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America’s digital payment sector is no more as behind as the Chinese claim it to be

Sometimes being a part of the generation that has most of this tech figured out at an early makes you forget that they haven’t been around for long. Say, for example, digital payment options that have been a crucial part of our late teen years weren’t even there like two decades ago. Sounds a little strange, right? Well, it is true. If we go back to some years ago, the now widely popular Stripe was just founded by two brothers Patrick and John Collison as an app to help other tech start-ups accept online payments. Come back to this day and Stripe has surpassed most of those tech start-ups with a market valuation of USD 95 billion, making it the biggest ever unlisted firm of the United States of America (USA).

As for America, this was the beginning of the digital payments industry revolution and it would be safe to say other tech start-ups washed their hands in the flow too. Take PayPal, a digital-payments firm that counted Elon Musk and Peter Thiel as early bosses, and which was set up in 1999 to allow users of Palm Pilots, a forebear of smartphones, to “beam” each other money. It was later bought by eBay, an online marketplace, which spun it out in 2015 for $45bn. Today it is worth $280bn, more than Citigroup and Wells Fargo, and is America’s 19th-most-valuable company. So, America, which was often remarked as the country of posted cheque and the hand-signed credit card receipts by Chinese executives, finally came forward with its digital payments. It is often remarked that the country was held back by the handful of banks and credit card firms that were too lazy to innovate, well, as investors held the string in their hands, the revolution began.

PayPal today, is even more valuable than Ant, the digital payment industry’s original king, which however has fallen out of favour with regulators of China in the past few months and is being forced to cancel its initial public offering. With more going public alternatives coming up in the forefront, the future of these big names like PayPal and Stripe is only going to look brighter. It can be affirmed from the fact that while most companies and businesses lost out during the pandemic, companies in the digital payment industry peaked investor interest so much so that the share price of one of the industry’s significant- PayPal- jumped up by 180 per cent during the pandemic year solely. Some rivals of PayPal and constituents of the industry gained even more significant margins, like Square whose share price quintupled and Adyen, who almost got its share value tripled.  With investors being so bullish in the industry, tech titans such as Google and Visa have also made their move towards the online payments niche. This bullish tendency can be witnessed from the fact that PayPal’s shares trade at 68 times earnings; Square’s, near 510.

Even though there are a number of reasons leading to this bullish tendency, more prominent of them is because of the fact that these firms have achieved scale. What this basically means can be understood by the numbers mentioned here. PayPal, the biggest of them, combines an online wallet used by 350m consumers with a gateway accepted by 30m merchants. This means that any associating brand gets the advantages of big networking effects, which are being further increased by the firm trying up with other firms that have many uses like that of Mercado Libre, UnionPay and Google. This gives investors an ode to a large-scale user market while simultaneously bearing comparative less risk tendency. Talking about Adyen and Stripe, who are pure online acquirers who typically integrate a client’s website with payment networks within days, we can rightly see a bright future. Because verifying a customer’s identity and probity is hard, especially when transactions are cross-border, about 10-15% of online transactions are usually declined. But the digital firms can reduce rejection rates by four to five percentage points. In return for all this, they charge a decent fee: Stripe typically takes a cut of about 2.7-2.9% of the value of each transaction or 1.9% in Europe. Now that they can spread their technology costs over hundreds of billions of dollars of transfers, the fee they earn on every additional payment is nearly all profit, which they can then reinvest.

The growing trend of e-commerce further adds to the list of the factors promoting the trend of digital payments and is one of the more prominent reasons for the exponentially growing industry. The increasing market share within online payments. Lisa Ellis, a researcher at the Moffett Nathanson, says “For all of the specialists’ might, over half of the digital-transaction volumes worldwide are still acquired by the captive, sluggish arms of banks.” Well, we never said there were no hurdles in the way, it is just that these hurdles prove to be consistently less powerful when it comes to the factors contributing to the success of the industry, especially the big four, whose surge data we all witnessed and contributed to. Especially after the COVID-19 pandemic, the growth pattern set for the digital payments industry has accelerated by about three to five years. However, with the industry all set to surge further, it’ll be about time in the next four to five years when the big four would be colliding head-to-head with each other, which however by all means will only be beneficial for the industry, remember the advantages of capitalism? So would the resultant be bigger room to roar because of expansion in the coming years or survival of the fittest, we’ll get to know. So even though it took some time to get America to be on board with the digital payments niche, now that it has its foot, the base is stronger than ever.

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