Left Brain Thinking Podcast: Digital payments and the rise of a cashless society.

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. Today we're talking about digital payments and the rise of the cashless society with Nolan Langford, Chief Executive at Left Brain Investment Research. Learn more about the firm and its research at leftbrainir.com. Learn about its new mutual fund at leftbrainfunds.com. And the firm is on Twitter @leftbrainir. Nolan Langford, thanks so much for joining me again.

Always great to talk to our listeners, and it's always great to be talking with you. It's always great to be talking to markets and stocks and trends.

Trends is what we're talking about, and it's, it's a trend that somehow feels like it's hot now. Though, quite honestly, it's been going on for a long time. I mean, ever since the evolution of charge cards and credit cards, people were less likely to carry cash, and there's been a move to make us cashless, but nothing has accelerated it like the pandemic. So digital payments and that industry, is this an explosion that is gonna continue to gaining ground, or is this one of those things that, okay, it got a good boost, but it's now gonna come back to earth and kind of normalize.

So, that's a really good way to frame the discussion. And I'll just go back to, we do think recently, sort of post-COVID, 18 months or so ago, that this may be a, a trend that was just extant or it may have accelerated during COVID But I'll go back to the, even if you took it a 5-year trend and you removed the last 18 months for COVID, Global payments have increased about 7% per year on average, and the majority of that has been digital payments. McKinsey did a study some time back, and if you go back to 2010 versus 2020, just about every nation and their share of physical cash has decreased, in some cases dramatically, but in all cases, the physical usage of currency has decreased and alternative forms of payment, i.e., credit cards and digital payments, have continued to increase as a percentage. And so that's a trend that's been well established. And we think with the rise of 5G and other alternative forms of payment, not physical, that's likely to continue, if not accelerate.

Does Bitcoin and cryptocurrency figure into this for you at all? Or for you, is the rise of the digital currency a play that doesn't yet include Bitcoin? 'Cause talk about your explosive growth, you can find it there. The question is whether it's real or illusory.

Yeah, that's a good question, Chuck. So when we just talk about payment and payment growth being 7% annually, again, going back to the McKinsey study and the share of payments going from physical cash to alternative forms, that really excludes Bitcoin. If you take a look at Bitcoin, which I believe is about a $600 billion market, and let's consider that more of a digital asset, not a digital currency. We define currency as a method of payment, and Bitcoin and the, the network may be great as a store of value, and we call it loosely cryptocurrency, but nobody's using Bitcoin for payment transactions. And if they were, it would be such a small number that it really doesn't come into play. So maybe in a point in the future, that'll be another accelerant toward non-cash or going cashless. But now we're just talking about the traditional forms of what we use all the time: credit cards, online payment, mobile wallets, and those sort of things.

Do you believe that as this develops, that the payment industry can continue to do what it's done without being so commoditized that basically the fees and the things that it makes go down to zero. Because if you think about it like investing, right, we saw index funds. Well, the index funds that started, that were first getting people's attention, had expense ratios that by today's standards would be considered high. They're not high by real standards, but, you know, we've been able to winnow things down and make things cheaper. So as you look at the payment industry with all of the growth, do you worry that all of the growth is going to make it that where a PayPal or a Visa or a MasterCard is making a cut of every transaction, that their cuts are going to get smaller and smaller and at some point their profit margins go, or they've got it, they're going to be able to maintain it?

That's a really good question. I think that is conventional thought, that as more transactions move to a network, you know, the cost of that network should decrease. And I guess the corollary there would be the same as stocks and stock market, that we used to have fixed commissions and now for the most part we trade at zero. In the case of payments, eventually we may get a lot lower payments as far as a percentage, but not now. Think about Visa and how sticky their margins have been. You're looking at gross margins here of over 75%. And if you think about the swipe amount that they take depending on these networks, it's still between 2.5% and 3%. And that's been pretty sticky between all three. Now there's some, some issues there. Part of one is the alternative, right? Particularly if you look at cross-border transactions. And how much of a hassle it is to perform the transaction, I guess, without these users. And currency is still one of those things that is very complicated if you take a look at making changes to, you know, if I get on a flight and go across the pond to Europe and I try to exchange currency, you know, US dollars for euros, some places, you know, the transaction fees are north of 5 or 6 or 7% if I go to a bad corner. And so I guess by comparison, these processors at 2.5 to 3% aren't so terrible. But it's amazing how sticky these margins are. Now, the one thing that you mentioned about Bitcoin, that does promise the hope of much lower transaction fees, because I can do a transaction fairly quickly in a matter of minutes. I can move a lot of money. Hundreds of millions of dollars on a network that is the safest network out there, and it's secure, and I can do it for fractions. So I do think is that the blockchain network, and in particular these digital assets and digital currencies, get larger and that network grows so they can do more transactions and quicker, they do them much cheaper. So to the extent they become more widespread, yes, I think you could see a compression of take rates, but we're not there yet. And we're probably years away from, from doing it.

So which of the payment companies, the digital payment specialty companies are the ones that you are most interested in right now?

So the big 3 for the listeners, the traditional one we think of is Visa and MasterCard. And they are, you know, I think Visa, which is growing low teens, 12 to 14% or so. If you take out last year when most people stayed home, so they weren't swiping. And think about that where payments were, you know, it's sort of the physical credit card in your wallet. And that business surprisingly is still growing by low teens percentage ex last year. It's still a really good business. And they're almost a duopoly, them and MasterCard. And the newer on the scene is PayPal. And think about PayPal as controlling when we purchase things on the internet. That's more of a digital wallet. And more transactions with the rise of e-commerce happening online, as we all know. And there you have a growth rate in the low 20s, high teens. And then finally, payments are going from online internet to in our wallet, in our digital wallet, that is, meaning i.e., our Apple phone or our Android phone with some type of electronic swipe system that we control in our wallet. And that business that's mobile now is going to be dominated in payments by Square. So Square is a, a business that's growing over 25% per year. So it's the fastest growing of all three, and it's one that's a little bit earlier stage of growth. It's still a $100 billion market cap. But the thing about Square is it's also a play on the digitally unbanked. They are the owner of the very popular Cash App. That you can download. You can send money to whomever you want in your contact list. You can send cash, it gets there almost immediately. But the other thing that I can do is I can spend that cash at merchants, but then I can also buy stocks. Not only can I buy stocks with my Cash App, I can also buy Bitcoin. So I think Square, out of all of them, it's certainly most interesting.

Your long-term prospects, these are stocks that meet the left brain criteria, what you're looking for in terms of potential growth?

Absolutely. For PayPal and Square, yes. I think Visa will still be a consistent grower. I think its hypergrowth days are behind it, you know, at a $500 billion market cap, but they continue to buy shares and grow very consistently. Again, the thought though is credit cards, though they're still growing in usage, that growth rate is probably going to quiet down at some point. Again, online, if you're a believer in e-commerce, which clearly the world is, then I think PayPal as a digital wallet choice, I think they will continue to do very well, particularly as they continue to grow past their separation from eBay being an exclusive pay merchant. So PayPal and Square are our two favorite ways to play the digital payment space and the movement away from physical cash in our wallet.

Nolan, great stuff as always. Thanks so much for joining me.

It's always great to be talking to the listeners, and we hope everybody have a wonderful week and enjoy the rest of the summer.

Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations. But are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe, and you can learn more about my weekday podcast at moneylifeshow.com or on your favorite podcast app. Thanks to my guest, Nolan Langford, Chief Executive Officer at Left Brain Investment Research. Learn more about the firm and its analysis at leftbrainir.com. Learn about their new mutual fund at leftbrainfunds.com. And follow them on Twitter @LeftBrainIR. Left Brain Thinking is available every other Wednesday. Please subscribe on your favorite podcast app and plan to put your left brain thinking cap on with us again in 2 weeks. Until then, stay safe and happy investing, everybody.