Digital payment platforms pave way to a cashless future

October 2021

Key points

This article is part of the Disruptive Innovation series.

  • The public is increasingly turning away from physical money to transactions involving novel forms of payment technology including digital wallets and ‘pay later’ point-of-sale credit, among other disruptive innovations
  • Companies enabling this change have the potential to increase their worth by using the data they gather to provide other financial services
  • Payment service providers Adyen and Stripe are among those at the forefront in the west, while ecommerce giants Alibaba, Tencent and MercadoLibre have built substantial payments businesses in emerging markets

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Cash appears to be on its way out. And credit cards may be going the same way.

In their place comes an increasingly complex world of digital wallets, online transactions and ‘buy now pay later’ services.

This transition could have posed overwhelming challenges to businesses. But some highly innovative, founder-led companies have stepped in.

These businesses are “the unsung heroes in the background of the innovation we have enjoyed in online commerce in recent years”, investment manager Gemma Barkhuizen said at a recent Baillie Gifford event exploring disruptive innovation across several industries.

As a result, she said, merchants can keep up to date with the growing number of payment options available.

Doing so can make the difference between securing or losing a sale. Being unable to accept Apple Pay or Google Pay at a shop counter or PayPal and AliPay at a website’s checkout page can cause customers to walk away.

Furthermore, some fintechs are also offering analytics and other new services that can benefit business customers and consumers alike.

“History shows that when you have a collision of technological change with a large market opportunity then you’re in fertile hunting ground for growth,” said Barkhuizen.

 “And in the payment space we have various forms of that disruption in the context of a market that might be the largest I will see in my career.”

WATCH: Baillie Gifford webinar on digital payment platforms


Cash out

Spending on payment cards totalled $35tn in pre-pandemic 2019.

And physical money is in fast decline. In 2020, use of bank notes and coins at shop tills was down by about a third on the previous year, according to one study. The Covid pandemic altered how people spend, probably for good.

“That amounts to about half a decade of change packed into a single year,” said Barkhuizen.

Online sales, by contrast, are booming, and forecasts indicate they will account for a growing share of consumer spend for years to come.

Source: eMarketer, May 2021

That creates an opportunity for two innovative payment service providers in which Baillie Gifford has invested: Adyen and Stripe. They empower some of the internet’s biggest brands.

For example, when Netflix expanded into 130 countries at once in 2016, it was Adyen’s payment acceptance infrastructure that enabled the video-streamer to accept and manage subscriptions paid in local currencies via a wide range of different payment methods.

In general, the Dutch firm targets large enterprises with complex needs. Its other clients include Airbnb, Uber, McDonalds, eBay and Spotify.

Stripe is used by big names including Wayfair, Deliveroo, Amazon and Zoom but much of its focus is on providing a service to smaller start-ups.

One of its distinguishing features is the add-on services it provides.

For example, Shopify uses Stripe’s tech to offer merchants a way to pay bills, track expenses and monitor their cash flow.

“Stripe is shaping up to be a much broader platform that’s enabling companies of all kinds to experiment with forays into fintech,” said Barkhuizen.

“And in that sense, it starts to look analogous to Amazon’s cloud computing business AWS – but for fintech.”

WATCH: Baillie Gifford animation on disruptive innovation

Emerging markets

In China, the shift from cash to digital payments is even further along the path.

If you don’t use AliPay or WeChat Pay, you can find yourself being unable to buy food in many restaurants, let alone trying to order a takeaway via an app.

Alibaba and Tencent respectively developed the tools because China lacked a mature payments infrastructure at the time they were establishing their core businesses. In addition to supporting payments to merchants, both services allow peer-to-peer money transfers between members of the public among the many features they have added over time.

Their scale is now astonishing.

Last year, Alipay alone reported processing more than $18tn of payments over a 12-month period – that’s more than Visa and Mastercard’s annual global tally combined.

But China isn’t the only emerging market where a Baillie Gifford-backed ecommerce giant has developed a digital payments platform, and then carried on building.

Argentina’s MercadoLibre reported nearly $50bn of transactions going through its Mercado Pago service last year, much of this occurring beyond its own website.

In addition, the business has expanded into other financial services including insurance, merchant credit, consumer lending and asset management.

“In Brazil, one of its core markets, the incumbent banks have some of the most expensive lending rates in the world,” said Barkhuizen.

“So to disrupt that with a lending business that can be fairer is a massive opportunity.”

No late fees

The rise of ‘buy now pay later’ companies is a further disruptive force.

They still account for a relatively small proportion of all online purchases but are expected to bite a deep chunk out of the credit card business over the next few years.

Source: The Global Payments Report 2021, Worldpay from FIS. Numbers adjusted for rounding may impact totals. *Forecasted

Affirm, another Baillie Gifford-backed company, is one of the leaders in the field.

Many consumers don’t pay an interest charge on the loans it makes.

Instead, Affirm makes money by charging the vendor a commission. They pay it because it can make the difference in securing a sale.

For instance, in the case of its tie-up with connected fitness firm Peloton, customers don’t pay interest if they pay off the equipment in full within an agreed timespan of up to 43 months. Nor are they billed for late fees if any of their instalments are overdue.

Some charities have voiced concerns that such offers can tempt people into debt, raising the prospect of regulatory intervention.

But as a business model it is arguably fairer than alternative ways to defer payment.

“Late fees mean credit cards are incentivised to offer loans to consumers who struggle to service their debt because the cards profit off the fines,” said Barkhuizen.

“Affirm thinks that’s toxic.”

Programmable money

The traditional finance system still plays a role in the examples given above.

But there’s the prospect of further disruption if cryptocurrencies catch on.

They can enable transfers of value which completely sidestep traditional payment routes, whether that’s to buy a pizza or pay taxes.

The attraction is that some of the complexity and cost of current payment systems could be reduced, while making further new features possible.

“Money for the first time can be programmable,” Barkhuizen said.

“You might, for example, only be able to spend it on a specific thing at a specific place.

“It’s inherently difficult to predict what this new possibility might enable in financial services, just as one couldn’t have predicted that the advent of smartphone technology would lead to something as ostensibly unrelated as disruption of the taxi market through Uber – but what we can be excited about is that this new capability should enable new innovation.”

Baillie Gifford has invested in a handful of companies attempting to develop new financial infrastructure by building financial services on top of the Bitcoin network. This helps further its understanding of the disruptive potential of cryptocurrencies.

The holdings include a stake in Blockstream, which is run by Adam Back. The esteemed cryptographer was one of a select few to have his work referenced in Satoshi Nakomoto’s Bitcoin white paper. This was the seminal document that laid the foundation of cryptocurrency technology.

“Blockstream has attracted some of the greatest minds in the Bitcoin space,” said Barkhuizen.

Physical money has been in use for thousands of years.

As long-term investors, the prospect of being involved in the shift to a new paradigm is hugely exciting, with plenty of upside potential for the companies leading the charge.


About the Investment Manager
Gemma Barkhuizen
Investment Manager
Gemma joined Baillie Gifford in September 2017. She is currently an analyst in the Long Term Global Growth Team and one of the managers of the Global Outliers strategy. She graduated MA in Modern History from The University of Durham in 2017. Prior to this, Gemma also graduated BA (Hons) in History and BA double major in History and Philosophy from Rhodes University in South Africa

Written by Leo Kelion 
Assistant editor, Intellectual Capital

You can read our other articles on disruptive innovation via the links below.

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