SIGNATURE #emergingpayments #transatlantic Equity Research 25 June 2020 Payments & Fintech The transition to cash-light societies The emergence of COVID-19 is accelerating a transition to cash-light societies that is already under way across the most digitally-advanced economies. We model a global tipping point in 2025, after which we expect absolute cash usage to begin to decline. This trend represents a structural tailwind to our global payments and fintech coverage, but it will also raise complex societal challenges. European Software & IT Services U.S. Payments, Processors & IT Services James Goodman Ramsey El-Assal +44 (0)20 3134 1038 +1 212 526 7144 [email protected] [email protected] Barclays, UK BCI, US *For list of authors, see page 2. Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. Please see analyst certifications and important disclosures beginning on page 71. Barclays | Payments & Fintech Barclays European Payments & Fintech Conference Monday, 21 September 2020 We look forward to inviting you to the Barclays European Payments & Fintech Conference, to be held on Monday 21 September 2020 in a virtual format. Presenting at our ninth instalment of this conference will be a variety of public and private companies across the Payments & Fintech sector. The format of the event will be fireside chats and panel discussions, with a schedule of one-on-one and small group investor meetings running in parallel. Report authors European Software & IT Services James Goodman Sven Merkt, CFA Corey Gayle Orson Rout +44 (0)20 3134 1038 +44 (0)20 3134 1254 + 44 (0)20 3134 0594 +44 (0)20 3555 0636 [email protected] [email protected] [email protected] [email protected] Barclays, UK Barclays, UK Barclays, UK Barclays, UK U.S. Payments, Processors & IT Services Ramsey El-Assal Benjamin Budish, CFA Damian Wille +1 212 526 7144 + 1 212 526 2418 +1 212 526 2469 [email protected] [email protected] [email protected] BCI, US BCI, US BCI, US Sustainable & Thematic Investing European Banks Hiral Patel Aman Rakkar, CFA Grace Dargan +44 (0)20 3134 1618 +44 (0)20 3555 1425 + 44 (0) 20 3555 4065 [email protected] [email protected] [email protected] Barclays, UK Barclays, UK Barclays, UK 25 June 2020 2 Barclays | Payments & Fintech FINTECH & PAYMENTS PRIMER VOL. 14: CASH IS KING NO LONGER Across the most digitally-advanced economies, cash usage has already reached a tipping point and is declining on an absolute basis. Countries such as Sweden, where ATM transaction volumes have halved over the past five years, highlight just how accelerated the transition to a cash-light society can be where certain societal and technological factors are combined. There are significant benefits to widespread adoption of digital payment methods, but there will also be deep societal challenges to address from reduced access to cash. While payments investors are familiar with the topic of a secular tailwind from cash-to-digital substitution, and the potential demise of cash has leapt to prominence since the emergence of COVID-19, there is a lack of global data available; through a detailed examination of country-level cash trends, we have built our Global Cash Model, forecasting absolute cash usage and transaction share out to 2030 under a range of scenarios. COVID-19 a clear accelerator of digital adoption – major changes in consumer habits are taking place There is strong evidence that COVID-19 is acting as a significant catalyst to further accelerate the substitution of cash by digital payment methods. Concerns around the cleanliness of cash, combined with increased online spending, have led to accelerated consumer adoption of a variety of digital payment methods, decreased merchant acceptance of cash and dramatic falls in ATM transactions. There will undoubtedly be a temporary effect to this – hard to quantify, but our base assumption is a 50% reversal of the substitution acceleration – yet we think persistent payments habits are being formed. Contactless the true cash killer, while the rise of P2P provides structural support to cash-light societies The increased convenience of contactless payments attacks the key remaining stronghold of cash – the low-value transaction – and can, we believe, lead to something of a person-by-person tipping point entirely away from cash. This is especially the case post COVID-19, with the majority of card transactions outside the US now contactless. We see mobile payments, including Apple Pay, adding to adoption and further cementing changing behaviours. In addition, while this report is concerned primarily with retail transactions, it is increasingly clear that scaled digital person-to-person networks are a key secondary requirement for a truly cash-light society, addressing issues of gifting and non-retail transactions. Our Global Cash Model post-COVID base case suggests a fall in cash’s share of value to 20% by 2030 The relative share of cash is in decline everywhere and, in the most digitally advanced economies, this is already resulting in absolute cash volumes contracting. However, across cash-centric economies, despite this loss of share, strong underlying spend growth is still driving absolute cash usage higher… for now. Our base case modelling suggests that a global tipping point will be reached in 2025, at which point we estimate cash usage will have fallen to ~30% of value, from ~50% in 2014. By 2030, we anticipate share declining to just 20%, and some 2-3pp lower than had COVID-19 not happened. In our most accelerated cash-light scenario, in which we apply a modest 20% premium to our annual country-specific digitalisation factors, cash usage falls to just 13% by the end of the decade. While the viability of fully cashless societies appears dependent upon policy, the transition to cash-light societies across digitally-advanced economies appears a near-certainty. The decline of cash raises serious societal challenges – fintech will be required to bridge the gap In a comparison to digital payment methods, cash scores well on availability, acceptance & convenience, immediate settlement, anonymity and budgeting. This, combined with the fact that a staggering ~1.7bn people remain unbanked globally, means cash is still today essential to many people, and disproportionately so to lower-income and vulnerable communities. For this reason, against the strong tide of global pro-digital regulation, there is building concern around the consequences of drastically reduced cash access. However, access to mobile phones is greater than to bank accounts, and basic mobile money can transform economies. Fintechs are providing bank accounts and banking services, in some cases more broadly and cheaply than incumbents, and we believe fintech innovation, combined with increased mobile and internet penetration, could lead to a net improvement in financial inclusion medium term, and is key to solving these challenges. Schemes and cash-market-focused acquirers benefit, a challenge for ATM and remittance providers We see the transition towards cash-light societies as a key positive driver for the majority of our global listed payments coverage. The schemes are well placed to capture the global trend, while the benefit to acquirers and processors is more powerful where geographic exposure is to still cash-driven markets, with a digitalisation tailwind ~3x higher. While there are obvious challenges to ATM operators and remittance providers over the longer term as a result of cash’s decline, we also see opportunities for vendors to offset this through increased outsourcing, solid execution and digital innovation. 25 June 2020 3 Barclays | Payments & Fintech A SNAPSHOT OF BARCLAYS GLOBAL CASH MODEL FIGURE 1 FIGURE 2 Global cash usage reaches a tipping point in 2025 in our … a year ahead of our undisturbed pre-COVID scenario, and global base case post-COVID cash model … resulting in 2-3pp of additional cash substitution by 2030 Cash Digital Cash usage Cash Digital Cash usage 250 250 48% 48% 200 200 40% 37% 32% 150 30% 150 22% 20% 100 100 50 50 0 0 FIGURE 3 FIGURE 4 While absolute cash usage is already in decline in the most ... cash-centric economies will continue to see absolute cash digitally-advanced economies … grow, but with a more powerful digital substitution factor 200 Cash Digital Cash usage Cash Digital Cash usage 29% 300 72% 250 150 56% 19% 200 45% 100 13% 150 29% 9% 100 50 50 0 0 FIGURE 5 FIGURE 6 As of now, there remain substantial differences in cash Our most extreme, accelerated cash-light scenario would usage by country, not necessarily linked to GDP suggest global cash usage could drop to just 13% by 2030 Cash Digital Cash usage 250 48% 200 36% 150 26% 100 13% 50 0 Source: Barclays Research estimates, combined with data from Bank for International Settlements, World Bank, ECB, selected central banks and Euromonitor 25 June 2020 4 Barclays | Payments & Fintech GLOBAL STOCK IMPLICATIONS FROM A DECLINE IN CASH 25 June 2020 5 Barclays | Payments & Fintech CONTENTS FINTECH & PAYMENTS PRIMER VOL. 14: CASH IS KING NO LONGER 3 A SNAPSHOT OF BARCLAYS GLOBAL CASH MODEL ............................. 4 GLOBAL STOCK IMPLICATIONS FROM A DECLINE IN CASH ................ 5 HOW CASH STACKS UP: A COMPARISON TO DIGITAL ALTERNATIVES .................................................................................................. 7 Advantages of cash – widely accepted, instant, anonymous .........................................................