The Case for Mobile Payments

   Payment Evolution

   The method of how we pay for goods and services has come a long way in the last few centuries. There has always been a need to exchange goods and services, but the medium of exchange has continuously evolved over time. We used to use things such as ivory, grains, conch shells (all hail the Magic Conch), clay, and even live animals, but luckily today we have many options for our preferred method of payment. We can choose from cash, credit cards, debit cards, checks, coins, and most notably our phones. Having the ability to be able to pay for things without even needing to carry around a physical wallet is what's spurring rapid growth in the mobile payment industry.

   Throughout history, the number one factor driving the evolution of payments has been convenience. Using tangible goods that represented currency such as grains, ivory or livestock factored out inflation, but it was a pain to carry these goods with you at any time you wanted to make an exchange. Paper banknotes were first introduced in China in the year 806, but they were not widely accepted until over a century later in 960. China spent the next several centuries struggling to balance paper money production and inflation; the tale of modern central banks. China eventually ended up ditching their currency and who can blame them, payments were complicated. Luckily for us, payments have become much simpler.

   Smartphones have fundamentally changed the way our society functions, including the monetary aspect of it. Looking back only 10 years ago we were primarily making payments through either cash, a card, or a check. Now we have the ability to make payments with our phones, and not only in a consumer to business fashion. Peer to peer payments have flourished over the past several years with names like Venmo, Square Cash, Snapcash, and Facebook's Messenger leading the way. Peer to peer payments offers convenience and security through encryption accompanied by fraud detection. So mobile payments are obviously very useful to us, but what is all the hype about?


   To understand the hype around the potential growth for the mobile payments market, we first have to discuss the smartphone market. Smartphones are what power most of our daily interactions and the smartphone market is growing exponentially globally. Let's think about how quickly the number of smartphone users in the United States grew. In 2010 only 62.6 million Americans owned a smartphone, and now over 224.3 million Americans own a smartphone, a 258.31% increase in less than a decade.

Increasing Global Smartphone Usage

   Emerging markets look like they will follow a pattern similar to America in the course of their smartphone adoption. Emerging markets have the advantage of leapfrogging old technology and adopting the new. As the developed world brings about economies of scale, smartphones will become cheaper and more available to those in emerging markets. You can see in the chart below that the number of smartphone users worldwide is forecasted to increase to 2.87 billion by 2020, bringing millions of new people into the mobile payments market.

   Once these new smartphones are in circulation it will allow for more potential mobile payments to take place. When we want to envision the future of how we will pay for things, we look to China as a model. The Chinese spent 50 times more than the United States through mobile payment platforms. Cash is not king in China, with 40% of Chinese citizens regularly carrying less than 100 RMB ($15.62) and 14% not carrying cash at all. The mobile payment market in China is controlled commandingly by tech giants Alibaba with Alipay and Tencent with WeChat pay. Together they hold roughly 90% of all mobile payment market share inside of China, leaving Apple with little room to work with Apple Pay.

How Mobile Payments Happen

   Mobile payments are made in two main ways in China, through either NFC or a QR code. That's right, people actually use QR codes for useful things, shocking. For NFC or Near Field Communication, you just simply hover or tap your device close to the NFC enabled reader in order to complete your transaction. Encrypted data is passed back and forth between the smartphone and the reader to complete the payment. QR codes are much more simple and do not require an NFC enabled device. To pay for something using a QR code you can either show your QR code to the retailers' scanner and have your bank account deducted, or scan the retailers unique QR code to pay. Both ways are highly secure and there is seldom an issue.

Cash is Inefficient 

   Global adoption of mobile payments is inevitable. Cash has worked for many years, but it has very apparent flaws. In 2017 the United States treasury department allocated $726.6 million for just printing currency. Yep, it cost $726.6 million U.S. dollars just to mint money only for 2017. You can see the cost of production per bill in the chart below. Physical cash has other issues though besides the printing cost. I'm not going to rant about the other downsides of dollar bills but continue here if you'd like to learn more.

Mobile Payment Transaction Value 

   In 2017, $230.82 billion was processed, however, that number is projected to increase to $391.44 billion for 2018, and then a staggering $1,328,243,800,000 (yes, four commas) by the year 2022, a 475% increase from 2017.

Global Revenue Projections

   Global revenue projections from mobile payments are more telling of whether or not this is actually worth investing your money in. Total revenue from 2017 for mobile payments was $780 billion but it is set to surpass one trillion by only 2019 as you can see in the chart below.

Mobile Payment Market Leaders

   WeChat Pay and AliPay together host over 1 billion users, with PayPal and Apple Pay trailing behind with a combined 297 million users between the two of them(see below). It will be hard for anyone to strip WeChat Pay and Alipay of their market share since they are so protected by the Chinese government, which leaves the other emerging markets ripe for investment by big payment firms.

How Can I Invest in This?

   You could spend your time doing intense research into each of the companies that have exposure to mobile payments and hope you pick the right ones, or you could just buy the ETF IPAY. IPAY indexes the entire mobile payment market so you can reap the benefits of the industry itself. IPAY has positions in 38 different companies across seven different countries. My only problem with this fund is that it lacks exposure to China, but of course, with strict government restrictions on capital inflow into China, this comes as no surprise. The top 10 holdings in the fund show some familiar names with the likes of PayPal, Mastercard, Visa, American Express, WorldPay, and Discover. As of today, there are no other funds that are focused on the mobile payment industry, but with more and more ETFs being listed, there could very well be someone better who enters into this niche market. If you have any further questions feel free to comment or email me.

Disclaimer: I am long IPAY.