Paymasters of the universe

When Tom Slater went to a meeting with Amazon 15 years ago, he wanted to know how the company was planning to improve the retail experience for its customers. Was it investing in technology that would improve the quality of recommendations, simplifying the page design or delivering better targeted ads? Actually, Slater explains, the conversation kept coming back to taking milliseconds off page-loading times to allow the user to move efficiently through the buying process. “With payments technologies, what really matters is doing everything you can to drive velocity and volume of revenues for your customers. And there are huge gains to be made from that,” he says.

These kinds of incremental, friction-reducing improvements are key to the efficiency of payment transactions. Global payment revenues will reach $1.9tn by the end of 2020, McKinsey, the consultancy, predicts – and that’s after an estimated 10 per cent drop caused by the coronavirus pandemic. Traditional banking and payment processing services have reaped the lion’s share of the profits from fees and service charges in this sector. But they are now being outpaced by Amazon, Apple and Google’s innovation in mobile and online payments. And there is also a new breed of ambitious, efficient and dynamic new technology companies claiming their own share of this market by offering faster, cheaper and more consumer-friendly services. In a market worth nearly $2tn, you don’t need much market share to create a very significant business.

Stripe, Affirm and TransferWise are all private companies in the Scottish Mortgage portfolio, and all founded by entrepreneurs who identified a common pain point for consumers.

Well respected for its engineering-focused approach, Stripe offers an elegant and powerful solution for the knotty technical problems of payment processing. Founded in San Francisco in 2010, Stripe was valued in April at $36bn, bolstered by the pandemic pushing many businesses online. “What Stripe has done,” Slater explains, “is come at it from a software engineer’s point of view – all a startup needs to do is insert seven lines of code to its site to handle payments. This takes away those really complicated issues around payment processing.” Before Stripe launched its solution, adding payment processing capability would take weeks of development work.

Until tech entrepreneurs came to online payments, the incumbents had been able to get away with slow, outdated services that made them a lot of money. “But the opportunity now is for startups to create something with a massive addressable market,” Slater says. “Trillions of dollars are flowing through these networks. This is particularly pertinent for Stripe – if every online business is using Stripe to process payments, it effectively becomes a royalty on the growth of the internet.” Customers might not notice a discreet ‘powered by Stripe’ label on the site they are buying on. Stripe sits between a retailer and the banks, a third-party processor and payment gateway that processes debit and credit card transactions. And that puts it in a strong position to launch ancillary services, such as fraud prevention or its own debit card.

London-based TransferWise has achieved both scale and liquidity in two large markets, the US and UK, which makes it extremely competitive. Its currency transfer service could also become a powerful platform for add-on services. “There’s value in having that mindshare with customers, which means they could look at delivering services for small-to-medium businesses off the back of that,” says Slater. TransferWise has already introduced multi-currency accounts that allow users to transfer money instantly between countries at very low conversion fees of between 0.4 per cent and 0.7 per cent. Launched in October 2019, the multi-currency accounts were holding £2bn in deposits by June 2020. It’s a service that bypasses the relatively high conversion fees of banks and builds on TransferWise’s reputation for transparency and fair rates among its very loyal userbase.