Cash will never completely disappear. There will always be some marginal room for good old fashioned paper money, but it´s certainly losing popularity as a payment method all over the world. As the trend towards more efficient payment methods becomes stronger over the next few years, investors will have plenty of opportunities to profit by investing in the different companies which benefit from the new paradigm.
An Inexorable Trend
According to McKinsey, cash payments accounted for around 29% of retail transactions in the US during 2012, down from 36% a decade ago, and expected to fall further over the next years. McKinsey estimates that the percentage of transactions done by paper money will drop to 26% by 2020 and to only 10% of transactions in three decades.
Cash is uncomfortable and inefficient, you need to regularly monitor the amount of money in your wallet, and there is always the risk of loss, damage, or being robbed. Debit and credit cards are superior in that sense, and the new e-wallets that allow customers to pay via their smartphones take the simplicity and convenience one step further.
Cash will never completely die because some people will always prefer paper money, particularly those who don’t trust new technologies or want to keep their transactions undercover. But the long term trend is away from cash and towards better payment methods, so investors would be smart to pay attention to the opportunities emerging from the demise of cash.
Debit card companies like Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) are the prime beneficiaries from this trend. These companies operate like gigantic global networks connecting banks and merchants, while making a profit every time a customer swipes a debit card. They are very profitable companies with pristine balance sheets, and they look outstandingly positioned for growth in the long term.
Both Visa and MasterCard benefit from rock solid competitive advantages. Their well established networks are very hard to replicate by potential new entrants, and they have invested for decades in marketing and branding to build their reputation and earn customer’s trust--an invaluable, or “priceless,” asset in this business.
Network effects play a crucial role for these companies. Merchants need to accept those cards which attract customers, and customers gravitate towards cards which are accepted everywhere by everyone. Adding more users increases the value of the service, which at the same time attracts more users, creating a virtuous circle of growth and increased competitive strength.
Visa is the market share leader with more than 60% of the market, while MasterCard has around 30% of the global share. But MasterCard is better positioned in emerging markets, where card penetration is comparative low and economic growth is more exciting, so it has better growth prospects.