Digital-Payments Growth in the U.S. Has a Ways to Run Yet

The pandemic caused some changes in how consumers pay, but cash and in-person shopping haven’t been pushed aside completely.

By guest author Telis Demos from the Wall Street Journal

Cash hasn’t gone away yet. That is actually good news for many payments stocks.

One big concern about payment companies has been that the surge in digital transactions and online purchases during the Covid-19 pandemic was a one-time shift in habits that pulled ahead years of growth, leaving much less runway for these stocks. But Visa  Chief Financial Officer Vasant Prabhu, speaking at a Bernstein conference late last week, said that based on the company’s best calculations, growth in the conversion of cash to digital through the pandemic was accelerated by maybe only one year.

This cash observation tracks with other recent data points about trends in the use of physical greenbacks. Consumer cash use in the U.S. actually increased slightly from 2020 to 2021, from 19% to 20 % of all consumer payments, according to the Federal Reserve’s recently published annual consumer-payment-choice survey. That was the first uptick since the Fed began the study in 2016, when cash was 31 % of consumer payments. This bounce in cash use likely tracked a small rebound in the share of in-person payments from the 2020 to 2021 survey as people left their homes and resumed shopping in person. In the 2020 survey cash use fell sharply from 2019, partly reflecting a big drop in payments made in person. Cash’s share of all consumer payments fell from 26 % in 2019 to 19 % in 2020.

Near-term cash inertia should actually reassure investors over the longer run, because it means that a lot of the growth potential for digital payments remains intact. Analysts at Goldman Sachs recently argued that the cash-to-card transition was more in the “middle innings” than the “late innings” across major economies. The analysts said this was a surprising finding to many clients: “We believe a number of investors had assumed that much of the card penetration gains were in the rear-view mirror,” they wrote in a note last week.

Notably, people are also still buying online significantly more frequently than they were before the pandemic. Visa reported that U.S. payments volume in May without a physical card present, excluding travel spending, was running at 173 % of the equivalent 2019 level, versus 127 % for card-present payments.

Shares of American Express AXP 0.11% and Mastercard MA 0.65% are up slightly so far this year, and Visa and merchant-payment providers Fiserv, FISV 0.62% Fidelity National Information Services FIS 1.43% and Global Payments are each down less than 5%. Still, on average this group trades at a multiple of expected earnings next fiscal year that historically isn’t a stretch: about 18 times 2023 estimated earnings, versus more than 21 times in the couple of years before the pandemic, according to FactSet.

Plus, there might be some significant new catalysts for digital-payments use in the coming years. During congressional testimony in May, Federal Reserve Vice Chair Lael Brainard cited “declining use of cash” as a possible reason to consider a central-bank digital currency. Of course, how exactly digitised dollars—if even adopted—would flow through payments systems is still to be determined.

Then there is inflation. Americans increased their store-of-value holdings of physical cash in their homes, cars and elsewhere during the pandemic, from USD 241 on average in 2019 to USD 347 in the 2021 survey. But as interest rates rise and people perceive rapidly rising prices, consumers might be discouraged from holding physical cash. Such a shift could be money in the bank for many payments and digital-finance stocks.

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