There is a clear trend towards a cashless society, not only in the United States, but all over the world. While cash probably isn’t going extinct entirely, at least not anytime soon, an increasing number of financial transactions are taking place through credit and debit cards, mobile apps, and other methods other than cash.
When there is a clear trend like this, there are often exciting opportunities for long term investors. And that’s especially true when we’re talking about a $ 185 trillion market opportunity, which is the current estimated volume of payments flowing around the world.
Two particularly interesting companies that investors might want to look at are a fast-growing financial technology company. Square (NYSE: SQ) and leader in payment processing Visa (NYSE: V). However, while both are great companies, they are two very different investments. So here is an overview of each of them to help you decide which is the best buy for your wallet.
Square: a huge disruptor with lots of growth potential
Calling Square a major disruptor would be like calling Amazon.com (NASDAQ: AMZN) a very successful retail business. The company has transformed the financial landscape by enabling all businesses, regardless of size, to seamlessly accept credit and debit card payments.
However, Square has evolved considerably since it started selling those little card readers coming out of merchant smartphones. Its payment processing hardware is used by businesses of all sizes and an annualized payment volume of more than $ 100 billion flows through its systems. Square Capital’s business loan division has generated billions of dollars in small business loans and the company has created a small business ecosystem.
The personal finance side of Square’s business becomes even more impressive. The company’s Cash app now has 30 million active users and in addition to its person-to-person payment functionality, Cash App now allows users to buy and sell bitcoin, invest in stocks and even more. But Square is not finished yet – its vision is to be a one-stop-shop for the financial needs of its users. This could add things like personal loans, high yield savings, insurance products, and more to the ecosystem over time, to name a few.
Visa: the world’s largest payment network
If you’re reading this, there’s a good chance there is at least one credit or debit card in your wallet that has the Visa logo on it. The world’s largest payment network, there are nearly 3.5 billion Visa cards, and the company has approximately $ 9 trillion in annualized payment volume flowing through its network.
However, don’t think, because Visa is such a massive company, that it’s as big as it is going to be. On the one hand, while most payment transactions in the United States are now cashless, many parts of the world are not. Acceptance of credit cards is not as universal in many places, and it is estimated that up to 80% of payment transactions worldwide are still made in cash.
Additionally, the $ 185 trillion global payments market includes things like person-to-person and business-to-business transfers, areas in which Visa has yet to fully tap into. A few months ago, I wrote that Visa could grow into a trillion dollar market cap company in the not too distant future (currently, that’s less than half that), and my opinion isn’t. has not changed.
Don’t think it has to be one or the other
One of the most common questions I get asked about the fintech world is, “Should Visa be worried that Square and other disruptors are going back to business?” And the answer is no. Square provides the systems that facilitate payment transactions and Visa manages the network that processes them. Both are required for a transaction. And there is plenty of room for both to benefit from the cashless trend.
The biggest question you should ask yourself as an investor is just how prepared you are to deal and what your tolerance for risk is. Square has tremendous growth potential, but it’s also a richly priced stock that’s priced for significant growth going forward. On the other hand, Visa essentially dominates payment processing with MasterCard (NYSE: MA) and much better suited for investors looking for stable and predictable earnings.
In a nutshell, both are great headlines and you probably won’t go wrong either. As a more growth-oriented investor, I would probably go with Square if I were to add one to my portfolio today (by any disclosure, I have been a Square shareholder for a short time after the IPO) , but there is a solid argument to be made for both.