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The U.S. certainly has its share of forward-looking tech companies. From Google to Amazon, Facebook to Apple, many of the world’s foremost digital pioneers have found inspiration and success on American soil.
But as the adage goes, necessity is the mother of invention. While U.S. companies were honing algorithms, mastering product distribution and cornering arcane online markets, a new wave of entrepreneurs was helping consumers around the world — often in emerging markets — more easily pay for and finance their purchases.
Much of that technology was built for consumers who had mobile phones but lacked bank accounts or the ability to make traditional digital payments. The new systems give users quick and reliable ways to pay with their gadgets, sidestepping banks and financiers. And the platforms have proven convenient enough that U.S. consumers are starting to notice.
“A decade from now, I think digital payments will be the norm and people will give you odd looks if you try to pay with cash,” says Capital Group equity portfolio manager Jody Jonsson.
In China, companies such as Alipay, part of Ant Group, and Tencent’s WeChat Pay have enjoyed rapid adoption, with demand strongly driven by consumers’ day-to-day needs. But it’s not just big companies with large global footprints that have benefited: China’s Yeahka is growing rapidly, as are Brazil’s PagSeguro and StoneCo. All these companies were able to aggressively move into the market by offering buyers convenience and security that older systems couldn’t match.
As with so many other digital trends, the pandemic supercharged adoption rates. Not only did consumers buy more online during lockdowns, but touchless technology — the better to avoid potentially germy public devices — became more popular during trips out of the house. In many parts of the world, mobile payments have become the norm.
Simply put, cash is no longer king in many non-U.S. markets, and that could augur a cashless future in the States as well. Beyond providing opportunities for international upstarts, this trend could boost the prospects of existing payment processors.
“Once this crisis is over, I think a lot more people will be comfortable making digital payments, and they probably won’t feel the need to use cash as often,” Jonsson says.
But consumers abroad aren’t just turning to new ways to pay — they’re finding new ways to finance their purchases. One increasingly popular way involves “buy now, pay later,” or BNPL, systems, in which consumers take out small loans or tap into a low-limit line of credit to buy items.
The loans have proven popular with younger cohorts, in no small part because they’re typically very inexpensive for consumers. Many lenders generate most of their revenue through fees charged to merchants, only charging borrowers fees for late payments.
“I think BNPL has the potential to structurally disrupt the credit card and payments industry,” says William Pang, an equity investment analyst with responsibility for global exchanges and Asian banks and financial institutions. “Australian banks have already introduced zero percent interest rate cards in response to these companies.”
And while merchants often shoulder the cost of these systems, they’re finding reasons to like them. Users tend to spend more and make purchases more often than consumers using traditional payment methods. Additionally, these customers are more likely to follow through on digital browsing, abandoning their carts less often than other shoppers.
BNPL companies have become commonplace in Australia, with 15% of adults having used Afterpay, one of the larger providers there. However, the companies have plenty of room to grow globally, with only a 2% market penetration in e-commerce worldwide and even more space to expand in brick-and-mortar transactions. They’ve already started making inroads in the U.S.: Sneaker maker adidas allows users to use BNPL lenders Affirm, Afterpay and Klarna to pay for its products. PayPal, long a traditional payment facilitator, entered the market this year.
“I think BNPL could potentially replace credit cards for millennials and Gen Z by 2030,” Pang says. “Why pay double-digit APR when you can get a free loan?”
These trends are a reminder that investors shouldn’t ignore opportunities in international and emerging markets. Though the U.S. is likely to remain a primary engine of innovation, it would be shortsighted to think of the country as the sole province of inventive companies. What’s more important for investors is to seek out the world’s most innovative companies in growing industries, wherever they are located.