America used to be behind on digital payments. No longer

JUST OVER A decade ago, Patrick and John Collison founded Stripe, a Silicon Valley company that helped other tech startups accept online payments. Since then it has outgrown them all. On March 14, the company announced it had completed a fundraising round that valued it at $95 billion — triple its valuation 11 months ago and enough to make it America’s largest unlisted company of all time . Stripe isn’t the only company to benefit from the payments business as America’s payments revolution is finally taking off.

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It has taken a while. In 2018, Ant Financial, China’s payments giant, raised $150 billion worth of private funds. Back then, it was common to hear Chinese executives say that America, the land of written checks and hand-signed credit card receipts, was years behind and held back by a cozy club of banks and credit card companies.

Now investors have decided the moment has come. Take PayPal, a digital payments company founded in 1999 to allow users of Palm Pilots, an ancestor of smartphones, to “beam” money to each other. It was later bought by eBay, an online marketplace, which spun it off in 2015 for $45 billion. Today it’s worth $275 billion, more than Citigroup or Wells Fargo. It’s also more valuable than Ant, which fell out of favor with regulators in China and was forced to cancel its IPO.

The craze for digital payment companies has been fueled by the pandemic. PayPal’s stock price is up 186% over the past 12 months, while shares in Square, an American rival, have more than quintupled and Amsterdam-based Adyen has nearly tripled. The digital boom is attracting credit card giants and tech titans like Visa and Google to online payments.

The digital payment industry is more like a transportation system. “Acquirers” connect the store’s app or website to the infrastructure and verify details, including a buyer’s identity or available funds, to authorize the trip. The money then moves along the type of “track” chosen by the customer: credit card, bank-to-bank or mobile wallet systems operated by different companies. Then come the refreshment carts — service providers like pay-now-later vendors that pretend to make the ride more enjoyable. Everyone takes a cut along the way.

Part of the rise of digital businesses reflects the fact that they have reached greatness. PayPal combines an online wallet used by 350 million consumers with a gateway accepted by 30 million merchants. That creates huge network effects, which the company has sought to further foster by forging links with other companies such as Mercado Libre, a Latin American marketplace, and UnionPay, a Chinese credit card scheme. The company expects its user base to double by 2025. Square, which caters to independent merchants and consumers underserved by traditional banks, operates a similar model (the chairman of The economistThe parent company of is a director of Square).

In contrast, Adyen and Stripe are online-only acquirers with no consumer branding. But their technology makes it quick and easy for businesses to set up online payment platforms. (Stripe has long served smaller firms and Adyen large ones, but they’re converging.) Because verifying a customer’s identity and legitimacy is difficult, especially in cross-border transactions, typically around 10-15% of online transactions are declined. But the digital companies can reduce rejection rates by four to five percentage points. In return, they charge a reasonable fee: Stripe typically takes 2.7-2.9% of each transaction, or 1.9% in Europe. Now they can spread their costs across hundreds of billions of dollars in transfers, the fee they earn for each additional payment is almost all the profit they can reinvest.

Three trends are helping to drive digital businesses forward. One of them is the growth of e-commerce, which has been given a turbo boost by the pandemic. The second trend is the move away from cash to digital payments, which Covid-19 is believed to have accelerated by three to five years.

A final factor comes from increasing market share in online payments. More than half of the world’s digital transaction volume is still acquired by the banks’ captive, lazy poor, says Lisa Ellis of MoffettNathanson, a research firm. With most lacking global ambition and e-commerce expertise, market share will inevitably drift to the online giants.

Such trends are also fueling the dominant card networks Visa and Mastercard. However, they operate only one type of rail, while the four payment champions are largely agnostic about which direction the money is going. And incumbent card companies are under attack from antitrust authorities who fear they are making it harder for merchants to process transactions through cheaper alternatives. On March 19, Visa’s shares fell on reports that the Justice Department was investigating them.

A bigger threat to the fintech quartet could come from giants in adjacent sectors. Big tech companies are starting to improve their own payment apps. Big retailers like Walmart and Target are building their own acquirers and wallets through which they could give rewards to loyal customers.

In order to prevent the threat of competition, the digital payments companies are expanding their offerings. PayPal introduced buy-now-pay-later, cryptocurrency trading, and credit card services. On March 8, it announced that it would buy Curv, a digital asset security firm; Last year it bought Honey, a coupon service. It says it wants to be a “super app” for financial services and told investors in February that it plans to increase its revenue to $50 billion by 2025 receive and use a debit card. It now has 36 million users, up from 7 million at the end of 2017, and brings in 45% of Square’s gross profit. Stripe has started offering working capital and accounts to merchants in partnership with banks.

As digital payments continue to proliferate, the fantastic four have three or four years before they meet head-on, predicts Darrin Peller of Wolfe Research, an equity research firm. By then, however, they will probably be completely different companies with their own banking or software offerings. That should give them even more leeway and access to far greater revenue streams. It may have taken a while for digital payments to hit the big time in America and the West. But better late than never.

A version of this article was published online on March 20, 2021

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