When is the last time you wrote a check to pay for something or left the house with a set amount of cash in your wallet for errands? For a growing number of people worldwide, it is entirely possible that they may not be able to recall. In the U.S., the use of credit and debit cards have largely replaced the use of checks, and carrying cash is increasingly seen as unnecessary and inconvenient. This dramatic transformation of our payment practices can be explained in part by the emergence of mobile payment technology for smartphones in recent years.

The rise of mobile payments has transformed the way we pay for everyday items and simplified how we share money with one another.

With smartphones in almost everyone’s pockets and apps that transfer money digitally in seconds, the days of frantically searching for an ATM or cursing yourself for leaving your wallet at home are coming to an end. Who needs a checkbook when you can quickly transfer your friend that $25 you owe them with a few taps on your smartphone?

What Are Mobile Payments?

According to Square, a leading mobile payment technology company, mobile payments are defined as “regulated transactions that take place digitally through your mobile device.” 

Most mobile payments are conducted through a mobile wallet or mobile money transfer. A mobile wallet is a smartphone app that securely stores credit or debit card information. This information can be digitally communicated to a business’s point-of-sale system by holding the smartphone near the business’s payment reader.

Popular mobile wallet apps include Apple Pay, Samsung Pay, and Android Pay, and companies that provide businesses with software and devices to accept mobile payments include Square, SumUp, and PayPal.

In the case of mobile money transfers (also sometimes referred to as “peer-to-peer” or “P2P” payments), funds are transferred between users on an app. Typically, a user creates an account on the app, links their bank account, debit card, and/or credit card information with the app, and “adds” accounts of other individuals who use the app. Money may then be requested from or sent to the accounts of these individuals.

Popular money transfer apps include Venmo, WorldRemit, and Azimo.

Mobile payment companies monetize the services they offer in a variety of ways. Square, for instance, charges businesses a fee ranging from 2.5% to 3.5% for each transaction (with a flat fee of 10 cents added to each transaction fee). Venmo, on the other hand, charges its users a 3% fee for sending money via credit card instead of debit card. Both companies offer expedited access to transferred funds for a fee. Since its November 2015 IPO, the stock price for Square has risen from about $8 per share to about $65 per share (as of November 2019). Since its July 2015 spinoff from eBay, the stock price for PayPal (Venmo’s parent company) has risen from about $40 per share to about $103 per share (as of November 2019).

A Fast Growing Market

According to a 2018 report by GSMA, 143 million new mobile payment accounts were opened worldwide in 2018, bringing the total number of accounts to 866 million. Approximately $1.30 billion was processed every day via mobile payment in 2018, and a typical active user moved an average of $206 per month.

The speed, efficiency, and security offered by mobile payments help explain why this technology has become so popular across the globe. The rise in this technology is also providing people who have traditionally been excluded from formal banking systems with access to life-changing financial services.

According to the World Bank, “Financial inclusion is a building block for both poverty reduction and opportunities for economic growth, with access to digital financial services critical for joining the new digital economy.”

Why Invest in Mobile Payments?

For those interested in investing in this rapidly-growing sector, however, there are a few important points to understand.

The mobile payment companies mentioned thus far are undeniably successful. Square’s total net revenue in the third quarter of 2019 was $1.27 billion, which is a 44% increase over 2018’s third quarter earnings. PayPal’s total net revenue for the same quarter was $4.38 billion, with Venmo accounting for $400 million (double the $200 million from the third quarter in 2018). With steady growth and a seemingly-unlimited appetite for disrupting the value of traditional financial institutions, there has never been a better time to consider investing in companies offering mobile payment solutions.

While Square and Venmo may be the first that come to mind with respect to mobile payments in the U.S., there are many other companies that have arisen in recent years in other parts of the world that are just as innovative and, in terms of active users, arguably more successful. Whether it’s WeChat Pay in China, Paytm in India, or M-PESA in Kenya, entrepreneurs across the globe have known about the transformative potential of mobile payments for years.

The acceptance of mobile payments as a trusted and valued financial tool has occurred at a faster rate and to greater effect in the developing world than in the U.S. For instance, an eMarketer report found that in 2019, approximately 80% of smartphone users in China regularly use mobile payments, while only about 30% of smartphone users in the U.S. regularly make mobile payments.

It may seem as if there would be no room for growth with 80% of users currently accounted for in China’s market, but it is important to note that the 20% of smartphone users not regularly making mobile payments represent about 135 million people.

Not to mention, the 70% of smartphone users in the U.S. not regularly making mobile payments represent about 138 million people. Smartphone users in the U.S. have been slow to adopt mobile payments en masse, due in part to a widespread perceived risk regarding the security of digitally-transferred funds. As the population in the U.S. ages and more accurate information about the security and convenience of mobile payments filters out, it is likely that a much higher percentage of the population will adopt the technology.

In the meantime, companies at the cutting edge of mobile payment innovation will continue to reimagine and redefine how we think about our finances.

How to Invest in Mobile Payments

A search on Magnifi suggests that there are a number of different ways for investors to get involved in the fast growing Mobile Payments sector.

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The information and data are as of the November 20, 2019 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.

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