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My local café can’t take a trick. Its EFTPOS machine died a week after Victoria eased COVID restrictions and locals rushed back to their favourite restaurants.
The café asked patrons to pay by cash but few people carry it these days. In an act of caffeine desperation, I bought a coffee at the nearby 7-Eleven, using the payment app on my watch.
COVID has turbocharged the move towards a cashless society, creating opportunity in financial technology (fintech) companies leveraged to this megatrend.
The pandemic has had two main effects on cash usage. First, health concerns about handling notes and coins (and spreading the virus) have boosted the use of cashless payments. Notice how many businesses asked customers to pay only by card or App during COVID.
Second, COVID has sped up the digitisation of business. E-commerce penetration (as a proportion of total retail sales) is soaring in Australia and overseas. As we buy more goods and services online, digital payments are the norm.
This trend is not new. Cash used for transactions has fallen steadily in the past decade, according to the Reserve Bank Consumer Payments survey. In 2007, Australians made an average 47 Automatic Teller Machine (ATM) withdrawals (almost one per week). In 2019, we made 17 ATM withdrawals.
I can’t remember the last time I used an ATM. If cash is needed for a payment, I usually withdraw cash at the supermarket or petrol station, for convenience and to avoid fees.
The RBA found only 16% of in-person transactions over $50 were made using cash. Cards were preferred over cash for all payments over $5. Higher users of cash tend to be older people, those on lower incomes, in regional areas or with limited internet access.
The RBA’s latest survey was taken before COVID. My guess is many more consumers have moved to online payments and no longer carry cash. If they’re like me, they visit ATMs sporadically and pay for more goods and services via their phone or watch.
How long until we move to a cardless society where people stop holding several credit/debt cards in their wallet that can be stolen or lost?
Here are three beneficiaries from the move to a cashless society:
Readers know I have been bullish on the big banks since April, when they were badly out of favour. I suggested “buying the sector” through a bank Exchange Traded Fund (ETF) , such as the VanEck Vectors Australian Banks ETF (MVB). It is up about 33% since April.
Greater use of cashless payments is another reason to buy banks. Of course, the main attraction is that the market badly overestimated the rate of bad loans among homeowners and small businesses at the pandemic’s peak. The banks set too much aside for impaired loans.
Less use of cash means the big banks will need fewer retail branches and ATMs. And greater scope to reconfigure existing branches to sell more home loans and bank products.
Banks have been rationalising their branch network for years, much to the chagrin of local communities. The number of branches and ATMs operated by the big banks has fallen (per 100,000 people) by a third over 2015-2020, according to data submitted to a parliamentary inquiry.
ATM numbers, in particular, are being slashed because they are costly for banks to maintain.
The upshot is banks have significant potential cost savings from faster rationalisation of their expensive branch and ATM networks. It won’t be easy: there is opposition to branch closures from unions and communities, and banks are trying to repair their battered reputations.
However, a faster uptake of cashless payments strengthens banks’ ability to close branches and remove ATMs. The Commonwealth Bank has repeatedly said it is committed to its branches, particularly in regional areas, and has no plans for a major culling of its retail network.
Even so, CBA has the most to gain from optimisation/rationalisation of bank branches and ATMs given it has the country’s largest network of them.
The flipside of the move to digital payments is greater competition from fintech companies that take share from the big banks, at the margin. That’s a longer-term risk, but the benefits of branch and ATM rationalisation – a big expense – are significant.
Chart 1: CBA
EML Payments provides digital solutions for payments, gift cards, incentive and reward cards, and supplier payments. The Brisbane-based company is rapidly expanding with operations in 28 countries and 450 employees.
EML is well positioned in the prepaid card market: for example, parents buying a gift card for someone’s birthday or as a thank-you for a neighbour. Almost US$400 billion was spent in the United States in 2019 in the prepaid card market (based on total transactional value).
At July 2020, the stored value of gift cards in Australia was $1.1 billion, RBA data shows. EML has less than 20% share of our prepaid gift-card market, so has plenty of room to grow.
Another growth area is digital prepaid cards. Instead of buying a plastic gift card at a shopping mall, more consumers are buying gift cards online. EML is also growing in the incentives program market, which has lower profit margins but is a larger addressable market.
EML was pummelled during the early part of COVID as the market fretted about consumer access to gift cards at shopping malls and demand for gift-card buying. EML shares fell from $5.66 in February to $1.58 in March and have recovered to $3.75.
An acceleration towards a cashless society bodes well for EML and the gift-card market. So, too, the increasing digitisation of products and services, such as gaming and entertainment content. One of my young relatives loves getting digital gift cards for the Apple iTunes store.
Macquarie Wealth Management has a 12-month target of $4.20 for EML. Much depends on COVID; if more countries introduce longer lockdowns, sales of gift cards will be affected.
Also, the gift-card market is highly seasonal: about three quarters of cards are bought in the lead-up to Christmas, on some estimates.
Near-term risks aside, the long-term trend of cashless payments, prepaid physical and digital gift cards, and incentive programs that use gift cards is strongly in EML’s favour.
Chart 2: EML Payments
I wrote favourably about Pushpay, a digital tithing company, in this report in mid-September at $1.71 (after adjusting the price for its recent four-for-one share split). Pushpay hit a 52-week of $2.27 in late October, but has been under pressure since then and is now trading at $1.71.
To recap, The New Zealand-based company develops payment technology for churches, schools and charities. Church parishioners, for example, use Pushpay software to donate money rather than putting it into a plate at mass – a trend that will quicken due to COVID.
E-tithing is big business. Pushpay had 10,986 customers in 19 countries at September 2020. The company processed US$5 billion of transactions in FY20, up 39% on the year. Pushpay’s revenue grew 32% to almost US$130 million in FY20.
Bible Belt churches in southern US states and in other countries are embracing “e-collection plates” because the technology encourages higher and more frequent donations and provides data and insights that churches use to better understand their congregation.
Pushpay shares were due for a pullback after such strong gains in 2020. Like other high-flying tech stocks, Pushpay has been sold off in recent weeks, even though its latest investor presentation showed good growth in cash flow.
Board changes and insider shares sales haven’t helped Pushpay’s share price, but these are temporary influences. The long-term trend of more churches embracing e-tithing technology and more parishioners donating electronically rather than with cash has never been stronger.
Notes and coins being passed in collection plates from one parishioner to the next seems antiquated and unhygienic in today’s COVID world. Donating to a church in real time via your phone or through an online payment plan is the future, especially for younger parishioners.
Pushpay’s sell-off may have further to run. The price weakness provides a better entry point for long-term investors who understand the potential of digital donations at churches worldwide.
Chart 2: Pushpay Holdings
Source: Yahoo Finance