to the digital age (contactless).

We note a rising number of consumers taking advantage of digital offerings to pay for products, while infrastructure is implemented by merchants to meet demand. According to eMarketer (a provider of digital commerce, media and marketing figures), mobile payment transactions will total $27.1B in 2016, suggesting a 3X increase from 2015 ($9B). Further, it is expected that total transaction value could reach $210B by 2019. Total mobile payment users reflect this trend, and are expected to reach 69.8M by 2019 (up from 37.5M in 2016). In addition, when diving into age demographics, it's expected that 45% of mobile payment users will be between the ages of 25-34, while only around 10% will be above the age of 65. We think this reflects younger generations embracing innovation, but could present another leg of growth for the latter (older generations) if and when security overhang is eventually removed.

When examining data on the other end of the spectrum (merchant tiers), 451 Research (an emerging technology data firm) cites that the number of mobile point of sale solutions (mPoS) deployed is expected to grow 4X from 13.3M units per day in 2015, to 54M by 2019 (32% CAGR). We think this suggests merchants continuing to acknowledge the need of a deeper digital reach to facilitate payments efficiently.

Given the increasing complexity of payment methods, we think companies with an omnichannel approach that recognize the need for flexible product offerings at the point of sale (POS) could gain ground with the current digital commerce trend. In our view, processors and POS channels alike need to have capabilities to furnish a bundle of solutions that are tailored to all needs, including contactless (NFC/RFID), traditional stripe methods, and Europay/MasterCard/Visa (EMV). Given activity to date, we think digital payment transformations continue to be a focal point for the companies highlighted, as they attempt to offer compelling options to consumers.

First Data Corporation (FDC 14 ****) is a provider of global electronic commerce offerings, merchant acquiring, issuing, and network solutions. FDC has three operating segments, including Global Business Solutions (GBS), Global Financial Solutions (GFS), and Network & Security Solutions (NSS) which contributed 22%, 57%, and 21% of total revenue, respectively. We think FDC will play a large role in the future of electronic payments, as its Clover cloud-based POS system is offered in a variety of form factors, and should help drive revenue expansion. As of Q1 2016, FDC stated approximately 200,000 Clover devices have been installed. Given FDC's diverse product portfolio of payment offerings, combined with transformational efforts (debt reduction plans and improving free cash flow profile), we think this enhances visibility for the business going forward.

PayPal Holdings Inc. (PYPL 37 ***) is a leading global technology platform company, that enables both digital and mobile payments for consumers and merchants worldwide. As of Q2 2016, PYPL had 188 active customer (an increase of 11%) accounts in 200 markets. Mobile payments rose 56% compared to last year, while merchant services payment volume rose 36%. PYPL currently believes that its total addressable market of digital commerce and money is a $100 trillion dollar opportunity. We note acquisitions have been a large part of its growth strategy and entry point into the digital payments arena, with purchases of Xoom and Paydiant in 2015 for $1.1 billion and $230 million. We think PYPL could see further growth in digital and mobile payments given its unique competitive positioning.

Square Inc. (SQ 12 ***) was started in February 2009 with a goal of enabling anyone with a mobile device to have the ability to accept card payments. Currently, 94% of net revenue is generated from payment processing services. SQ has continued to expand products to POS, financial services and marketing offerings, as it attempts to shift focus of its customer base to larger and more stable merchants. As of 2015, gross payment volume (GPV) processed stood at $35.6B, and was generated by 712M card payments from around 190M cards. In the most recent quarter, GPV grew 61%. Despite significant international opportunities, as 97% of sales are currently in U.S., and a flexible suite of offerings, we note the discontinuation of its largest client contract (Starbucks) in October 2016, and a competitive environment.

VeriFone Systems Inc. (PAY 17 ***) is one of the largest global providers of electronic payment solutions at the point of sale. PAY's system solutions run on its proprietary operating systems, security and encryption software. Capabilities of PAY's product portfolio remains well diverse, and include debit/credit cards, contactless/RFID, smart cards, pre-paid, gift, and other stored-value cards. As of Q2, PAY generated around 65% of revenue from its systems solutions business, or electronic payment devices. PAY serves around 10 million customer-facing POS devices domestically, and currently holds roughly 50% of total worldwide market share. We note EMV delays causing headwinds to sales. While we think this issue largely remains a delay, and not a material reduction, we think the future timeline remains in question.

We think security and privacy apprehension could postpone adoption among users. Additionally, prolonged EMV implementation delays, and conflicting regulations regarding select companies' contactless payment technology could prevent usage of digital offerings.

 

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