The transition from cash to electronic and digital payments was growing at a steady rate prior to the Covid-19 pandemic. These forms of payments were growing at a high clip, but the social distancing restrictions forced many to turn to electronic and digital payments as a means to acquire the items they needed.
As a result, the increase in the number of people holding a bank account, which would be needed to pay a credit card bill, grew tremendously during the worst of the pandemic. As recently as 2011, only 51% of adults globally had a bank account. That number improved to 68% by 2017, but jumped to 76% by 2021. This is a remarkable increase in a few short years.
Current Trends in Digital Payments
In 2022, nearly two-thirds of all U.S. transactions were made with some card, such as credit, debit, or prepaid. Add in the number of electronic payments made through online bill pay and these methods of payments made up 75% of all transactions last year. By comparison, less than a quarter of transactions were conducted with cash, check, or money order.
Figures like this are similar in our developed countries, but it was not the same for lower- and middle-income economies. That has changed due to Covid-19. Prior to the pandemic, it is estimated that approximately 40% of consumers used electronic and digital payments worldwide. Post-pandemic, that number increased to nearly 60% in just three years.
Future of Digital Payments
These figures are expected to continue to increase in the years ahead as more people around the world become more comfortable with electronic and digital payments. In fact, more than 90% of consumers that have a digital wallet expect that they will continue to use it for purchases.
In short, electronic and digital payments are not going anywhere and it is very likely that more consumers will choose to make their purchases in this manner. Therefore, investors interested in this space should focus on high-quality companies that have a dominating market position. Fortunately, there are several names that stand out as possible investment choices, including Discover Financial Services (DFS, Financial), Mastercard Inc (MA, Financial), and Visa Inc (V, Financial). All three of which happen to be trading at a discount to their intrinsic value.
Discover Financial Services
First up is Discover Financial Services (DFS, Financial) which is a holding company that provides various financial services to its customers. The company has generated revenue of nearly $16 billion over the last year and is valued at just under $22 billion.
Discover Financial Services (DFS, Financial) operates two business segments, Digital Banking and Payment Services. The Payment Services business provides payment processing and settlement services. Direct Banking provides credit cards under the namesake brand Discover as well as loans for individuals and homes and deposit products.
Discover Financial Services (DFS, Financial) has a solid GF Score of 83 out of 100 from GuruFocus, implying the potential for modest returns going forward. Solid ratings for value, growth, and profitability are offset by weaker results for momentum and financial strength.
Discover's Investment Potential
The GF Value Line, however, shows that the stock could be significantly undervalued based on historical ratios, past financial performance, and future earnings projections. Shareholders of Discover Financial Services (DFS, Financial) could see a 70% return if the stock were to reach its GF Value of $148.63. The dividend yield of 3.2% is one of the highest in the fin tech industry. The company has raised its dividend for 11 consecutive years.
MasterCard Inc
Next up is Mastercard Inc (MA, Financial), one of the largest processors of electronic payments in the world. The company is valued at $382 billion and has produced sales of $24 billion over the last twelve months.
Mastercard Inc (MA, Financial)’s primary competitive advantages is the sheer size of its business. The company partners with more than 25,000 financial institutions around the world and has more than 3 billion cards in use. Due to its size and scale, Mastercard Inc (MA) is likely to be one of the primary beneficiaries of more the world’s population moving to electronic and digital payments.
Mastercard Inc (MA, Financial) has an impressive GF Score of 97 out of 100, which is one of the highest scores in the market. This means that the likelihood that the stock will deliver outperformance is high. Mastercard Inc (MA) has perfect scores in the areas of profitability and growth, a near perfect showing for momentum, and moderate results for value and financial strength.
MasterCard's Investment Potential
The stock’s GF Value Line suggests that the stock is modestly undervalued. With a GF Value of $485.58, shares are trading at a nearly 20% discount to intrinsic value. The stock’s yield is just 0.6%, but Mastercard Inc (MA, Financial) has raised its dividend for 12 consecutive years.
Visa Inc
The final name for consideration is Visa Inc (V, Financial), the global leader in digital payments. The company has a market capitalization of $483 billion and has generated close to $32 billion in revenue over the last year.
As with Mastercard Inc (MA, Financial), Visa Inc (V, Financial) benefits from its tremendous payment network. The company has operations in more than 200 countries and can handle up to 65,000 transactions per second. Visa Inc (V) had more than 4 billion cards in use as of its most recent quarterly filing. Visa Inc (V) should also continue to benefit from the trend towards electronic and digital payments due to its reach.
Visa Inc (V, Financial) has a GF Score of 98 out of 100, implying that the stock could also see strong returns. This score is backed by perfect marks for momentum, growth, and profitability. Financial strength and value are slightly lower at 7 out of 10, but still above both Discover Financial Services (DFS, Financial) and Mastercard Inc (MA, Financial)’s results.
Visa's Investment Potential
Visa Inc (V, Financial)’s GF Value Line ranks the stock as modestly undervalued. With a GF Value of $291.93, Visa Inc (V) is trading 23% below its intrinsic value. Shares yield just 0.8%, but Visa Inc (V) has increased its dividend for the past 15 years.
Final Thoughts
The Covid-19 pandemic escalated the transition to electronic and digital payments. More people than ever have a bank account around the world, which has led to spikes in the number of payments done with something other than cash.
This ongoing transition should benefit the largest names in the fin tech space. Discover Financial Services (DFS, Financial), Mastercard Inc (MA, Financial), and Visa Inc (V, Financial) are three names that should continue to perform well as more of the world conducts its business electronically and digitally.
Each name is also trading at a double-digit discount to its GF Value. Therefore, investors looking for value in this space should consider adding these three stocks to their watchlist.
