The War on Cash Heats Up
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With the advent of new and innovative peer-to-peer transfer technologies, cashless payment platforms are growing rapidly and multiple players are vying for dominance.
In our latest podcast, Alger Senior Analyst Darryl Ah Now discusses virtual banking, the "underbanked population", and how innovation is transforming the cashless payment landscape.

KEVIN COLLINS:​ Hello. I’m Kevin Collins, Client Portfolio Manager at Alger and you’re listening to The Alger Podcast. 

With the advent of new and innovative peer-to-peer transfer technologies, cashless payment platforms have grown rapidly over the past few years.  As various players vie for dominance, we see an industry leveraging tremendous convenience to overcome some potential trust and security concerns. 
To give us a broad overview of the “cashless payment” landscape is Alger Senior Analyst Darryl Ah Now.  Darryl, thanks so much for taking the time to speak with us.  

DARRYL AH NOW: Thanks, Kevin.

KEVIN: Darryl, why are cashless payments such a hot topic right now?  

DARRYL: We think of this in the payments industry as the war on cash and certainly that has been going on for several, several years, but what we’ve seen in the past few years is the proliferation of new technologies that leverage this type of payment system to really increase and accelerate the penetration of electronic payments going forward.

I think what you’re seeing is a demographic shift of technology enabling easier payments, more efficient payments.  And certainly, the millennial group is much more open to using these technologies than, say, myself who’s a little bit older.  

Secondly, I think what you’re seeing is there have been a bunch of disrupters who have really enabled merchants or people to accept cashless payments in a much more efficient manner.  Historically, if you were a small business and you wanted to accept credit card payments or electronic payments you had to go to your bank, go through an arduous credit check, three weeks later they would say, okay, you’re good to go, and your business would have to stall until that happened.  

Today, if you were to start a business you could literally get up and running either online or through a physical point of sale within a matter of hours.  Those two convergences, I believe, are helping to drive this big acceleration in electronic payments.

KEVIN: Are the two most popular cashless platforms – that is, traditional credit cards and today’s predominant money transfer platforms – trying to disrupt each other?

DARRYL: To a certain extent, yes, but what’s interesting, too, is that much of these newer technologies that are being transferred on peer-to-peer transfers are actually being powered by the underlying network rails of the existing credit and debit card players.  So, I would call them, frenemies.  A bit of healthy competition but there’s still that underlying reliance on each other.

KEVIN: One innovation we’re seeing today is the rise of “virtual banking” – that is, banks that exist purely as an online convenience and without the brick-and-mortar presence of the more familiar kind.  What’s your view on these platforms?  

DARRYL: I think in this day and age the idea of a virtual bank is that you don’t have all the physical infrastructure costs that you have to deal with which gives you a significant cost advantage, which is why you can see these banks offering more attractive savings rates.  The hurdle for them to overcome is, obviously, public trust.  Are you willing to put your money with a virtual bank that you’ve never heard of?

KEVIN: Is “trust” a common concern across all platforms?

DARRYL: Yes, I think trust is a challenge that actually both large and small players have to deal with.  Obviously, there have been some very large data breaches over the past several years, although we didn’t really see it in the numbers, there’s certainly a public perception of giving electronic payments perhaps a pause, a second thought before deciding to continue with it.  

I think what you’ll see is that with almost every payments company today, the first or second thing that they’ll talk about is security and fraud prevention.  So, it is priority number one for all of these firms.  Without going into all of breaches specifically, there were certain lapses that were not necessarily technology related.

So yes, I believe that security and consumer trust is paramount for this industry to continue to grow.

KEVIN: In wake of some of these breaches that we’ve seen over the past few years, do you feel comfortable that the companies you’re tracking are taking preventive measures and communicating those changes effectively?  

DARRYL: Yes.  I think, obviously, if you’ve suffered a breach you tend to react very swiftly to correct that issue.  And I think all the players involved in the industry, whether it’s the merchant, the bank, or the payment provider, they all realize that they’re in this together.   A breach of Company X isn’t necessarily a positive for Competitor Y because that only creates distrust in the system.  So, I think there’s a collective effort to work together and realize this is a common problem that they have to address.

As we talk about security, one of the trends that we’ve seen is a technology called tokenization.  And what that does is it takes your physical card number and it scrambles it and assigns a token.  So instead of your 16 digit number on your credit card there’s a random code of XYZ124567.  So, in the event that the card is compromised it is effectively useless to a counterfeiter because they cannot unencrypt the underlying payment credential.  So that is certainly a big step that the industry has been taking.

KEVIN: One thing that I would guess plays a part in the establishment of these platforms is branding.  How impactful is a good brand?

DARRYL: I think branding is certainly important.  Getting back to the issue we talked about before, trust.  People trust big brands.  If they’re familiar with the brand, they know the brand a long time.  If they had a bad experience in the past they know it’s been rectified.  So that is certainly a value proposition.  And in one case a merchant I spoke to said that their brand, the store brand is not very well known.  So when they’re selling products online they’re getting customers from all over the world who don’t really know if that’s a legitimate store.  Therefore, they go with a certain payment method which has global trust with the consumers.

KEVIN: Let’s talk for a moment about the rise of global payment platforms.  Certainly, investors are familiar with domestic-focused payment systems.  Are you seeing more and more platforms trending towards being globally-focused?

DARRYL: I would say that there is a mix of both and local and international systems.  And many of the major ones that we think about in the U.S. are, in fact, global and have very strong global presences and have the same global trust, the same trust internationally that they do locally.  

There are certain markets which are more restrictive.  For example, China is a closed off payment system and non-Chinese players can participate in certain segments such as cross-border transactions.  But they are not able to compete in domestic transactions.  In those instances, in China, there are a few domestic schemes which have really gained a lot of traction.  And one of the watch points from our perspective at Alger, is to see how those Chinese businesses evolve overseas and how they start to penetrate, whether it’s in the U.S. or Latin America or the rest of Asia.  So that’s certainly something that we keep track of.

KEVIN: What do you find the most exciting about the current platforms?

DARRYL: I think what excites me the most is the ability for these newer platforms to really become not just a payment mechanism but bring the full financial services vertical to people who may not have that opportunity.  We often talk about the underbanked and the unbanked population and those are generally people who don’t have full access to the traditional banking suite, and if they do have access because they’re typically not carrying high balances they’re not really profitable to the banks, therefore, they’re charged high fees.  

A lot of these newer technologies are actually democratizing financial services for this lower income group and it allows them to participate in payroll deposit, bill pay, checking, savings, insurance products.  All of those are available at a reasonable cost to them.

KEVIN: As an Alger analyst, how do you – on the ground – determine the most promising players?  

DARRYL: At Alger we have a very thorough and deep process in trying to come up with fundamental research to understand how the landscape is playing out.  That includes talking to the companies themselves, doing surveys of consumers, attending industry conferences.  

In fact, over the last couple of weeks I’ve been to several conferences that have been not focused with the traditional CFO of a bank presenting or CFO of a payments company presenting, but more panels of industry experts ranging from startups to private equity holders, to venture capitalists, to former executives in the industry, all collecting their opinions on different aspects of the payments value chain.

KEVIN: So, bottom line, if you’re a consumer - is this a good time to be cashless?

DARRYL: It most certainly is.  And again, it comes back to efficiency, ease of use, technology.  The one thing I will say is that I don’t think we’re going to become a cashless society.  As long as  there’s one person to pay with cash, merchants will continue to accept cash.  Indeed, what we’ve seen, and here in New York City there are certain lunch spots that only take cash.  

So, I think from a societal perspective, it’s certainly a great time to be moving more payments to cashless.  However, cash is not dead.

KEVIN: Darryl, thanks so much for speaking with us today.  

DARRYL: Thanks, Kevin.  

KEVIN: And thank you for listening.  For more information and a transcript of this recording, please visit www.alger.com.​



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