Digital payments gaining share of wallet

A perspective from E*TRADE Securities 05/20/21

Phone, keys, wallet—it’s the mental checklist many of us run through every time we leave the house. 

Over the past year-plus, though, with e-commerce and “contactless” payment options taking on a new importance, that checklist may increasingly have one less component: that trusty billfold.

In fact, Morgan Stanley’s 2020 AlphaWise survey of 2,000 US consumers found that one-third of respondents reported upping their usage of contactless payments as a result of the pandemic, while more than 40% had a card stored in their mobile wallets.1 

For investors, accelerating adoption of digital payment trends may mean opportunities in a space that has been slow to gain traction in the US.

Cash, credit, or app?

Despite a burgeoning FinTech industry pushing e-commerce, digital banking, and mobile wallet alternatives, US consumers have proven that old habits die hard. Cash and physical cards are still the most common forms of in-person payment, while debit and credit cards make up the majority of online transactions.1 

However, the AlphaWise survey shed light on some notable shifts in consumer habits last year, illustrating how the pandemic may have spurred a radical change in purchasing behavior. For example, compared to 2019 results, consumer adoption increased among all the key digital wallets, while cash usage waned across a variety of locations, including fast food chains, public transit, and gas stations. Also, the number of consumers that indicated they did not have one of the following digital payment services fell from 30% in 2019 to 22% in 2020:

Source: AlphaWise, Morgan Stanley Research


Making it stick

As a leader in the space, some of PayPal’s latest initiatives illustrate how the FinTech world is making the push to capture a larger share of consumers’ wallets. The company saw record payment volume (up 31%) in 2020, and recently upped its outlook for 2021, forecasting 30% volume growth and an additional 55 million new users.2

  • Merchant acceptance: PayPal has been expanding its network of retailers offering its QR codes in store, giving customers more opportunities to use digital wallets as they return to shopping in person. The company said that even businesses like grocery stores—where cash and card are usually favored—remained the fastest-growing year-over-year spending category.2
  • Buy now, pay later: Another area of focus is PayPal’s “Pay in 4,” which allows customers to split purchases into multiple payments, potentially committing to larger purchases they might not have otherwise made. This is a highly competitive space, with players like Afterpay, Klarna, and Affirm also vying for share of the rapidly growing market. 
  • Crypto: Digital currencies continue to garner attention, and a growing number of businesses, exchanges, and platforms have begun allowing customers to transact with virtual currency. Last October, PayPal became one of them, announcing it would allow its US users to sell, buy, and hold cryptocurrencies like bitcoin, ethereum, bitcoin cash, and litecoin in their digital wallets.3

Investing considerations

Of course, it remains to be seen how “sticky” pandemic-driven spending habits will prove to be as the world returns to normal. There’s no doubt, though, that the rapidly evolving digital and mobile payment space is making it easier than ever keep our wallets online. In terms of investing, a few areas of the market may be worth looking into:

  • Payment processors: A secular shift away from cash to credit and debit, whether in store, online, or via app or digital wallet, may continue to benefit mainstay payment processors.
  • E-commerce infrastructure: Companies that provide the technology and solutions that allow payment terminals and smartphones to communicate with one another are central to helping businesses expand e-commerce offerings.
  • International players: Digital wallets and instant-payment-based solutions have seen faster adoption outside the US, particularly in Asia. 

It should be noted that many stocks in this space have cooled recently amid a larger rotation away from high-growth tech. But for long-term investors eyeing new frontiers, there may be trends and companies worth considering. As always, make sure that any decisions reflect individual goals, timelines, and risk tolerance.

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  1. Morgan Stanley Research, “Digging into Digital Wallets: Who's Winning in C2B?,” 12/18/20
  2. The Wall Street Journal, “Pandemic Payment Habits Are Looking Sticky,” 5/6/21, https://www.wsj.com/articles/pandemic-payment-habits-are-looking-sticky-11620295203
  3. The Wall Street Journal, “PayPal’s Entry to Crypto Followed Long Buildup in Expertise,” 3/11/21, https://www.wsj.com/articles/paypals-entry-to-crypto-followed-long-buildup-in-expertise-11615503851

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