Payments of the Universe

The value of your investment and any income from it can go down as well as up and as a result your capital may be at risk.

When Tom Slater met Amazon 15 years ago, he wanted to know how the company was planning to improve the retail experience for its customers. The answer was in taking milliseconds off page-loading times. “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. Traditional banking and payment processors are being outpaced by Amazon, Apple and Google’s innovation in online payments. And now a new breed of dynamic technology companies are claiming their share of this market by offering faster 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.

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. “Stripe comes at it from a software engineer’s point of view,” says Slater, “so all a startup needs to do is insert seven lines of code to its site to handle payments.” Before Stripe, adding payment processing capability would take weeks of development work.

Stripe sits between a retailer and the banks, a third-party processor and payment gateway that processes debit and credit card transactions. “Trillions of dollars are flowing through these networks,” Slater says. “So if every online business is using Stripe to process payments, it effectively becomes a royalty on the growth of the internet.”

London-based TransferWise has become extremely competitive by achieving scale and liquidity in the large markets of the US and UK. “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. 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.

Building trust with consumers has worked well for Affirm, the eight-year-old point-of-sale credit company. Its transparency and fair rates have resonated with millennials and Gen Z, who account for more than half its 5.3m customers.

Affirm allows its retail clients, including Peloton and Walmart, to offer a buy now pay later option at the online checkout. “In the financial world, the challenges are acquiring customers and the cost of acquiring customers relative to that value to you,” says Slater. “You need to bring on as many good customers as you can and then have a longer relationship with them.” Online, there are far more data points that sites can use to assess the user’s creditworthiness.

Stripe, TransferWise and Affirm are all online-enabled businesses that are rapidly growing their share of the market, have modest capital requirements and are led by their founders. Affirm was founded by Max Levchin, the Ukrainian-American software engineer who co-founded PayPal. “That combination of reputation and the respect he has earned, combined with the scale of the opportunity, makes it really interesting,” Slater says. “We look for robust, adaptable businesses, led by visionary people and with strong cultures, that can navigate whatever is thrown at them.”