We are living in anxious times. With COVID-19 still spreading, but no real data on how widely and how fast, alarmist speculation is the order of the day. While it is understandable that people want to know as soon as possible how bad the effects will be, and prepare for the worst, there is a wide gulf between the best case scenario and the worst.
A recent PaymentsSource article, “How coronavirus could change the payment industry,” lists several immediate effects:
Many regions are already seeing a rise in contactless transactions, which could be seen as less prone to spreading disease than the handling of cash or paper checks.
Travel advisories could lead to a drastic drop in tourism spending, which could hurt the growth of global payment systems that rely on foreign travel for growth. At the same time, companies that have been undergoing a digital transformation, or promoting new technologies such as cashier-free checkout, may see more rapid adoption if their offerings can reduce the risks of transmitting the virus through human interactions.
So on one hand, lower travel and tourism spending, as well as disruption to supply chains, could cause lower payments volumes than expected. On the other hand, less face-to-face contact could actually increase non-cash spending, as people rely more on e-commerce, cards, and ACH.
Nevertheless, top payments companies are already reporting slower growth in certain segments. According to a March 3, 2020 article in Digital Transactions, “With Visa Issuing a Revenue Warning, the Coronavirus Takes a Further Toll on Payments Companies,”
In a regulatory filing, Visa said it expects revenue growth for fiscal 2020’s second quarter ending March 31 to be 2.5 to 3.5 percentage points lower than it predicted Jan. 30 during its latest quarterly earnings call. At that time, Visa forecasted second-quarter revenue growth in the low-double digits, percentage-wise.
Note that this is not actually a decrease; in fact, as far as I can remember, there has not been an actual decrease in card payments except during the Great Recession, when large numbers of credit card accounts were closed as banks strove to get risky borrowers off their balance sheets, and consumer sought to deleverage. In general, electronic payments are remarkably stable, growing every year. This is part of what has made Mastercard and Visa stock so valuable: their reliable revenue growth.
The main area of weakness, as one might expect, is in cross-border payments. For example, in the same Digital Transactions article, we read:
On Feb. 27, PayPal Holdings Inc. said “international cross-border e-commerce activity has been negatively impacted by COVID-19” and would result in a 1-percentage-point reduction in year-over-year company revenues in the first quarter. A few days earlier, Mastercard Inc. disclosed that cross-border travel, and to a lesser extent cross-border e-commerce growth, “is being impacted” by the virus and was on track to reduce first-quarter revenue growth by 2 to 3 percentage points from Mastercard’s earlier forecast.
Going back to the PaymentsSource article, there is a chart showing $210.7 billion dollars in foreign tourism spending in the U.S.A. This is a lot, but if you compare it to the $1.9 quadrillion in total non-cash spending projected for 2020 from all sources in the Mercator Worldwide Payments Model, that is only 0.011%, a rounding error.
Note that 61.5% of the $1.9 quadrillion comes from wires, but those are actually more likely to be affected by cross-border payments issues, so it is appropriate to include them. Even if we think about all of the possible sources of spending that could be affected, it is unlikely that there would be a meaningful impact on total payments. What we will see is individual companies, like card networks and payment processors, reporting lower – but not negative – growth.
Part of the reason for this is that the vast majority of payments traffic is just “keeping the lights on,” regardless of what is happening in the economy. Banks and corporations need to move vast amounts of money between their accounts; settlements need to happen; benefit payments continue; securities trading continues.
We would have to see a truly catastrophic situation, such as a sustained loss of electricity, telecommunications and logistics capabilities, for there to be a major effect. In that case, payment industry revenues will be the least of our worries.
In short, while there are plenty of things to be worried about, the payments industry is not one of them.
Overview by Aaron McPherson, VP, Research Operations at Mercator Advisory Group