Payments - Big Tech, Neobankng and Many More

Lisa Ellis
lisa@moffettnathanson.com 212-916-2660
Eugene Simuni
eugene@moffettnathanson.com 212-916-2652
Ariel Hughes, CFA
ariel@moffettnathanson.com 212-916-2659
Kate Zolner
kate@moffettnathanson.com 212-916-2658
November 25, 2019

Visa (V), Mastercard (MA), PayPal (PYPL), Fiserv (FISV), Square (SQ), Fidelity
Nat'l. Info. Services (FIS), Global Payments (GPN)
Payments: Big Tech, Neobanks, and Many More – Top

Trends and Recent Developments in Payments
Vital Signs
Vital Signs
Around this time each year – on the heels of our annual Visa (V)
sojourn to Money20/20, and when we start thinking about Recommendation Visa (V) Buy
Target Price
Recommendation $210.00
Buy
what the New Year might bring – we take a fresh look at the Closing
Target Price
Price (11/22/19) $179.47
$210.00
major trends shaping the Payments industry, and how they Closing Price
Forward P/E (11/15/19) $179.77
28.9x
Payments, Processors, and IT Services

impact our covered stocks. 12Forward
MonthP/E Relative to S&P 28.9x
16.9%
12 Month Relative to S&P 12.9%
Mastercard (MA)
Mastercard (MA)
If you’re curious what last year’s list looked like (or are Recommendation Buy
Recommendation Buy
keeping score), the two key research notes are: Payments: A Target
TargetPrice
Price $330.00
$330.00
Peek into the Future of Payments – Insights from Closing
ClosingPrice
Price(11/22/19)
(11/15/19) $282.57
$280.78
ForwardP/E
Forward P/E 36.5x
36.5x
Money20/20 2018 – Nov 6, 2018, and Payments 2019: You 1212Month
MonthRelative
Relative to
to S&P
S&P 25.3%
36.6%
Are My Sunshine – Jan 10, 2019.
PayPal (PYPL)
PayPal (PYPL)
Recommendation Buy
In this research note, we attempt to accomplish two things: Recommendation
Target Price Buy
$135.00
Target Price
Closing Price (11/15/19) $135.00
$104.20
Forward
Closing P/E (11/22/19)
Price 34.0x
$101.77
First, provide our current perspective on the top 12 Month
Forward P/ERelative to S&P 6.4%
34.0x
trends – eight of them – shaping the Payments 12 Month Relative to S&P 12.4%
Square (SQ)
industry, and Payments stocks, over the next Recommendation Buy
several years. Target Price Square (SQ) $85.00
Recommendation
Closing Price (11/15/19) $64.70Buy
Target Price
Forward P/E $85.00
83.1x
Second, deep dive into a handful of ‘hot spot’ areas 12 Month
Closing PriceRelative to S&P
(11/22/19) -26.8%
$67.75
in Payments where there have been material, recent Forward P/E
Fiserv (FISV)
83.1x
developments. These deep dives include: Big Tech 12Recommendation
Month Relative to S&P -11.4%
Buy
expanding its role in Payments/FinTech (e.g., Facebook Pay, Target Price $125.00
Closing PriceFiserv (FISV)
(11/15/19) $113.91
Google checking accounts, Apple Card); the rise of the Recommendation
Forward P/E Buy
28.6x
Neobank (e.g., Square Cash App, Chime); the emergence of 12 Month
Target PriceRelative to S&P 29.8%
$125.00
‘beyond-omni’ commerce (e.g., voice, AR/VR, Closing Price (11/22/19) $113.92
Fidelity
Forward P/ENat'l. Info. Services (FIS)
28.6x
experiential retail, unattended retail); the groundswell of Recommendation
12Target
Month Relative to S&P
Buy
30.1%
Price $157.00
financial inclusion and alternative lending initiatives for Closing Price (11/15/19) $135.82
SMB’s and gig workers; card- and card-rail innovation FidelityP/E
Forward Nat'l. Info. Services 24.6x
(FIS)
Recommendation
12 Month Relative to S&P Buy
14.2%
(e.g., ‘points rails’, ‘POS lending rails’, card customization Target Price $157.00
and controls, AI-based security); and advancements in Global
Closing Price Payments (GPN)$135.46
(11/22/19)
Recommendation Neutral
cross-border payments as this historically-niche market Forward P/E
Target Price
24.6x
$200.00
explodes as a result of eCommerce. 12Closing
MonthPrice
Relative to S&P $179.23
(11/15/19) 13.0%
Forward P/E 29.0x
Global Payments (GPN)
Among these six Payments ‘hot spots’, we view Big Tech Recommendation Neutral
encroaching in Payments/FinTech as the most Target Price $195.00
Closing Price (11/22/19) $178.65
Forward P/E 29.0x
Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution
Refer to the end of this report for important disclosures and disclaimers.
Trends and Recent Developments in Payments Page 2
directly negative for our covered Payments stocks, and one of the top disruptive risks
the Payments industry overall. In sharp contrast, we view the rise of Neobanks as
generally positive for our covered Payments stocks, as is the groundswell of financial
inclusion initiatives and card-related innovations. Finally, we believe ‘beyond omni’
commerce and advancements in cross-border payments are critical competitive
battlegrounds – particularly for the merchant acquirers (FIS, Fiserv, Global Payments), but
also Visa, Mastercard, and PayPal who have large, lucrative cross-border payments businesses
today and have yet to solidify their positions in the emerging modes of commerce (e.g., voice,
unattended retail).
Investment Implications
Square (Buy, TP = $85). We believe the sharp sell-off in Square’s stock following 2Q19
earnings was overdone – in contrast, our outlook for Square’s fundamentals got better, not
worse, based on the new disclosures in the quarter (sale of Caviar, larger-than-expected Cash
App contribution). Square’s valuation now stands at 55-60x EV/NTM EBITDA, a ~25%
premium to peers - a sharp contrast to a year ago when Square was at ~90x EV/NTM EBITDA
vs. peers at ~45-50x – so we believe that going forward Square’s distinctive EBITDA growth will
translate to stock appreciation. We are expecting clear positive catalysts for Square’s stock over
the next ~6 months (e.g., updates on Cash App growth and Seller business profitability, re-
acceleration of GPV growth). Over the long term, however, we continue to monitor the tug-o-
war between the strong bull arguments (highly innovative, core product under-penetrated,
strong momentum with larger sellers, traction with consumers), and strong bear arguments
(behind in eComm, facing competition from Clover and PayPal-iZettle, macro exposure is a
wildcard, uncertain Instant Deposit growth) for Square.
Mastercard (Buy = TP $330) is in rarefied air among investment opportunities, with its
unique combination of strong secular growth, a defensible market position, and an intrinsically
high-leverage business model, which historically combine to deliver 20+% EPS growth year-in,
year-out. Mastercard is one of our Top Picks – we are ~2 ppts above consensus estimates for
2020 revenues on a clean basis, driven by cross-border, share gains in Europe and ROW, B2B,
and ancillary services.
Fiserv (Buy, TP = $125). We expect legacy Fiserv (~60% of New Fiserv) to grow modestly
above Financial Technology Services industry growth of 4% as it gradually penetrates larger
financial institutions in the U.S. and other adjacent segments. We expect legacy First Data's
turnaround to continue with gradual improvements in the critical NA GBS segment and support
from its small, but high-growth international businesses. We expect the Fiserv-First Data
merger to create a balanced combination of strategic and financial benefits. Nearly half of our
expected stock appreciation over the next year comes from de-levering and capital structure
benefits as debt-laden First Data is absorbed into cash-rich Fiserv. We’re expecting modest
outperformance of New Fiserv revenue growth (5.9% CAGR for ‘18-‘21, compared to 4.2% for
Fiserv for ‘15-‘18) as an injection of investment from Fiserv stabilizes and accelerates the
turnaround of First Data’s North American Merchant acquiring business.
FIS (Buy, TP = $157). We expect legacy FIS (~70% of New FIS) to grow modestly above
Financial Technology Services industry growth of 4% as it gradually penetrates larger financial

institutions in the U.S. and other adjacent segments. We view legacy Worldpay (30% of New
FIS) as a leading merchant acquirer, with a unique competitive positioning in global,
omnichannel commerce, benefiting from attractive long-term secular trends in payments (cash
displacement, eComm growth), with upside from Vantiv merger synergies and investments in
B2B. We like the FIS-Worldpay merger because we believe the investment capacity and global
reach of FIS ($2.4B in '18 FCF, operations in 146 countries) will turbo-charge Worldpay's
growth at a critical "land grab" period in the merchant acquiring industry. We expect pro forma
New FIS to grow revenue and EBITDA at 7.5% and 12.0% respectively, for '18-'21. In addition,
we expect additional stock appreciation to come through sizeable, if predictable, benefits from
cost synergies and delevering.
PayPal (Buy, TP = $135) is an eComm pure-play with an under-appreciated competitive

moat (est. 30x+ the TPV of Amazon Pay) and strong execution. We expect that in 2019 and 2020
PayPal will achieve its EPS growth target of 20% despite headwinds from the Synchrony sale,
eBay roll-off and acquisition integration costs. To achieve this earnings growth rate we expect
PayPal to maintain ~20% branded checkout TPV growth in the U.S., and accelerate branded
checkout TPV growth outside of the U.S. to ~25% in 2019. We expect that operating leverage
and PayPal’s ~$10B cash reserve available for share repurchases will also help support earnings
growth. The number one reason to own PayPal stock now is the possibility of asymmetric
upside, as the now-eBay-free company inks additional partnerships with players ranging from
Facebook to WeChat to Wal-Mart to Amex.
We remain positive on Visa (Buy, TP = $210), with continued strong 18% clean EPS growth
expected in FY2020, and upsides from Visa Direct and pricing in Europe. Like Mastercard, Visa
is in rarefied air among investment opportunities, with its unique combination of strong secular
growth, a defensible market position, and an intrinsically high-leverage business model, which
combine to deliver high-teens EPS growth year-in, year-out. Now that the Visa Europe platform
integration and contract negotiations are complete post-Visa Europe acquisition, we’ll be paying
close attention to how quickly Visa can close its performance gap with Mastercard in Europe, as
well as how fast it scales its Visa Direct service – the two primary potential upsides to our
earnings forecasts.
Global Payments (Neutral, TP = $195). We like the TSYS deal for Global Payments, and
have a more favorable outlook on the stock as a result. Three primary reasons we like the deal:
1) strong positioning in the high-growth, secularly attractive Payments sector (93% of revenues);
2) a compelling international cross-selling opportunity that should improve New Global
Payments’ competitive positioning and drive revenue synergies; 3) upside potential from cost
synergies. Three factors keep us cautious: 1) Post-deal, New Global Payments will still be
underindexed in eCommerce – we believe the most critical competitive differentiator and
growth driver in Payments; 2) New Global Payments will face elevated competitive pressure
from New FIS and New Fiserv in both its core domestic businesses and international expansion
efforts; 3) We view Global Payments’ re-iterated commitment to growing its vertical software
portfolio as less attractive and more risky than focused investments in payments. We expect pro
forma New GPN to grow revenue and EBITDA at 9% and 13% respectively, for '18-'21, and drive
the majority of stock appreciation.

First, our updated perspective on the top trends – eight of them – shaping the
Payments industry, and Payments stocks, over the next several years
We see eight mega trends shaping the global Payments landscape over the next several years:
1. Sustained cash displacement-driven secular growth in card payments: we expect

5+ more years of double-digit card volume growth globally (11% CAGR ‘18-‘23)
2. Rise of eCommerce: eComm is accelerating card volume growth, disrupting the existing
Payments ecosystem, and triggering consolidation
3. Increasing role of governments in driving and shaping digital payment

adoption: governments are promoting digital payments and opening up their markets,
while also sponsoring alternative local champion payment rails
4. Rapid ‘land grab’ in merchant acquiring: the merchant acquiring industry is

globalizing and consolidating, while adapting to a rapidly evolving commerce landscape
5. The rise of digital wallets and neobanks: online-only fintechs are rapidly proliferating,
and playing an increasingly important role in the Payments landscape
6. The encroachment of Big Tech: Facebook, Amazon, Google, Apple, Uber and online
commerce platforms are creeping further into Payments and FinTech
7. Expansion into payment flows beyond C2B: C2B-focused Payment players are
increasingly focused on B2B, B2C and C2C flows
8. Existential threat of Crypto. Ten+ years after the birth of Bitcoin, many new crypto
initiatives – most prominently Libra – pose an existential threat to the Payments ecosystem.
Payments mega-trend #1. Sustained cash displacement-driven secular growth in card

payments
The foundation of a thesis on the Payments sector. We forecast 11% global payment volume
growth from 2018-2023, 5-6ppt above GDP growth, as global digital payment penetration rises
from 43% to 56% in 2023. Our card volume growth forecast underpins our bullish view on the
Payments sector as whole, and has positive implications for all of our covered Payments stocks,
with varying exposure to accelerators (e.g., mPOS, eCommerce) and faster-growth regions (e.g.,
ex-U.S.) driving differentiation in our company-level volume forecasts.
Payments: The Foundation of the Bull Thesis – Why We Have 5+ More Years of Double-Digit
Volume Growth (March 25, 2019)

Payments mega-trend #2. Rise of eCommerce
In our view, eCommerce is the strongest disruptive force in Payments – we second-guess any
stock thesis not aligned with eComm. We expect the explosive growth of carded eComm (est.
~19% p.a.) to be one of the primary accelerators of global card volume growth over the next five
years, and to be the root cause behind several other trends on this list (e.g., consolidation in
merchant acquiring, Big Tech expanding in Fintech/Payments, and the rise of digital wallets and
neobanks). Among our covered Payments stocks, PayPal, Mastercard, Visa, and FIS have the
best eComm exposure.
Payments: The Tidal Wave – Our Proprietary eCommerce Forecast and Implications for the
Payments Sector (October 2, 2019)
Payments mega-trend #3. Increasing role of governments in driving and shaping digital
payment adoption.
Digital payments are viewed by most governments as good for society, as digital forms of
payment facilitate financial inclusion and tax collection, and eliminating cash helps eliminate
corruption and theft. As a result, governments around the world are actively implementing
policies to drive digital payment penetration – hot spots include the EU, India, Japan, and
Brazil. The heavy hand of government involvement in digitizing payments has a mixed impact
on our covered Payments companies, playing a critical positive role in accelerating card volume
growth, but also creating local competitors to the global players, in the form of government-
sponsored, and often protected, alternative payment rails (e.g., IMPS/UPI in India, FedNow in
the U.S.).
Payments mega-trend #4. Rapid ‘land grab’ in merchant acquiring.
Merchant acquiring is rapidly globalizing, triggered by the two prior trends on this list.
eCommerce is transforming merchant acquiring from a localized, labor-intensive, store-centric
business to a global, scalable, technology-centric business. The rapid digitization of payments in
regions like continental Europe, Latin America, and southeast Asia – driven by government
initiatives – is creating a veritable land grab for merchant acquiring market share in these
regions. Further complicating matters: merchants are urgently demanding omni-channel
merchant acquiring, with seamless integration across in-store and online/mobile channels, to
respond to consumers’ demands for services like ‘order ahead’. As a result of these trends,
merchant acquirers, who have historically largely operated in their own swim lanes – focused in
a particular country and either in-store or online – are beginning to consolidate. We view 2019’s
three mega-mergers as positive for all three players (FIS, Fiserv, and Global Payments), and
believe these mergers are the beginning, not the end, of the consolidation trend.
The Merchant Acquirer M&A Chessboard - Who is Next? (April 3, 2019)

PayPal 2Q19: $10 B Burning a Hole in the Corporate Pocket – Who PayPal Might Buy Next (July
25, 2019)
Payments mega-trend #5. The rise of digital wallets and neobanks.
Even though PayPal – the granddaddy of digital wallets – is 20 years old, and Apple Pay just
crossed its 5th birthday, the overall category of digital wallets and so-called ‘neobanks’ – a large
and varied group of providers that offer consumers a digital alternative to a traditional checking
account for storing and spending money, ranging from Square’s Cash App to Alipay – is still
early in its development, and its ultimate impact on the Payments ecosystem remains unclear.
Case in point: in a survey of 1000 U.S. consumers we conducted earlier this year, respondents
reported increased adoption and usage of all fourteen digital wallets and neobanks included in
the survey. The emergence of digital wallets and neobanks is most potentially disruptive to
traditional banks, but it is also an important trend in Payments. In the Payments ecosystem,
digital wallets/neobanks may be customers/partners (e.g., issuing debit or credit cards in
partnership the networks and issuer processors), and may unlock new revenue streams (e.g.,
immediate fund transfers over Visa Direct/Mastercard Send or Fast ACH rails), but may also
pose a threat (e.g., the creation of closed-loop payment systems analogous to Alipay or WeChat
Pay).
Payments: Digital Wallet Wars Escalate – New 1000+ Respondent Consumer Survey on Usage
of 14 Wallets (June 20, 2019)
SQ, PYPL: Is it Worth 40% of Valuation? A Deep Dive into Square’s Cash App (July 8, 2019)
Visa 4Q19: “A Digital Wallet By Any Other Name…” Visa’s Strategy to Make Friends with
FinTechs (Oct 25, 2019)
Payments mega-trend #6. The encroachment of Big Tech in Payments and FinTech.
While the risk of Big Tech disruption has been a major theme in Payments (and FinTech more
broadly) for a solid decade (e.g., we’ve seen at least three incarnations of Google Pay/Android
Pay/Google Wallet), a recent string of announcements from major tech players suggest a pick-
up in Big Tech activity in Payments and FinTech. Two recent developments of note: first, major
online commerce platforms that have historically played little or no role in Payments (e.g.,
Facebook, Uber, eBay), now entering (e.g., Facebook Pay, Uber Money, eBay assuming the
merchant-of-record role); and second, the three Big Tech players active in payments for many
years (Apple, Google, and Amazon) now noticeably expanding their offerings (e.g., Apple Card,
Google checking accounts). While Big Tech in Payments can have positive effects (e.g., helping
to accelerate eComm, or creating lucrative partnerships like PayPal’s with Facebook), we
generally view the encroachment of Big Tech as a risk, and a long-term negative, for our covered
stocks.

FB, PYPL, Square: Facebook Pay – Good for Facebook, Good and Could Be Better for PayPal,
Non-Event for Square (Nov 19, 2019)
V, MA, PYPL: The Amazon Risk (March 8, 2019)
FB & PYPL - A Match Made in Heaven? What an Expanded FB/PYPL Partnership Might Look
Like (and Why Now) (December 13, 2018)
Payments mega-trend #7. Expansion into payment flows beyond C2B.
Payment flows outside of consumer-to-business represent a huge opportunity for our covered
Payments players: in aggregate, B2B (>$120T), B2C (~$50T), and P2P (~$10T) payment flows
are 5-6x the size (by dollar value) of C2B payments (~$34 T ex-China). These new payment
flows are a highly attractive ‘white-space’ expansion opportunity for Payments firms (still
heavily manual and/or cash/check-based, few large established players), but require new
solutions to address their unique needs, which differ greatly from C2B payments. We view
expansion into these new payment flows as the single largest source of long-term (e.g., 3-5+
year) upside for Visa and Mastercard, and to a lesser extent FIS, Fiserv, Global Payments,
PayPal and Square.
V, MA, FIS, FISV: B2B Payments – Big? Yes. Lots of Inertia? Double-Yes. And in Need of a
Leader. (September 26, 2019)
MA: Laying the Foundation for the Next 20 Years – Mastercard’s Expansion into New Payment
Flows (September 18, 2019)
Payments mega-trend #8. Existential threat of Crypto.
Cryptocurrencies and blockchain – futuristic and existential, perhaps, but the one true
disruptive threat to the Payments ecosystem – resurged this year with the announcement of
Facebook’s Project Libra. We believe the disruptive threat of cryptocurrency systems (the threat
that one – e.g., Bitcoin or Libra – matures into a globally accepted ‘unbranded’ payment system
that disintermediates the current incumbents like Visa, Mastercard, and PayPal) is unlikely to
occur soon, but bears watching, especially for specific use cases, e.g., as a fiat currency substitute
in high-inflation regions, analogous to mobile minutes in the mPesa payment system in Africa.
We believe Visa, Mastercard and PayPal should take an active role in shaping and developing
the crypto-based payments ecosystems, to de-risk this long-term threat.
FB, V, MA, PYPL: Libra, Libra, Libra – Answers to Your Top 25 FAQs (July 16, 2019)
V, MA, PYPL: Not Imminent, but Worth Watching – the Risk of Disruption from
Cryptocurrencies and Blockchain (February 27, 2019)
Payments, Processors, and IT Services: Blockchain and Cryptocurrencies – State of the Industry
(February 13, 2019)
Second, deep dives into a handful of Payments ‘hot spots’ where there have
been material, recent developments
In the prior section, we summarized our latest perspective on the top eight mega-trends shaping
the Payments industry, and Payments stocks, over the next several years.
Rather than going into detail on each of the eight mega-trends (since many of them we have
covered extensively in prior research), we have focused the remainder of this research note on
the “new news” – the handful of areas in Payments where there have been material, recent
developments.
These deep dives into Payments ‘hot spots’ include:
 Big Tech expanding its role in Payments/FinTech (e.g., Facebook Pay, Google checking
accounts, Apple Card) – a deep dive on the new developments in Payments Mega-trend
#6. While Big Tech in Payments can have positive effects (e.g., helping to accelerate
eComm, or creating lucrative partnerships like PayPal’s with Facebook), we generally
view the encroachment of Big Tech as a risk, and a long-term negative, for
our covered stocks
 The rise of the Neobank (e.g., Square Cash App, Chime) – a deep dive on the Neobank
component of Payments Mega-trend #5. We believe that Neobanks are offering
solutions that meet real market needs, and, in contrast to Big Tech, see their
emergence as generally a positive development for the Payments players
(new revenue models for the wallets + new card issuance customers for the networks and
bank processors).
 The emergence of ‘beyond-omni’ commerce (e.g., voice, AR/VR, experiential retail,

unattended retail) – a deep dive on the commerce trends that will help determine the
winning merchant acquirers of the future (Payments Mega-trend #4).
 The groundswell of financial inclusion and alternative lending initiatives for SMB’s
and gig workers – a deep dive on the ‘how?’ and ‘why now?’ aspects of financial inclusion
– the mission that drives government involvement in payments (Mega-trend #5) and
many FinTech firms (e.g., PayPal, Square).
 Card- and card-rail innovation (e.g., ‘points rails’, ‘POS lending rails’, card
customization and controls, AI-based security). Following the mantra that “the best
defense is a good offense”, this deep dive looks at the powerful and oft-overlooked
initiatives by the incumbent card payments players to counter the disruptive
risks posed by, e.g., Big Tech (#6), Digital Wallets/Neobanks (#5), Government-funded
payment systems (#3), and Crypto (#8).
 Advancements in cross-border payments. The highly lucrative, and historically-

niche market of cross-border payments is exploding as a result of eCommerce (Mega-
Trend #2). This deep dive reviews the new developments in cross-border payments (e.g.,
payment localization), and the likely winners and losers. We see these new developments

as both an opportunity and a threat to cross-border incumbents Visa,

Mastercard, and PayPal, and an important basis of competition for FIS,
Fiserv, and Global Payments.
The overall implications of these recent developments for our covered Payments stocks, in brief:
Visa and Mastercard: Among these six deep dive ‘hot spots’ in payments, two are positive
developments, two are future opportunities, two are emerging battlegrounds for the card
networks. The two positive developments: the rise of the Neobank, an attractive new class of
customers for Visa and Mastercard, and the roll-out of card- and card-related innovation (e.g.,
‘points rails’ and ‘POS lending rails’) which will help differentiate the global networks from
alternative payment methods. The two future opportunities: ‘beyond omni’ commerce and
financial inclusion, which offer use cases for the networks’ advanced capabilities (e.g., tokens)
and are a source of long-term volume growth. The two battlegrounds that bear close watching:
Big Tech encroaching in payments, and advancements in cross-border – both lucrative, high-
growth components of Visa’s and Mastercard’s businesses, where they have a lot to lose.
FIS, Fiserv, and Global Payments: We believe that capabilities in ‘beyond omni’ commerce
and cross-border payments – two of the payments ‘hot spots’ highlighted above – will largely
determine the long-term winners in merchant acquiring, and the field is wide open, with no
player yet emerging as a clear leader. On the other hand, like the card networks, the merchant
acquirer/processors face risk from the encroachment of Big Tech in Payments, a move which
threatens to commoditize or disintermediate their role. The other three ‘hot spots’ (neobanks,
financial inclusion, and card-related innovation), are largely opportunity areas for FIS, Fiserv,
and Global Payments.
PayPal: This list of ‘hot spots’ in payments has mixed implications for PayPal. The rise of the
neobank, financial inclusion initiatives, and card-related innovation are all potential positives
for PayPal, given PayPal’s role in enabling all three of these trends (e.g., providing infrastructure
for neobanks, extending installment loans, and enabling card-features like ‘pay with points’).
However, Big Tech encroaching in Payments, ‘beyond-omni’ commerce, and advancements in
cross-border all pose as much risk as opportunity for PayPal: many Big Techs have directly
competitive offerings with PayPal (e.g., Amazon Pay, Apple Pay), ‘beyond omni’ commerce is a
difficult area for PayPal to address given its limited presence in store, and cross-border is an
important, lucrative business where PayPal has a lot to lose.
Square: With a leading Neobank (with Cash App), and a sizeable financial inclusion-oriented
SMB working capital business (~6% of revenues), Square benefits directly from the emergence
of these two ‘hot spots’ in payments. The other four have a more limited impact on Square: the
encroachment of Big Tech is generally negative for Square, but less so than other Payments
players; the emergence of ‘beyond-omni’ commerce is also a mild negative, given Square’s
concentration in-store. On the other hand, card-related innovations are positive for Square’s
core POS business (which processes card payments). As a nearly-entirely U.S. business, Square
is largely unaffected by advancements in cross-border payments.

Deep-dive #1. Big Tech continues to expand in Payments / FinTech, a long-term

negative, but not an imminent threat, to the Payments ecosystem
While the risk of Big Tech disruption has been a major theme in Payments (and FinTech more
broadly) for a solid decade (e.g., we’ve seen at least three incarnations of Google Pay/Android
Pay/Google Wallet), a recent string of announcements from major tech players suggest a pick-
up in Big Tech activity in Payments and FinTech. Two recent developments of note: first, major
online commerce platforms that have historically played little or no role in Payments (e.g.,
Facebook, Uber, eBay), now entering (e.g., Facebook Pay, Uber Money, eBay assuming the
merchant-of-record role); and second, the three Big Tech players active in payments for many
years (Apple, Google, and Amazon) now noticeably expanding their offerings (e.g., Apple Card,
Google checking accounts). While Big Tech in Payments can have positive effects (e.g., helping
to accelerate eComm, or creating lucrative partnerships like PayPal’s with Facebook), we
generally view the encroachment of Big Tech as a risk, and a long-term negative, for our covered
stocks.
In this section, we provide a brief overview of the Payments/FinTech initiatives of the major
tech players (Amazon, Facebook, Uber, eBay, Apple and Google) and outline our perspective on
the threats they pose to the Payments ecosystem. Three overarching conclusions emerge.
First, the most meaningful direct threat currently posed by Big Tech is the threat
to digital wallets (PayPal, Square Cash App) and merchant acquirers (FIS, Fiserv,
Global Payments) posed by the growth of the Big Tech digital wallets – Amazon
Pay, Apple Pay and Google Pay (not yet Facebook Pay because its scope remains limited to
Facebook platforms only). Among these, Amazon remains the most dangerous competitor
because the Amazon Pay’s ‘master-merchant’ business model competes head-to-head with
PayPal and disintermediates merchant acquirers. However, Apple Pay and Google Pay are
gaining significant traction in in-store checkout, and are critical to watch as the line between
eCommerce and in-store commerce becomes increasingly blurry. For now, PayPal retains its
dominant position in the digital wallets competitive landscape – in our recent survey of U.S.
digital wallet users 80% of respondent were active PayPal users (vs. 19% for Google Pay, 16% for
Apple Pay and 13% for Amazon Pay).
Second, online commerce platforms are playing an increasingly important role in

eCommerce and becoming a critical customer segment – and concentration risk –
for Payments providers. In our coverage, we view PayPal as best positioned to benefit from
this trend - assuming it successfully executes its strategy to partner with large commerce
platforms. We are very closely watching PayPal’s new partnerships with Uber and Facebook, as
well as PayPal’s evolving relationship with eBay. In our view, this trend – large volumes of
eCommerce funneled through a few large platforms – is generally negative for V, MA, FIS, FISV,
and GPN, as it creates customer concentration, and poses the risk that value currently provided
by the payments players (e.g., customer authentication, payment authorization, trusted brands,
charge-back and dispute management) will migrate to the commerce platforms.
Third, we do not yet see any indications that Big Tech players are seriously
attempted to implement closed-loop payments systems on their platforms
(analogous to Alipay from Alibaba) – a move that would pose the most disruptive,

but least likely to succeed – risk to the Payments players. That said, we are keeping a
close eye on any initiative by a Big Tech player that could become an enabler of a closes-loop
payments system – Uber’s and Google’s proposed checking account offerings are probably most
notable in that regard.
Three dynamics we are watching most closely over the next 12 months: (1) further disclosures
from Google on its plans to offer a checking account, (2) Facebook’s roll-out of Facebook Pay
and Instagram Checkout, (3) more tactically – the eBay’s transition away from PayPal.
Amazon (threat level: MEDIUM) is a threatening competitor to digital wallets (e.g.,

PayPal) and merchant acquirers (e.g., Global Payments), but Amazon does not appear
to be moving in the direction of a ‘closed-loop’ payment system on its platforms
Amazon’s major initiatives in FinTech/Payments: Amazon’s most significant

FinTech/Payments offering is its digital wallet Amazon Pay. Amazon Pay is the exclusive
payment method for all transactions on the Amazon platform (including for 3rd party merchants
selling through the Amazon platform), which totaled ~$280B in 2018 and represented >10% of
the global eRetail, Travel & Leisure volume, and as much as ~20% of the U.S. eRetail, Travel &
Leisure. Importantly, Amazon also offers Amazon Pay as a ‘checkout button’ for merchants off-
Amazon – competing head-to-head with the PayPal Checkout button and un-branded merchant
acquiring services (e.g., offered by FIS, Fiserv, or Global Payments). Other notable Payments-
related products offered by Amazon include its ‘stored balance’ offering, Amazon Prime Reload
(a re-loadable gift card with $2,000 maximum balance), Amazon Cash (the ability to add cash to
Amazon balance at retail locations), and Amazon Allowance (recurring additions to gift card
funds). Amazon also offers financial products to small merchants (e.g., Revolving Corporate
Credit Line), and offers fairly standard co-brand and private label cards (e.g., the Amazon Visa
co-brand card). Finally, Amazon is experimenting with development of innovative digital
payment systems in emerging markets such as Mexico (link).
Amazon’s goals in FinTech/Payments: Similar to other major online commerce platforms

(Uber, Facebook, eBay) it appears that Amazon’s primary goal in Payments/FinTech is to
maximize the quality and minimize the cost of transactions on its platform – i.e., using
Payments offerings not as independent sources of revenue but as enablers of its core online
commerce business. However, the fact that Amazon is actively marketing Amazon Pay to
independent merchants indicates Amazon is experimenting with leveraging its assets to compete
in Payments more directly. For now, Amazon has stayed away from offering financial services
products (such as a checking account) to its ~300M user base, but is likely to be considering this
move as the next growth vector for its marketplace.
Current threat level to the Payments ecosystem: Medium. We view Amazon Pay as a
direct (and potentially dangerous) competitor to PayPal Checkout and therefore are
watching the expansion of Amazon Pay carefully. However, we have yet to see signs that Amazon
Pay is gaining significant ground in the ‘button wars’ – in our recent survey of the U.S. digital
wallet users (Payments: Digital Wallet Wars Escalate – New 1000+ Respondent Consumer Survey
on Usage of 14 Wallets – June 20, 2019) only 5% of the respondents indicated that Amazon Pay
is their top choice wallet for making online payments (compared to 63% for PayPal and 7% for
Apple Pay and Visa Checkout), and Amazon Pay ranked below Zelle, Venmo, Google Pay and
ApplePay in net usage increase in the past year. In addition to the direct threat posed to PayPal
(and other digital wallets) by Amazon Pay, we are carefully watching the more fundamental
threat to the Payments ecosystem that Amazon could pose if it decided to leverage its massive
(and expanding scale) in online commerce to create and promote a closed-looped payment
system (e.g., by starting to expand and more aggressively promote Amazon Prime Reload). For
now, it appears that Amazon is not electing to move in the direction of a closed-loop
payments system – it is not aggressively nudging consumers to use Amazon Prime Reload, it
is keeping its wallet open to cards, and it continues to actively partner with key players in the
existing Payments/Financial ecosystem such as J.P. Morgan Chase and Visa.
See V, MA, PYPL: The Amazon Risk (March 8, 2019) for our deep dive on the Amazon risk.
Apple (threat level: LOW/MEDIUM) is important to watch as a leader in in-store digital

wallets, as commerce becomes increasingly omnichannel
Apple’s major initiatives in FinTech/Payments: Apple’s most significant

FinTech/Payments offering is its digital wallet Apple Pay. Unlike Amazon Pay, Apple Pay is a
‘pass-through’ wallet that works in partnership with the card networks and issuers (whose cards
are stored in the wallet) and with the merchant acquirers (who enable merchants to take Apple
Pay and process payments made using Apple Pay). In its most recently quarterly disclosure,
Apple reported 3B transactions processed through Apple Pay during the quarter - a similar level
to PayPal’s transaction count. Apple Pay’s other features include P2P and a ‘stored balance’,
Apple Cash (powered by Green Dot). Over the summer, Apple made another big splash in the
Payments/FinTech universe when it introduced Apple Card - an Apple co-branded credit card
issued by Goldman Sachs and tightly linked to the Apple Pay app (e.g., the card rewards
accumulate in the Apple Cash balance). (The Incongruous Apple Card - most concerning to
PayPal, Square, and...AT&T/Verizon? – August 21, 2019).
Apple’s goals in FinTech/Payments: As with most Big Tech entrants to Payments/FinTech,

it appears that Apple’s primary goal is to support its core business (e.g., drive handset usage,
engagement, and stickiness), rather than build profit-generating Payments/FinTech businesses.
Apple makes no revenue on most transactions processed through Apple Pay; rather, views the
wallet offering as a way to increase user engagement within the iOS ecosystem. Similarly, Apple
Card is similar to the standard co-brand credit cards issued by nearly every major retailer, but
could potentially be an element of Apple’s strategy to establish a direct relationship with iPhone
buyers (potentially dis-intermediating carriers) – see Giving Apple Some Credit: The Apple Card,
and What It Means for Verizon and AT&T - November 1, 2019.
Current threat level to the Payments ecosystem: Low/Medium. We view Apple Pay as
an important competitor to PayPal’s Checkout button, but do not yet see Apple Pay
gaining significant ground on PayPal in PayPal’s core market of eCommerce. According to
our recent digital wallet user survey, 63% of consumers view PayPal as their #1 choice for
making online purchases (including in-app) compared to ~7% for Apple Pay. Of course Apple
Pay holds an advantage in brick-and-mortar mobile transactions where PayPal still has virtually
no presence – a dynamic we will be watching very carefully over the next several years as the
lines between eCommerce and in-store commerce blur and the ability to offer the best
omnichannel payment solution becomes a critical axis of competition in Payments. Outside of
the ‘wallet wars’, we see Apple as currently posing a low threat to the rest of the Payments
ecosystem – Apple Pay was developed in close partnership with the card networks, and (unlike
Amazon Pay) does not displace traditional merchant acquirers. Apple’s first entry into
FinTech (the Apple Card) is as ‘friendly’ to the Payments ecosystem as it can be – a
co-brand Mastercard credit card. That said, Apple’s scale, user loyalty and the two-sided
network it is building with Apple Pay make it a potentially dangerous competitor in
Payments/FinTech and we will be watching its next moves in this area closely.
Google (threat level: LOW/MEDIUM) is also an important player in the omnichannel

digital wallet wars, and we are watching Google’s initiative to introduce a checking
account, which may be groundwork for establishing a closed-loop payments system
Google’s major initiatives in FinTech/Payments: Google has made several (mostly small
scale) entries into Payments/FinTech over the years. Its most significant existing
FinTech/Payments product is Google Pay – Google’s version of a ‘pass-through’ digital wallet
that can utilized to make in-app and in-store purchases using an Android phone. (Google Pay is
also active outside of the U.S. – most notably in India where it has been an active enabler of
India’s Fast ACH payment rail UPI/IMPS). Earlier this month Google made headlines when –
through an article published in The Wall Street Journal (link) - it was disclosed that Google is
planning to start offering a checking account in partnership with Citibank and the Stanford
Federal Credit Union.
Google’s goals in FinTech/Payments: It appears that for now Google is approaching

Payments/FinTech as a way to expand the breadth of its consumer ecosystem, i.e., to engage
consumers in as many ways as possible, not as a way to directly generate revenue and profits (to
our knowledge Google Pay generates no revenue). As Karen Webster of PYMTS.com highlighted
in her recent editorial (link), this strategy is somewhat akin to the strategies pursued by the so-
called ‘super-apps’ in Asia (e.g., China’s WeChat). Google’s plan to introduce a checking account
offering also appears aligned with this strategy – according to The Wall Street Journal article,
Google will not be selling the data it generates from checking account activity (e.g., transaction
history) to advertisers, but it will plan to leverage this data to better serve users with targeted
financial products.
Current threat level to the Payments ecosystem: Low/Medium. Similar to Apple Pay,
the Google Pay digital wallet is an important competitor that we are watching in the
‘wallet wars’. Just like Apple Pay, we believe Google Pay remains far behind PayPal in online
commerce – in our survey of digital users, Google Pay ranked 4th in online commerce use with
5% of the respondents picking it as their #1 choice (behind PayPal at 63% and Apple Pay and
Visa Checkout at 7%). Also just like Apple Pay, Google Pay is much more prevalent than PayPal
in in-store transactions and thus remains an important challenger as commerce becomes
increasingly omnichannel. Beyond the ‘wallet wars’, we will be closely watching Google’s
strategy to move towards a ‘super-app’ offering – especially as it starts offering users an option
to store money inside the Google ecosystem through the Google checking account. ‘Super-apps’
in theory pose a significant threat to the card-based Payments providers (networkers, acquirers,
etc.) because they create a setting where a consumer can make large share of their everyday
transactions within a closed-loop system (as is the case with WeChat and Alipay). There are
no indications yet that Google is contemplating enabling such as closed-loop
payments system within its platforms, but we will be watching its actions closely.
Facebook (threat level: LOW) is ramping up commerce on its platforms, a move which
should benefit PayPal, with limited immediate effect on other Payments players
Facebook’s major initiatives in FinTech/Payments: Facebook is pursuing two major

initiatives in FinTech/Payments, Libra/Calibra and Facebook Pay. Libra/Calibra is Facebook’s
cryptocurrency initiative and most relevant to Payments Mega Trend #8 in the first section.
Earlier this month, Facebook announced the launch of Facebook Pay (FB, PYPL, Square:
Facebook Pay – Good for Facebook, Good and Could Be Better for PayPal, Non-Event for Square –
November 13, 2019). Based on Facebook’s announcement, Facebook Pay appears to be a re-
branding, consolidation, and integration of the existing payments experiences across the
Facebook platform – specifically, the payments interfaces on the Facebook core platform and
Facebook Marketplace, Instagram Checkout and P2P payments in Facebook Messenger.
Separately Facebook has been experimenting with the introduction of P2P payments capabilities
within its WhatsApp messaging platform (with experiments focused on the Indian market).
Facebook’s goals in FinTech/Payments: We believe that Facebook is primarily pursuing

Payments solutions as part of a broader strategy to become a leading ecommerce platform.
Improved payments solutions such as Instagram Checkout and Facebook Pay will help facilitate
commerce on the Facebook platform, by improving the user experience and conversion rates,
while also giving Facebook valuable data on actual transaction behavior. Importantly, at this
point it does not appear that Facebook is looking to start marketing its payments products (e.g.,
Facebook Pay wallet) outside of its platforms.
Current threat level to the Payments ecosystem: Low. Facebook is pursuing its
Payments strategy in close partnership with PayPal. PayPal is a leading payments processing
provider for Facebook, Facebook’s partner in enabling Instagram Checkout, and in enabling P2P
in Facebook Messenger (see FB & PYPL - A Match Made in Heaven? What an Expanded
FB/PYPL Partnership Might Look Like (and Why Now) and FB & PYPL Partner for Instagram
Checkout - March 19, 2019). The launch of Facebook Pay does not alter the structure of these
partnerships. In fact, we view the Facebook relationship as a key growth vector for
PayPal and estimate that it could contribute as much as ~$1.3B in incremental revenue (7% of
PayPal’s 2019 base) to PayPal over the next 2-3 years. Similar to most other Big Tech players,
Facebook appears to be focused on leveraging Payments solutions to improve transactions on its
platform, not to become an independent Payments competitor – as we highlighted above there
are no indication that Facebook is planning to offer the Facebook Pay wallet as a payment
method outside of Facebook platforms. The threat level currently posed by Facebook is further
reduced by the fact that (unlike Google, Uber, Apple, or Amazon) Facebook has not yet rolled
out a ‘stored balance’ solutions for its users, reducing the likelihood that Facebook plans to
develop a closed-loop payments system. To monitor the ongoing threat from Facebook, we are
focused on two areas: (1) the strength and depth of Facebook’s partnerships with Payments
providers – e.g., how much will Facebook rely on PayPal to develop Facebook Pay, (2) any
indications that Facebook is moving in the direction of establishing ‘stored balance’ and a
closed-loop payments system.
Uber (threat level: LOW) recently ramped up its activity in FinTech/Payments, and we
will be carefully watching Uber’s strategy with its digital checking account Uber Debit
Uber’s major initiatives in FinTech/Payments: A keynote address by Uber’s Head of

Payments Peter Hazlehurst kicked off the first full day of this year’s Money20/20 and illustrated
Uber’s rising prominence as a FinTech/Payments player. In his address, Peter highlighted the
key pillars of Uber’s FinTech/Payments strategy. The first pillar is the Uber Debit account – a
digital bank account Uber offers to its drivers (powered by Green Dot). Payments to drivers are
deposited into the Uber Debit account on a real-time basis, and drivers can access the funds
with a Visa Uber Debit Card which provides 3% - 6% cash back rewards on gas purchases. Uber
also offers drivers an option to immediately access their earnings (by having them transferred to
a debit card) using its Instant Pay feature (powered by the card networks’ push-payment
capabilities). The second pillar of Uber’s FinTech/Payments strategy is Uber Cash – a reloadable
stored balanced that can be used to make payments for rides. Finally, Hazlehurst highlighted the
coming roll-out of Uber Wallet – a solution targeted at both drivers and consumers to help them
“track their earning and spending history, manage and move their money, and discover new
Uber financial products all in one place”.
Uber’s goals in FinTech/Payments: Hazlehurst commented that the primary goal of Uber’s
FinTech/Payments offering is to facilitate transactions on its platform. For example, the Uber
Debit account and Instant Pay feature helps onboard Uber drivers – ~35% of whom sign up
without a bank account. The Uber Cash feature is designed to reduce friction in ride payments -
according to Hazlehurst ~40% of all Uber’s trips worldwide are still paid in cash. Hazlehurst did
highlight that Uber’s aspiration is not just to help drivers run their operations, but also to help
drivers improve their financials status – primarily by encouraging and facilitating savings (e.g.,
Uber struck a partnership with the Blackrock Emergency Savings Initiative).
Current threat level to the Payments ecosystem: Low. For now, Uber appears to be
pursuing its entry into the FinTech/Payments market in a way that is not threatening to the
existing Payments players. Uber is building out its Payments offering in partnership with
players like Visa (partner for the Uber Debit Card) and PayPal (made an $500M investment in
Uber, is a major payment processing provider for Uber and a potential partner in the
development of the Uber Wallet). And, Uber’s entry into Payments appears to be motivated by
the desire to improve the quality of transactions on its platforms, not the desire to become an
independent Payments provider competing with the existing players. That said, we will be
carefully watching the development of Uber’s Payments strategy with the focus on (1) the
quality and depth of Uber’s partnerships in Payments – e.g., how active of a role will
PayPal play in the development of Uber Wallet, and (2) any signs that Uber plans to utilize its
Uber Debit offering and Uber Cash solution to move towards a closed-loop Payments
system.

eBay (threat level: LOW) is taking over payment intermediation on its platform from
PayPal in 2020. We do not view eBay’s decision as directly threating to PayPal, but do
consider online marketplaces a critical customer segment for the merchant acquirers
and will be carefully watching the competitive dynamics in this segment
eBay’s major initiatives in FinTech/Payments: One of the sessions we attended at

Money20/20 featured Alyssa Cutright – eBay’s Chief of Payments. Last year, eBay made a pivot
in its Payments strategy when it announced a decision to let its exclusive partnership with
PayPal (under which PayPal has retained the function of payment intermediation for the eBay
merchants after its spin out from eBay in 2015) lapse in the middle of 2020 and moved to
assume the role of payments intermediation for the merchants on its platform (leveraging Adyen
as a payments processing provider).
eBay’s goals in FinTech/Payments: During the Money20/20 session, Cutright noted two
major reasons eBay decided to take on payments intermediation on its platform. First is the
desire to have direct control of the payments experience on the platform. Payments is a critical
part of the merchant and consumer experience on a marketplace like eBay and eBay made a
decision that its ability to shape this experience was contingent on taking on the payments
intermediation function directly. Second is the desire to minimize costs associated with
payments processing – eBay quoted a figure of ~$500M in expected annual financial benefit in
taking over payment intermediation function from PayPal.
Current threat level to the Payments ecosystem: Low. eBay’s move to take over
payment intermediation on its platform most directly impacts PayPal. We laid out our detailed
perspective on the impact of eBay roll-off on PayPal in PayPal 3Q19: Yes, It is (Really, Finally)
Happening - An Investor’s Guide to the eBay Roll-off (October 24, 2019). In short: we believe that
PayPal will emerge from the eBay transition (in 2-3 years) in a stronger competitive position and
healthier financial position, but the roll-off will represent a very real headwind to earnings over
the next two years - ~2.5ppts in 2020 and as much as 6ppts in 2021.
The broader issue raised by eBay’s strategy is the evolving relationship between
marketplaces such as eBay, Shopify, and Etsy and Payments providers. As we
highlighted in Payments: The Tidal Wave – Our Proprietary eCommerce Forecast and Implications
for the Payments Sector (October 2, 2019) we believe that the role of online commerce platforms
in eCommerce is expanding, and these platforms are becoming increasingly important
customers for Payments firms. There are three dynamics we will be watching most
carefully over the next several years in the evolving relationship between online
commerce platforms and Payments providers. First is the threat that online
marketplaces move to take over greater control of the payments function,
potentially commoditizing or dis-intermediating Payments providers – we see this threat as low
at this point given that Payments providers still bring to bear highly valuable and unique
capabilities such as ability to process cross-border transactions. The second dynamic we are
watching is the competition among Payments providers in creating the most
attractive offering for the marketplaces (e.g., Adyen’s MarketPay offering) – we see this
as an increasingly important axis of competition in merchant acquiring. The third dynamic is
initiatives by the Payments firms to expand their own offerings for smaller
merchants (e.g., PayPal’s working capital, disbursement, and One Touch onboarding solutions

for small merchants) - we view these initiatives as both a compelling growth opportunity and
good defensive play (to avoid risk of commoditization and disintermediation by online
marketplaces) for Payments firms. Overall, we view PayPal as the best-positioned Payments
firms in our coverage to take advantage over the growing clout of online marketplaces and will
be very closely watching the development of its new partnerships with Facebook and Uber, as
well as its evolving relationship with eBay.

Deep-dive #2. The rise of the Neobank – unlike Big Tech, generally a positive
development for Payments players
One of the most notable trends in the fintech and Payments landscape today is the rise of
‘neobanks’ (e.g., Square Cash App, Chime), a large and varied group of providers that offer
consumers a digital alternative to a traditional checking account for storing and spending
money. The emergence of neobanks is most disruptive for traditional banks, but it is also an
important trend in Payments. In the Payments ecosystem, neobanks may be customers/partners
(e.g., as issuance customers for the card networks), and unlock new revenue streams (e.g.,
Square Cash App offering by Square), but can also pose a threat (e.g., Chinese neobanks Alipay
grew into a major closed-loop payment system). The neobank trend was prominently featured at
this year’s Money20/20 and we had a chance to attend a variety of sessions on the topic, ranging
from the presentation by Uber on its global Uber Money strategy to the presentation by start-up
neobank Dave focused strictly on the college student customer segment.
Our conclusions, in brief: First, neobanks do appear to offer solutions that address
real market needs, including demand for better digital banking offerings (especially for
customers of smaller traditional banks), demand for lower-cost basic banking services, and
demand for new services such as budgeting and fractional investments. Second, the attributes
and business models of neobanks vary greatly, with some more likely to succeed
than others. While the revenue models of most neobanks are tied to capturing interchange
fees, the methods and costs of customer acquisition differ – we believe that neobank models tied
to P2P services (e.g., Square Cash App) or to commerce platforms (e.g., Uber Money) are more
likely to succeed than standalone neobanks (e.g., Chime) because their customer acquisition
costs are significantly lower. Third, we believe that the emergence of the neobanks is
generally a positive development for the Payments firms in our coverage – we view
Square’s neobank offering (Square Cash App) as well positioned in the competitive landscape,
and we view neobanks (and smaller traditional banks looking to catch up with them) as valuable
potential customers for the card networks, bank processors, and even PayPal. The biggest threat
posed by neobanks is linked to the risk of Big Tech – the possibility that large online commerce
platforms such as Uber and Facebook move to enable closed-loop payment systems on their
platforms leveraging the neobank infrastructure they are currently developing.
Neobanks do appear to offer solutions that address real market needs. The core
neobank value proposition is offering consumers a digital alternative to the traditional checking
(and savings) account for storing and spending money. Neobanks are trying to solve a variety of
pain-points not adequately addressed by traditional banks. These pain-points fall into three
broad categories. First, neobanks are simply trying to close the gap in digital banking
offerings. According to Kellie Judge - Industry Manger of Financial Services at Facebook - 52%
of 18-34 year olds and even 43% of older consumers prefer to open bank accounts online, and
90% of 18-34 year olds and 73% of older consumers want to interact with banks on messaging
apps. While major U.S. banks such as Chase and Bank of America are (mostly) meeting this
demand for digital banking capabilities, many smaller banks and credit unions (which still
control ~50% of the deposits in the U.S.) are not. Second, neobanks are looking to leverage their
lower cost base (derived due to the lack of physical branches) to make basic banking
services more affordable to a greater share of the population. For example, according
to the neobank Varo, Americans paid $34B in overdraft fees last years, and ‘no overdraft fees’ is

a feature offered by most neobanks (e.g., Stash’s registered online domain:

www.bankingfeessuck.com). Other similar features include ‘no account minimums’ and ‘no
account maintenance fees’. Finally, neobanks are leveraging digital solutions to provide new
value-add services to consumers (typically not offered by traditional banks). Examples of
such services include advanced budgeting tools (e.g., neobank Dave uses AI and machine
learning to help customers predict expenses), mechanisms nudging customers to save, methods
for building credit (e.g., Dave allows consumers to build credit through rent and utility
payments) and even ways to access fractional investing options (e.g., Square Cash App offers the
ability to invest in Bitcoin, and recently launched fractional stock investing) What makes these
services highly valuable is the fact that building up savings remains a challenge for most
consumers – according to Uber, 40%+ of people in the U.S. have less than $400 available in
savings.
The attributes and business models of neobanks vary greatly. We differentiate

between three categories of neobanks. The first category is the Digital Banks. These providers’
offerings are similar to the offerings of the traditional banks, but delivered in a digital form.
Examples of Digital Banks include digital-only bank offering by ‘traditional’ financial
institutions such as Discover (Discover Online Banking), as well as new entrants such as
Europe-based Revolut and N26, and U.S.-based Varo and Chime. The second category is the
Digital Wallets. The banking-like offerings of these players have emerged from and are tightly
linked to the stored balances in a digital wallet – often resulting from P2P activity. Square Cash
App is an example of a Digital Wallet neobank. Venmo and PayPal could also be considered
neobanks since they now allow users an opportunity to both store funds (stored balances) and
spend them (using a debit card or by checking out with a Venmo or PayPal Checkout). The third
category we see emerging are the Platform Wallets. Platform Wallets are neobank-like
offerings provided by non-financial services firms – for example technology commerce
platforms such as Uber or even more traditional players such as Intuit or ADP – both Uber
Money and Intuit’s banking offering (Turbo Card) were prominently features on the neobank
panels during this year’s Money 20/20. Across the three categories discussed above, another
critical differentiator is the banking license – many neobanks (especially Digital Wallets
and Platform Wallets) do not have banking licenses and partner with traditional banks to enable
banking services.
Debit interchange represents the primary source of revenue for almost every type
of a neobank. The revenue models of neobank vary. Some (like Revolut) offer premium
monthly subscriptions providing customers higher ATM withdrawal limits (e.g., $600 per
month vs. $300 per month in Revolut’s case) and priority customer support. Some (like Dave)
charge customers for their budgeting service. Some (like Square) charge a fee for instant
withdrawals. Some (like N26) offer credit products. However, the most common and significant
source of revenue for almost every type of neobank is the interchange collected by the neobank
when its users spend the funds from their account with a merchant – either through a debit card
(e.g., Square Cash App or N26) or through an online checkout button (e.g., Venmo). (Notably,
the small size of the neobanks/partner banks means that in the U.S. they are currently exempt
from Durbin interchange caps (<$10 B in assets), so are able to qualify for unregulated
interchange (~1.5% and 2.25% for a $40 card-present and card-not-present transaction,
respectively; the regulated rate would be ~0.60% for both transactions).

We view differences in customer acquisition as one of the primary competitive

differentiators of neobanks. On this dimension, we view Digital Wallets and
Platform Wallets as advantaged over the Digital Banks. Platform Wallets cross-sell
banking products to their existing customer base (e.g., Uber is selling Uber Money services to
the Uber drivers and Uber customers) and Digital Wallets typically acquire customers through
P2P services – we believe these methods of customer acquisition provide these neobanks with a
material cost advantage over the Digital Banks that need to rely on costly traditional methods of
customer acquisition. As an illustration, we estimate that Square Cash App (a Digital Wallet
neobank) is operating at an impressive ~37% incremental profit margin (inclusive of customer
acquisition costs): Square 3Q19: A Little Painful to Get There, But So… Much… Better –
November 7, 2019.
Impact on our covered companies:
Square: Square is the firm in our coverage with the most advanced neobank offering – Square
Cash App. In the most recent quarter, Square Cash App contributed ~25% of Square’s total
Adjusted Revenue growing at 115% y-o-y. Based on our recent consumer survey and deep dive
into Cash App (see Payments: Digital Wallet Wars Escalate – New 1000+ Respondent
Consumer Survey on Usage of 14 Wallets – June 20, 2019, and SQ, PYPL: Is it Worth 40% of
Valuation? A Deep Dive into Square’s Cash App – July 8, 2019), we believe Cash App has a
viable (if unproven) long-term business model. We believe that Cash App’s performance
trajectory and likely additional disclosures on the economics of the Square Cash App (e.g., its
incremental profit margin which we estimate to be ~37%) are likely to represent a positive
catalyst for the stock over the next 12 months – one of the several reasons Square is the top
stock pick in our Payments coverage for 2020. (see Square 3Q19: A Little Painful to Get There,
But So… Much… Better – November 7, 2019 for more detail).
Visa and Mastercard: The emergence of neobanks has primarily represented a boon for the
card networks as it opened up opportunities for Visa and Mastercard to support payments
activities of these providers through debit card issuance and deployment of the push-payment
capabilities to enable instant transfers. As we noted in Visa 4Q19: “A Digital Wallet By Any
Other Name…” Visa’s Strategy to Make Friends with FinTechs (October 25, 2019), Visa has
been especially active in playing the role of the issuance partner for the neobanks around the
world ranging from Square Cash App in the U.S. to Qiwi in Russia, Paytm Payments Bank in
India, and Uber Money around the world. The main potential threat posed to the networks by
the neobanks is that commerce platforms like Uber will leverage their bank offerings to create
closed-loop payments systems on their platforms – we are watching this threat carefully, but for
now see commerce platforms as more likely to partner with the card networks vs. trying to
disintermediate them.
PayPal. The neobank trend could benefit PayPal in two ways. First, a neobank-like model is a
path PayPal can take to monetizing its market-leading P2P service Venmo. PayPal is taking
incremental steps in that direction – primarily by allowing Venmo users to start spending their
stored balances with a Venmo debit card or through Checkout with Venmo (generating
interchange revenue for PayPal). Second, PayPal is exploring opportunities to partner with
commerce platforms to help them develop neobank and Payments capabilities – for example,
according to the company, PayPal’s recent minority investment in Uber enabled it to establish a
broader partnership in Uber, including a potential role for PayPal in the development of Uber

wallet (Uber did not comment on PayPal’s role during its Money20/20 session). We consider
these opportunities as potentially attractive growth vectors for PayPal, but do not see their
realization as essential to our long-term bull thesis on the stock.
FIS, Fiserv, Global Payments. The newly combined merchant acquirers/bank processors
also stand to derive incremental benefit from the emergence of neobanks. First, in their role as
technology partners for smaller banks, these firms (especially FIS and Fiserv) are the key
beneficiaries of initiatives by smaller banks and credit unions to digitize their offerings to defend
their market share against neobanks – the creation and operation of digital banking offering is
often fully outsourced to FIS and Fiserv. Bank processors also serve neobanks directly – e.g., FIS
commented that it is providing services to 6 out of the 7 new Payments banks recently chartered
in India. All of the neobanks issuing cards are also potential issuer processing customers for FIS,
Fiserv and Global Payments.
What are we watching for? The top three dynamics we are watching over the next 12
months as part of the neobank trend: (1) Square Cash App’s success in the neobank competitive
landscape – we believe that Square Cash App is well positioned to continue rapid growth, (2)
continued initiatives by Visa and Mastercard to partner with neobanks and ensure that the
payments systems there are developing remain card-centric, (3) the emerging role of commerce
platforms like Uber in neobanking.

Deep-dive #3. The emergence of ‘beyond-omni’ commerce – All Payments

players, particularly merchant acquirers, must prepare for these commerce
trends
Over the last five years, eCommerce (Payments mega-trend #2) has been one of the most
significant disruptive forces in Payments, crashing like a tidal wave across the sector,
accelerating digital payment growth and changing the basis of competition in many parts of the
ecosystem – perhaps most notably in merchant acquiring. However, the payment needs of
retailers continue to evolve very rapidly, and winning Payments firms, particularly among the
merchant acquirers, need to be prepare to meet the future needs – not just the current needs –
of retailers, including, e.g., IoT/voice commerce, AR/VR-based commerce, social/contextual
commerce, and advanced omnichannel. We believe these ‘beyond-omni’ commerce trends will
help determine the winning merchant acquirers of the future (Payments mega-trend #3).
For our merchant acquirers, the implications are straightforward: the long-term winners
amid the ‘land grab’ in the merchant acquiring space will be those who develop the
capabilities to enable these “future of commerce” trends (e.g., looking beyond
eCommerce to omnichannel). No merchant acquirer is yet doing omnichannel well (much less
advanced omnichannel); we view FIS as the best positioned acquirer, given its strength in both
the brick-and-mortar and online channels. For our other companies, the evolution of
commerce presents both opportunities and risk. Visa, Mastercard, and PayPal can
derive additional revenue streams – e.g., PayPal as an infrastructure layer for contextual
commerce (e.g., recent partnership with Instagram), Visa and Mastercard as providers of value-
added services, particularly for security (e.g., tokenization, advanced authentication). However,
the evolution of commerce poses some risk of brand obfuscation, as the payment method
becomes more hidden in the transaction process (e.g., no longer taking out a physical card at the
POS).
A few of the ‘beyond-omnichannel’ commerce trends:
IoT/voice commerce and – eventually – AR/VR: “Alexa, please order me some

more milk”. Voice commerce - telling your Alexa, Google assistant or appliance to buy things
for you – remained a theme at this year’s Money20/20. We believe this trend bears watching
closely, as it has widespread implications for the payments ecosystem, which has the job of
enabling – and securing – payments by voice. Voice commerce continues to gain traction –
according to Oliver Wyman, 34% of U.S. consumers use voice assistants monthly and 15% use
voice assistants to make a purchase. Patrick Gautheir, the VP of Amazon Pay, delivered a
keynote address on the rise of voice commerce and Amazon’s initiatives in the space. One
benefit of voice commerce highlighted by Gauthier was speed – the average person
speaks 200 words per minute, compared to typing 40 words per minute. Speed is becoming
increasingly critical in commerce experiences – according to Forrester, 50% of buyers will drop
a shopping session if they cannot find an answer to their questions within minutes. Voice
commerce is also driving greater customer engagement. Earlier this year, Amazon
integrated delivery notifications into Alexa (“Where is my stuff?”). Since introduction, delivery
notification has become one of Alexa’s top three dialogues, and has driven greater engagement
then traditional notification methods (47% of delivery notices that are sent via Alexa are opened,
compared to 15-25% average open rate of emails). Amazon is adding new voice commerce
use cases, most recently bill pay. According to Gauthier, 14.7B utility bills were sent in the
U.S. last year, and 70% of consumers choose to not use auto-pay. With Alexa’s new functions,
consumers will be able to use voice to give Alexa permission to access a billing account,
determine when bills are due, compare usage to previous bills (e.g., how does my electricity
usage compare to last month), and pay bills. Looking into the future, augmented reality
is a potential next step in commerce experiences. On a Money20/20 panel discussing
‘The Future of Merchant Payments,’ John Drechny, the CEO of the Merchant Advisory Group,
highlighted shopping as one of the best use cases for augmented reality (e.g., walk down the
aisle, see different SKUs).
Contextual commerce: “Where can I buy the coat my friend is wearing in this
Instagram photo?” Retailers are increasingly looking for ways to reach consumers beyond
their storefront, website, or app and new ways to trigger a purchase, as well as reduce the
friction and burden on consumers in the order placement process (according to Oliver Wyman,
the average customer completes 5.5 steps and 23.5 fields of data to place a digital order). One
important use case is the greater incorporation of shopping into social networking (e.g., the
ability to purchase a coat you like on a friend’s Instagram page with one click). Another
interesting application is stimulating real-time purchasing based on contextual data collected on
the consumer’s location or purchasing habits. Earlier this year, Facebook and PayPal launched
Checkout capabilities in Instagram Shopping. Previously, when Instagram users clicked on
items in Instagram posts to purchase them, they were redirected to a third party site, rather than
transacting directly within the Instagram app. With Checkout, users no longer have to navigate
to the browser to make purchases, and can store their protected payment information within the
Instagram app (for more details, see: FB & PYPL Partner for Instagram Checkout - March 19,
2019). Contextual commerce was also on display at Money20/20. Companies are still working
through the friction at checkout in contextual commerce experiences – for example, Vikram
Yeldandi, the Sr. Global Checkout & Payments Manager at VF Corporation, commented that
some consumers will drop a purchase if a non-preferred payment method is triggered. Panelists
also highlighted the growing importance of the payment process within a commerce experience
– Amit Shah, CMO of 1-800-Flowers.com, commented that payments have risen in the ranks of
what is important in the consumer shopping journey and have become a growing focus of
merchants (vs. just focusing on the log-in process, etc.).
Advanced omnichannel. The clear-cut distinction between brick-and-mortar and

eCommerce is fading. In addition to the basic omnichannel capabilities such as ‘order-ahead’ or
‘buy online and return in store’, consumers are beginning to expect a seamless buying
experience (e.g., shared data for a single consumer’s experience across shopping online and
shopping in-store) in a more compressed time window (e.g., same-day pickup in store). There is
also a trend toward eCommerce-like experiences in an in-store setting – Michelle Evans from
Euromonitor predicted the rise of unattended retail for in-store purchases and order online,
pick up in-store (e.g., unmanned biometric-enabled lockers for in-store pickup), and tech-
enabled, experiential shopping (e.g., large screens in stores, which enable consumers to
easily filter and sort items). A notable recent example is Amazon Go stores, which uses deep
learning algorithms and sensor technology to allow consumers to ‘grab and go’ items without
checking out of the store – purchases are charged to a consumer’s Amazon account. Winning
Payments players, particularly merchant acquirers – many of whom are still struggling with the
basic integration of the in-store POS system with the eCommerce payment gateways – will need
to enable these fully-integrated, fluid, experiences.
Implications on our covered companies:
FIS, FISV, GPN. For our merchant acquirers, the implications are straightforward: the long-
term winners in the space will be those we develop the capabilities to enable these “future of
commerce” trends. Notably, the merchant acquiring wars are about omnichannel, not just about
eCommerce. Across our merchant acquirers, we believe FIS is best positioned in omnichannel
due FIS’s (legacy Worldpay’s) leading position in the global eCommerce merchant acquiring
market, combined with a strong in-store footprint (a competitive advantage over Chase
Merchant Services (lower in-store presence) eCommerce pureplays such as Braintree, Stripe and
Adyen).
V, MA. We believe the ‘future of commerce’ trends present an opportunity for Visa and
Mastercard to offer value-added services, particularly around security. As payment credentials
are stored in more environments (e.g., smart microwaves) and payment transactions occur in
different environments (e.g., voice commerce, unmanned retail), the complexity around security
and authorization increases. Visa and Mastercard have been building out solutions to address
these issues, most notably tokenization solutions (e.g., Mastercard now has >2,000 issuers
using the Mastercard Digital Enablement Service (MDES), Visa recently closed its acquisition of
Rambus to help enable rail-agnostic tokenization), and advanced authentication (e.g.,
Mastercard’s recent launch of Identity Check, which uses almost 200 data elements to help
issuing banks judge the risk of transactions).
PYPL. We believe PayPal should continue to position itself to provide the infrastructure layer
for these new commerce experiences (e.g., the contextual commerce partnership with
Instagram). However, several of these commerce situations reduce the friction to consumers by
utilizing card-on-file (e.g., store a card within Alexa), lowering PayPal’s value proposition. There
is also some risk to PayPal (as well as Visa and Mastercard) of brand obfuscation as the payment
method becomes more hidden in the transaction process (e.g., no longer taking out a physical
card at the POS), which lowers the value of Visa, Mastercard and PayPal’s strong brands and
potentially commoditizes the payment transaction.
SQ: Square’s low level of eCommerce exposure (~10% of volume) is one of the factors that give
us pause about Square’s long term competitive positioning in the Payments landscape. Even
SMBs and micro-merchants will need to be able to offer omnichannel experiences, so we are
closely watching Square’s initiatives to strengthen its eComm presence, e.g., the success of the
Weebly acquisition.
What are we watching for? Over the next 12 months, we are watching for (1) emerging
winners among the merchant acquirers in omnichannel, (2) PayPal’s positioning and
partnerships in contextual commerce, including the traction of the Instagram partnership (3)
Square’s progress in developing new eCommerce and omnichannel tools and capturing card-
not-present volume.

Deep-dive #4. The groundswell of financial inclusion and alternative lending

initiatives for SMB’s and gig workers is the driving force motivating many other
trends in Payments
The long-term secular cash displacement trend in payments (Payments mega-trend #1) has left
some consumers and businesses behind. Helping the millions of consumers and small business
that currently operate on the fringe of, or outside of, the financial system, has clear benefits to
these populations, and also business benefits to the financial institutions and Payments firms
providing the services. The push for financial inclusion is the motivating factor behind many
government initiatives in payments (Payments mega-trend #3), and is a primary use case
driving the emergence of new technologies (e.g., alternative lending and ‘smart credit’) and
business models (e.g., digital wallets and neobanks – Payments mega-trend #5).
Our view, in brief: Over the long term, moving the needle on bringing the 3 billion
‘underbanked’ individuals globally into the financial system should unlock significant new
digital transaction volumes, benefiting all of our covered companies. In the shorter-
term, the push for financial inclusion also opens up new revenue streams for several of our
companies – Visa and Mastercard can participate in the facilitation of alternative credit, card
issuance for neobanks, and enabling faster access to funds for merchants and consumers using
Visa Direct and Mastercard Send, while Square and PayPal derive revenue from the
facilitation of merchant credit and the facilitation of moving and spending money within their
consumer-facing services. However, we remain cautious on the sustainability of Square and
PayPal’s revenue streams - credit businesses targeted at the lower-quality credit population are
highly sensitive to macro and credit cycles, and revenues and profits that PayPal and Square
generate from charging ‘underserved’ consumers for real-time access to their funds are highly
sensitive to attitudes toward the fair treatment of the ‘underbanked’ populations. We will be
closely watching our Payments companies’ strategies around building tools for and partnering
with companies who are facilitating increased financial inclusion, and are keeping a close eye on
the growth of PayPal and Square’s merchant working capital and consumer Instant
Deposit/Instant Transfer revenue streams.
Consumer financial inclusion remains a significant issue, with increasing

attention from new businesses and incumbent payment companies.
The scope the consumer financial inclusion opportunity/problem remains

tremendous. Last year at Money20/20, we were struck by the statistics highlighted during the
sessions dealing with consumer financial inclusion. According to the COO of PayPal, there were
30 million ‘underbanked’ consumers in the U.S., and 3 billion around the world. According to
the CEO of Yodlee, 85% of people in the U.S. said they’re overwhelmed by managing their
finances, 65% said it keeps them sleepless, greater than 50% had less than $10,000 in savings,
and 1/3 had no retirement savings. According to Tala, more than 2/3 of the adult population in
the world lack any formal credit. The sessions at this year’s Money20/20 display that the
problem of consumer financial inclusion has not gone away. According to the head of Calibra,
there are 1.7 B individuals globally outside of the financial system, and an additional 1.5 B that
are underserved. According to the CEO of the Financial Health Network, underserved
consumers in the U.S. spend $173B in fees to use $1.94T in financial services. According to the

Chairman of BBVA, 30% of people in the U.S. have no emergency savings, and 50% don’t
regularly put money aside.
Business models addressing underserved consumers are beginning to proliferate.

Most notable this year was the explosion of neobank offerings. At their core, neobanks offer
basic digital banking services, often at lower costs than traditional banks. Some
examples: Dave provides digital banking services targeted at Gen Z consumers – Dave’s CEO
disclosed that the app’s median user saves $500/year on overdraft fees; Chime believes basic
banking services should be free, and offers free checking accounts, savings accounts, a Visa debit
card, and a ‘Spot Me’ service (allows a negative balance without an overdraft fee). Neobanks
and other financial services players are also working to offer additional value-
added services that are traditionally not available or prohibitively expensive for
underserved consumers. David Marcus, the head of Calibra, highlighted Libra’s particular
use case of sending money abroad instantaneously for almost free, compared to current
solutions (multiple days, no confirmation of receipt, expensive). Dave works with the credit
bureaus in the U.S. so that consumers can improve their credit every time they make rent or
utility payments through Dave’s app. Traditional brokers (e.g., Charles Schwab) and newer
neobanks (e.g., Cash App) are offering free fractional stock investing.
This year at Money20/20, we noticed a particular focus on financial inclusion for

SMBs, especially access to capital and alternative lending.
Small businesses remain limited in their access to capital. Visa management disclosed
that 60-65% of small businesses say they want money faster. PayPal sees particular demand for
their working capital product in underserved communities – according to Dan Schulman,
PayPal’s CEO, 70% of PayPal’s working capital loans go to communities that have had a
disproportionate number of banks closed, low and medium income neighborhoods, and to a
disproportionate number of women and minorities small business owners.
Increasing access to capital for small businesses has driven positive results. Dan
Schulman is a strong believer that doing good creates more shareholder value. He commented
that the average sales for businesses that receive PayPal working capital loans increase 22%,
compared to sales increases of 1-2% in a control group. Kabbage addresses the common issues
they see small businesses make in drawing on credit – usually, businesses borrow too much too
soon and hold on to funds for too long, resulting in higher total interest payments. Kabbage may
lend less credit than customers demand in an initial 30-60 day period, but ultimately see higher
repayments and long customer relationships – their average customers borrow funds from 15-
20 times over three to four years.
Gig economy workers are receiving targeted financial inclusion products and
services. Branch, a financial services application for hourly workers, disclosed that hourly
workers are particularly underserved: 40% of hourly workers have zero saved, and 75% have
<$500 saved. Branch utilizes services like Mastercard Send and a Mastercard debit card to
provide instant access to earned wages. Uber is also developing an impressive suite of
products and services to give their drivers greater access to capital and inclusion
in the financial system. Uber is offering a debit card linked to an Uber driver’s stored balance
– in Mexico City, 35% of drivers signing up for Uber’s debit card (launched 3 months ago with
BBVA) had never been in the banking system before. Uber is also offering a $100 fee-free

overdraft for eligible drivers. Uber is seeing strong demand for this product - 56% of eligible
drivers are taking advantage of overdrafts and 60% are doing it six or more times per month,
saving >$200 in fees than if they overdrafted at a retail bank. Similar to PayPal and Square’s use
of transaction-level merchant data, Uber is able to leverage its extensive data on how Uber
drives are earning and spending their funds to determine the credit risk of offering fee-free
overdrafts to certain drivers.
Implications for our covered companies:
Over the long term, moving the needle on bringing the 3 billion ‘underbanked’ into the financial
system should unlock significant new sources of digital transaction volumes benefiting all of our
covered companies.
The push for financial inclusion also opens up new revenue streams for Visa and Mastercard,
including the facilitation of alternative credit (Mastercard recently dipped its toe into alternative
lending with its acquisition of Vyze, a cloud-based financing technology company for
merchants), card issuance for neobanks (e.g., Visa-branded Cash Card, Mastercard-branded
Venmo card), and enabling faster access to funds for merchants and consumers using Visa
Direct and Mastercard Send.
The financial inclusion trend offers both opportunities and risks for Square and PayPal. Both
companies derive revenue from the extension of merchant credit (and consumer credit for
PayPal), and from fees associated with their digital wallet products. Even after the divestiture of
its consumer credit book to Synchrony, ~10% of PayPal’s revenue (~$1.7B on an annualized
basis) is derived from ‘value added services’ – a revenue stream to a large extent driven on
revenues associated with PayPal’s credit products. PayPal does not charge merchants for the
Funds Now product, but it does charge consumers for real-time access to the funds from their
Venmo accounts – this fee is 1% per transaction and described by the company as a primary
source of Venmo monetization (bringing in ~$400M in revenue on an annualized basis).
Square Capital facilitated $563K in loans to small businesses in 3Q19, which we estimate
contributed ~$35M to adjusted revenue. Similar to PayPal, Square also allows merchants and
consumers instant access to their funds for a fee (1% for merchants, 1.5% for consumers)
through their Instant Deposit product – we estimate Square derived ~$85B in Consumer
Instant Deposit revenue and ~$25M in Merchant Instant Deposit revenue in 3Q19. While these
revenue streams are attractive and growing quickly, we remain cautious on their sustainability.
Credit businesses targeted at the lower-quality credit population are highly sensitive to macro
and credit cycles. And revenues and profits that PayPal and Square generate from charging
‘underserved’ consumers for real-time access to their funds are highly sensitive attitudes about
fair treatment of the ‘underbanked’ populations.
What are we watching for? Over the next 12 months, we are closely watching (1) the
continued development, roll-out, and traction of Visa and Mastercard’s alternative lending
solutions, (2) all Payments’ players strategies to partner with the rising tide of neobanks, and (3)
Square’s continued transition of Cash App user monetization from Instant Deposit to Cash Card.

Deep-dive #5. My card does what? Innovations in card – and beyond card –
capabilities
Over the last few years, the global card networks - Visa, Mastercard, American Express, and
Discover - have been rolling out new innovation in a lot of areas. A few examples: new forms of
authentication using AI and advanced biometrics (e.g., using movements), new forms of
acceptance using QR codes or contactless, or new forms of online checkout like SRC / ‘click to
pay’. And, of course, the major push into new payment flows like B2B, B2C, and C2C, with Visa
Direct/Mastercard Send, Fast ACH, and ‘network of networks’ capabilities. The networks have
also been working very hard to ensure that their cards are everywhere: issued by every bank and
accepted at every store (of course), but also in every digital wallet, every website or app, and
every kiosk, taxi, food stall, and parking meter.
The card experience itself, however - at least from the perspective of most consumers - has
remained largely the same. Amazingly fast, amazingly reliable, amazingly secure, perhaps, but,
pretty much the same.
That is about to change. Percolating largely off the radar are a number of significant innovations
to the core card experience that will be rolled out over the next few years. We highlight four of
them below: 1) alternative lending ‘rails’; 2) loyalty/points ‘rails’; 3) user-driven card controls,
and 4) card feature specialization. In our view, these card-related innovations will play an
important role in differentiating cards vs. alternative methods of digital payment (e.g. pay-by-
bank, PIN/domestic debit, or closed-loop digital wallets), reinforcing the leadership position of
cards as the preferred method of consumer-to-merchant payment, and maintaining the pricing
power of the card networks. The networks are, of course, the primary beneficiaries, but the
entire card-driven payment ecosystem (including all of our covered payments names), benefit.
Highlights of what is happening in card-related innovation:
We’ve identified four major innovations in the core card experience that will be rolling out over
the next several years:
Alternative lending ‘rails’. Alternative lending (e.g., consumer or small-merchant

installment loans, same-day working capital loans for micro-businesses/gig workers, or fees for
‘instant funds’) is a core component of the global push for financial inclusion, which is a trend in
and of itself (see Deep-Dive #4). Standalone providers of alternative lending solutions abound,
including well-established players like Affirm, AfterPay, Klarna, PayPal, and Square. However,
Visa and Mastercard are rolling out what amounts to alternative lending ‘rails’ – the ability for
any of their card issuers to extend a credit offer to a consumer at the point-of-transaction. On
the company’s 4Q19 earnings call, Visa highlighted new partnerships with Affirm and Afterpay,
as well as the roll-out of its installment solution API, which enables issuers and merchants to
give Visa cardholders the option to divide their total purchase amount into smaller, equal
payments – by leveraging an existing Visa account, issuers can approve an installment loan
without needing to run a new credit check or have the consumer download a new
app. Separately, earlier in 2019, Mastercard acquired the company Vyze, which connects
merchants to multiple lenders so that merchants can offer customers a wide range of credit
options online and in-store at the point of sale, including installment lending.

Loyalty points ‘rails’ and other rewards-related innovations. Another area of on-going
card-network innovation is loyalty. Both Visa and Mastercard are in the process of rolling out
loyalty points ‘rails’, i.e., the ability to pay with points (e.g., credit or debit rewards points) at the
point-of-sale. Current rewards programs still have relatively limited utility – under the current
system, 54% of customers in loyalty programs don’t feel like there are enough options, and 1/3
of customers never use their points. Mastercard has expanded its Pay with Rewards program
over the last few years, and seen very positive results – one of their U.S. issuers saw a 61%
increase in spending for those using Pay with Rewards. At their Investor Day, Mastercard
management highlighted the company’s partnership with Citi for its recent launch of Pay with
Points, which allows Citi reward program members to redeem their points for a variety of
purchases at the point of sale. Similarly, Visa offers a real-time Rewards Redemption program
and lists API solutions for loyalty & engagement as a coming attraction on its Visa Next
platform.
Consumer-driven card-on-file management and card controls. While card-on-file is

proliferating across merchants and billers, security questions remain for consumers – according
to Mastercard, more than three quarters (78%) of survey respondents are hesitant to store their
financial information online. In recent years, the card networks have continuously innovated to
provide consumers with more control around their card programs. Discover’s D-PAS Connect
program allows for enhanced card personalization (e.g., enable digital receipts at certain
merchants using personal contact information stored on your card instead of with the
merchant). Two years ago, Mastercard launched Consumer Controls APIs, which allow
consumers to view everywhere their card is stored across digital channels from their banking
app and set parameters around each card (e.g., $100 monthly limit for spend at a particular
merchant, turn off card access for a particular merchant or device). Visa offers a similar API
solution (Visa Consumer Transaction Controls), launched in 2016, that allows consumers to
turn card authorizations on and off, manage specific transaction types (e.g., request alerts for
international access, block ATM withdrawals), set spending limits, and manage multiple cards.
Highly customized cards for unique business payment use cases. There has also been
significant innovation in card controls for business situations. A key enabler in this space is the
emergence of new issuer processors (e.g., Marqeta, Wex), which enable easy, self-service
issuance of highly customized cards (either prepaid or virtual card) with easy-to-use card
controls. Some interesting examples from Money20/20: Home Depot offers a special loyalty
program for their large base of professional contractors involving the issuance of cards with
specialized controls (e.g., enable a runner to buy on a contractor’s behalf, but limit to certain
types of supplies or a dollar amount). DoorDash partners with Marqeta for debit card issuance
for its “Dasher” delivery people – the card has zero balance until an order is placed, and then
can only be used at the correct restaurant for the exact amount of the customer’s order. In the
loyalty space, Marqeta powers Bridge2’s Loyalty Pay solution, which allows customers to redeem
points by converting them into virtual cards for digital wallets issued instantly at the point of
sale.
Highlights of what is happening in beyond-card innovation – primarily in fraud and

security
eCommerce card payments are an area with two competing challenges: On one hand, fraud is
increasingly concentrated in card-not-present transactions, while at the same time consumers
are increasingly demanding less friction in these same card-not-present transactions. As a

result, payments players are developing advanced authentication and security
tools to differentiate their eCommerce offerings.
 Tokenization. A token is, in essence, a digital version of a card – a digitized payment

credential that replaces stored card information in digital wallets, merchant websites,
etc., with a more secure format. The value proposition of tokens in online transactions
includes security, better functionality with Internet-of-Things systems, and the
automatic updating of replaced or expired card credentials. Visa and Mastercard are
driving the implementation of tokenization through Visa’s Digital Enablement Program
(VDEP) and the Mastercard Digital Enablement Service (MDES). In 3Q19, Mastercard
provided an update on MDES – in the last two years, Mastercard has doubled the
number of issuers on MDES to 2,200, and formed strategic partnerships with Adyen,
Worldpay, Stripe, and numerous card-on-file merchants (e.g., AT&T, Liberty Mutual,
Microsoft). Visa recently closed its acquisition of Rambus, which will enable Visa to
provide payment rail-agnostic tokenization services (e.g., the ability to tokenize an
account credential as well as a payment credential).
 Advanced authentication solutions. Visa and Mastercard are carving out

leadership positions as providers of authentication and security solutions for eComm
transactions. For example, Mastercard recently launched Identity Check, which uses
almost 200 data elements to help issuing banks judge the risk of transactions – in live
implementations, Mastercard has seen a 13% uplift in approval rates of transactions
using Identity Check.
 Improved authorization rates through data analytics. Improving authorization

rates through the addition of issuer processing, bank account, and other financial-related
behavior data is a key synergy focus for the FIS/Worldpay, Fiserv/First Data, and Global
Payments/TSYS mergers.
Card-not-present fraud is also creating digital-identity and authentication

specialty players. Emerging security and authentication players received significant airtime at
Money20/20 this year. 2019 marked the inaugural Feedzai Financial Crime and Technology
Summit, with four hours of presentations and workshops on topics including AI adoption,
money laundering, fairness and ethics in AI, blockchain and fraud, and behavioral biometrics.
Payfone and Synchrony gave a joint presentation detailing their partnership – Payfone offers
identity authentication services that seek to minimize the friction consumers experience in
digital transactions by leveraging a multitude of data sources. Payfone is seeing strong demand
for their product – last year, Payfone processed 20B authentications (mostly for banks). Finally,
as always, companies offering AI and/or advanced analytics for fraud detection and
authorization dominated the tradeshow floor at Money20/20. Some interesting examples
include: OneSpan: a platform-based company offering authentication, fraud analysis, and
mobile app security solutions across a range of industries; Onfido: a document verification and
facial biometrics technology provider; Emailage: predictive online fraud risk scoring based on
dynamic data analytics; and Feedzai: a fraud prevention product for omnichannel commerce.
Implications for our covered Payments companies:

As discussed above, these card-related innovations will play an important role in differentiating
cards vs. alternative methods of digital payment (e.g. pay-by-bank, PIN/domestic debit, or
closed-loop digital wallets), reinforcing the leadership position of cards as the preferred method
of consumer-to-merchant payment, and maintaining the pricing power of the card networks.
The networks (including Visa and Mastercard) are, of course, the primary beneficiaries, but
the entire card-driven payment ecosystem (including all of our covered payments names),
benefit. We view advanced security capabilities as another tool in Visa and Mastercard’s arsenal
as they combat the growing tide of alternative payment methods, especially country-specific
real-time payment rails (e.g., India’s IMPS real-time payment rail, productized by UPI, is still in
the early stages of building strong security operating rules and authentication solutions).
What we are watching for: Over the next 12 months, we are most closely watching (1) the
continued development, roll-out, and traction of Visa and Mastercard’s alternative lending and
loyalty ‘rail’ solutions, and (2) continued advancements in fraud and security technology by all
of our covered companies.

Deep-dive #6. Cross-border payments – a highly lucrative payment type that is

exploding as a result of eCommerce – is an important basis of competition for
existing players, and is attracting a steady stream of new competitors
The increasing importance of cross-border payments – which have historically been a niche,
lucrative-but-largely-ignored segment of payments – is a manifestation of several Payments
mega-trends. The rise of eCommerce (Trend #2) is driving growth in C2B cross-border flows, by
opening the spigot of cross-border retail. As a result, the enablement of cross-border payments
is becoming a critical axis of competition for merchant acquirers, driving them to pursue global
expansion (Trend #4). At the same time cross-border flows outside of C2B - P2P and B2B
remain highly inefficient and represent a compelling expansion opportunity for the C2B-focused
Payments firms (Trend #7). And the complexities and inefficiencies in cross-border payments
workflows are attracting a steady stream of new entrants looking to ‘solve’ cross-border,
including cryptocurrency-based disruptors (Trend #8).
Our view in brief: We see the expanding role and importance of cross-border
payments as an opportunity and a threat to cross-border incumbents Visa,
Mastercard, and PayPal, and an important basis of competition for FIS, Fiserv,
and Global Payments. We view C2B cross-border as a critical market segment for Visa,
Mastercard and PayPal, and, to a lesser extent, FIS, Fiserv, and Global Payments. The
complexities involved in cross-border payments and the unique assets and capabilities Visa,
Mastercard and PayPal bring to bear (e.g., at-scale global networks) make cross-border
transactions exceedingly profitable – we estimate the yields on cross-border transactions for
Visa and Mastarcard are 5-6x larger than the yields on the domestic transactions. As C2B cross-
border flows continue to grow (we believe at 8%-10% annual rate) they are attracting significant
competition – most notably from a range of new entrants looking to enable a wide variety of
local payment methods (e.g., Rapyd, PPRO). We will be closely watching Visa, Mastercard and
PayPal’s actions to defend their competitive position against these new entrants – e.g., PayPal’s
investment in PPRO. For the merchant acquirers (FIS, Fiserv, and Global Payments), cross-
border payments are mostly upside opportunity (as these firms expand globally), but are also a
critical axis of competition, since the low payment authorization rates in cross-border payments
make them a particular pain point for retailers. P2P and B2B cross-border payments flows are
an important growth vector for the Payments providers in our coverage (they have minimum
presence in these flows currently). Here the competitive landscape is also heating up including
with crypto-based solution (e.g., Ripple). We are will be closely watching our Payments firms’
strategies to carve out an attractive competitive positioning in P2P and B2B cross-border – e.g.,
the development of Visa’s B2B Connect offering and deployment of push-payment rails (Visa
Direct and Mastercard Send) in cross-border B2B for SMB customers.
Cross-border is a large payments flow (~$27T) and is growing modestly above the
growth rate of global GDP (driven by the secular globalization trend); C2B cross-border
is likely growing faster (8%-10% p.a.) driven by the rise of eCommerce.
Good data on overall cross-border size and growth rates is hard to come by and (varies greatly
across different sources), but based on triangulation of several sources we estimate that cross-
border flows total ~$27T annually (for comparison U.S. GDP is ~$20T) composed primarily of

B2B cross-border payments (~$25T) with a smaller contribution from C2B cross-border
payments (~$1.5T) and P2P cross-border payments (~$0.5T). Boston Consulting Group
estimates that overall volume of cross-border payments is growing at ~6.5% (compared to
overall global GDP growth of ~5%).
We believe that over the last several years, the rise of eCommerce has been a major growth
driver in cross-border payments – most prominently in the C2B cross-border flows.
Traditionally, C2B cross-border payment flows have been driven by tourism and business
traveler spend – a category of spend that is growing at ~5% per year. However, eCommerce
enables cross-border retail – a category with significantly faster growth. We estimate that today
eCommerce already accounts for as much as 1/3 of total C2B cross-border flows and is growing
at ~15%-20% per year. The implication is that overall C2B cross-border flows are likely growing
at an 8%-10% rate.
The cross-border payments workflow is significantly more complex than the domestic
payments workflow
There are four major factors that make cross-border payments more challenging than domestic
payments. First, is the complexity of creating and maintaining global networks. At the
core of every payment workflow is a network, and most existing payment networks (e.g., ACH
networks, local debit networks) do not cross international borders. As we highlight below, one of
the most critical (and unique) assets Visa and Mastercard bring to bear in cross-border are their
large scale global payment networks. Second, is the complexity and variability of local
regulatory regimes. Each country has a unique set of regulations and licensing requirements
with which any firm looking to enable cross-border payments in that geography needs to
comply. Often, Payments providers need to establish a local presence in the country to be
licensed as a local payments operator. Third, each market also has a unique set of local
payment methods. For example, in some geographies (e.g., Canada, U.S., U.K) card
penetration is high and the card is a preferred digital payment method. In other geographies
(e.g. the Netherlands) digital payments penetration is also high, but direct bank transfers are
preferred over cards (at least in eCommerce), and in many emerging markets (e.g., India) cash
remains the dominant form of payment. Finally, the most basic source of complexity in enabling
cross-border payments is the need to enable current conversion.
The complexities involved in cross-border payments flows make cross-border a

lucrative business and an attractive expansion opportunity for the existing Payments
firms...
C2B cross-border payments has long been an important area of focus for Visa and
Mastercard. We estimate that ~7-11% of Visa and Mastercard’s volume, and as much as ~30%
of the network’s revenue is linked to the C2B cross-border payment flows (implying that yields
on cross-border are 3-5x domestic yields). The reasons Visa and Mastercard are able to earn
outsized yields on cross-border transactions is the unique set of assets and capabilities they
bring to solving the pain points in the C2B cross-border payments. Visa and Mastercard are
virtually the only ‘game-in-town’ for enabling C2B cross-border transactions on a meaningful
scale. Alternative consumer payment networks, such as the large European schemes, are nearly
all domestic-only – they can’t authorize in real-time a transaction with the issuer and acquirer in

different countries. In addition, Visa and Mastercard assume the short-term FX volatility risk in
cross-border transactions and are able to charge a premium for that exposure.
PayPal is the only other at scale provider that can enable C2B cross-border
payments in real-time – cross-border accounts for ~20% of PayPal’s volume and a greater
share of PayPal’s earnings. PayPal’s focus has been on enabling eCommerce cross-border
transactions – a key trend in cross-border we highlighted above.
P2P cross-border payments are the focus of a number of specialty Payments

providers including traditional players such as Western Union and Moneygram and a long list
of new entrants including Remitly, Transferwise, and PayPal-owned service Xoom.
Finally, B2B cross-border payments have historically been enabled through the
complex, expensive and inefficient (and high-fee generating for providers)
correspondent banking system. Visa and Mastercard have not historically participated
in B2B cross-border flows but have recently indicated that they see this area (B2B
cross-border) as an important expansion opportunity. Visa launched Visa B2B Connect
earlier this year (an alternative to the SWIFT network, targeting high-value, cross-border B2B
payments), and recently acquired Earthport (providing Visa with settlement capabilities into
99% of accounts (checking, savings, or other) in 88 countries around the world). Mastercard
recently acquired Transfast (a cross-border payments network provider with SMB payments as a
particularly addressable use case), offers software applications to help facilitate cross-border
B2B (e.g., a Trade Directory of key business information for >200M companies across 170
countries that enables faster onboarding and compliance screening of suppliers), and recently
announced its intent to develop a blockchain-powered cross-border solution with R3.
…but are also inviting new competition, especially in the high growth cross-border
eCommerce segment
We are closely watching three categories of new entrants focused on cross-border Payments.
Companies enabling local payment methods. As payment methods (e.g., digital wallets,
real-time payment rails) proliferate, it becomes more complicated for companies looking to
grow their cross-border eCommerce volume to ensure their customers’ preferred payment
method is available. At Money20/20, we noticed several companies who are working to facilitate
simplified acceptance of country-level local payment methods for cross-border retail. A few
firms that have caught our eye:
 Rapyd. Rapyd’s ‘Fintech-as-a-Service’ platforms allow merchants to accept 900 local

payment types (including bank transfers, e-wallets, and local cards) in over 100 countries
through simple API connections. Rapyd has additional offerings including disbursements, a
white-label wallet service, and API-enabled card issuance program. Rapyd was one of 17 ‘5
Star Sponsors’ at Money20/20, along with firms like Mastercard, Citi, Google, and PayPal.
 PPRO. PPRO connects payment service providers (PSPs) with local payment methods
through a single connection. PPRO offers over 150 local payment methods from around the
world. In July 2018, PayPal led a $50M investment in PPRO.

 dLocal. Through direct integrations with local acquirers and payment providers, dLocal
enables acceptance of over 300 local payment methods. dLocal also helps accelerate a
company’s time-to-market in new countries through local market expertise (e.g., regulatory
knowledge). dLocal’s customers include Uber, Nike, and Dropbox.
Companies enabling cross-border B2B payments. As discussed above, cross-border B2B

payments are ripe for disruption – the majority of B2B cross-border payments travel via the
traditional correspondent banking system (using the SWIFT messaging system), which involves
multiple participants (regional banks and money center banks) which results in cross-border
transactions being slow (3-5 days to complete), unreliable (~6% fail rate according to Ripple),
and costly (10+x higher fees than on the domestic transactions). A few emerging cross-border
B2B firms that have caught our eye:
 Veem. Veem, sometimes referred to as the ‘Venmo for SMBs,’ provides a cross-border wire
transfer solution powered first and foremost by a 2-sided network of small businesses
around the world exchanging payments in a seamless way. In addition to its two-sided
network, another competitive advantage for Veem is its user interface: even a simple feature
like allowing the small business owner to track the payment is currently absent from the
traditional banking solutions.
 TransferMate. TransferMate’s core value proposition is allowing businesses to send and

receive international B2B payments as if they were domestic payments. TransferMate offers
same-day cross-border payments across 162 countries and 134 currencies through an API
integration with no transfer or wire fees. TransferMate is also easily integrated with other
major business software products (e.g., Quickbooks, SAP, Sage).
 Payoneer. Payoneer’s primary cross-border solution is its Global Payment Service, which
enables companies to receive local bank transfers into local receiving accounts from
companies and marketplaces in the US, UK, EU, Japan, Canada, Australia, and Mexico.
Cryptocurrency-enabled cross-border. Cross-border payments, particularly for B2B and

P2P transactions, is the most well-developed payments use case for cryptocurrencies, with
several models emerging that have the potential to compete with Visa’s, Mastercard’s and
PayPal’s current solutions. The cryptocurrency based models offer an alternative rail for cross-
border transactions that (assuming sufficient liquidity for the cryptocurrency) could offer better
speed, reliability and cost than the existing system. In addition, (and the key advantage over
blockchain-based solutions), leveraging a cryptocurrency for cross-border transactions mitigates
the stranded liquidity issue created by nostro vostro accounts, by creating a global ‘pool’ of
cryptocurrency, which can readily be converted into the needed fiat currency ‘on demand’,
leveraging a cryptocurrency exchange in the relevant country. Libra is a recent example of a
cryptocurrency solution for cross-border transfers – at Money20/20, David Marcus highlighted
cross-border payments as one area where Libra has a strong value proposition (for our views on
Libra’s positioning in cross-border payments, see: FB, V, MA, PYPL: Libra, Libra, Libra –
Answers to Your Top 25 FAQs). Cryptocurrencies are also being applied to B2B payments. For
example, the Bitcoin payment system is an important element of Veem’s SMB cross-border
payment solution, and Ripple is streamlining cross-border B2B payments with a product suite
that offers both messaging and settlement capabilities as well as on-demand liquidity by
utilizing the digital asset XRP.
Implications for our companies:
Visa/Mastercard: For Visa and Mastercard, we estimate cross-border payment flows make up
~7-11% of volume and >30+% of revenue. Given its high profitability, C2B cross-border
payments is a key area for Visa and Mastercard to continue defending. The networks’ continued
efforts to expand their eCommerce capabilities (e.g., tokenization, advanced authentication; see:
Payments, Processors, and IT Services: 3Q19 Roundup - Top Sector Themes and Updated Stock
Preferences) should help them maintain their privileged position as cross-border eCommerce
continues to scale. The proliferation of companies enabling local acceptance methods for cross-
border eCommerce poses some risk to Visa and Mastercard, as it lowers the value proposition of
their single global brand and simplifies the process of utilizing competing payment methods.
Cross-border P2P and B2B payment flows are areas where Visa and Mastercard have minimal
current revenue at risk, but represent important expansion opportunities that the networks
should be (and are) actively addressing with e.g., acquisitions and push payments.
PayPal. Cross-border payment flows make up ~20% of PayPal’s volume. They likely make up a
larger proportion of PayPal’s earnings since as we highlighted above, the yields in cross-border
transactions are significantly higher than the yields on domestic transactions (while the costs
are similar). Just like for Visa and Mastercard, we view cross-border capabilities as a key
competitive differentiator for PayPal and a lever it can (and should use) to win key customer
relationships –especially with international marketplaces. For example, when last year PayPal
made a $500M minority investment in the Latin American marketplace MercadoLibre,
management called out enablement of cross-border commerce on MELI’s platforms as one the
key sources of synergies from the partnership between the two firms. To maintain its strength in
cross-border payments PayPal needs to continue building out its global presence (e.g., with
investments and partnerships such as MELI investment) and continue enhancing its ability to
accept local payment methods (e.g., with investments / acquisitions such as investment in PPRO
we highlighted above).
FIS, Fiserv, Global Payments. FIS, Fiserv and Global Payments are exposed to cross-border
payment flows (primarily C2B cross-border) through their merchant acquiring franchises. Just
like PayPal, these players are competing for the payment processing mandates of merchants
who are increasingly interested in accessing global customer base (i.e., engaging in cross-border
eCommerce). Similarly to PayPal, to win these mandates merchant acquirers will need to
continue enhancing their cross-border capabilities with strong local presence and broader
acceptance of local payments methods. We believe that among the three, FIS is currently best
positioned to benefit from the growth in cross-border eCommerce. Its merchant acquiring
business already derives ~20%+ of revenue from global eCommerce and has a strong presence
in the critical Europe/U.S. cross-border corridor (based on the merger of Vantiv and Worldpay).
FIS management called out eComm-focused expansion to other geographies (e.g., India, Brazil)
as a key strategic goal for the merchant acquiring business over the next several years. We
expect cross-border to be a critical contributor to the overall growth of FIS’ merchant acquiring
over the next several years (we forecast 13% CAGR ’19-’22).
What are we watching for? The three aspects of cross-border market we are most closely
watching over the next 12 months are: (1) PayPal’s ability to win in cross-border eComm
payment processing (enabled by integration of local payment methods into the wallet), (2) Visa
and Mastercard’s success rate in penetrating cross-border P2P and B2B flows with push

payments solutions and B2B offerings, (3) the evolving role of cryptocurrency rails in facilitating
cross-border payments.

Financial Summaries
Exhibit 1)
Visa Summary Financials
Visa - Key Metrics

FY17 FY18 FY19 FY20E FY1Q20E '19-'22E CAGR
Net Revenue 18,358 20,609 22,977 25,624 6,115
Yoy growth - FXN 23% 11% 13% 12% 12% 13%
Non-GAAP Operating Income 12,336 13,749 15,371 17,273 4,142

Yoy growth 23% 11% 12% 12% 11% 14%
Non-GAAP Diluted EPS 3.48 4.61 5.44 6.25 1.47

Yoy growth 23% 32% 18% 15% 13% 17%
Key Operational Metrics
Purchase Volume Growth - FXN, new def. 9.1% 11.6% 10.6% 11.5%
Purchase Volume Growth - FXN, old def. 29.6% 10.7%
Switched Transaction Growth 34% 12% 11% 13% 12% 12.9%
European Purchase Volume Growth - FXN 10% 9%
Net Revenue Yield Growth - new def. 5.3% 2.0% 3.5% 1.7%
Net Revenue Yield Growth - old def. -12.1% -0.2%

What We're Watching For
What we're watching Date What we're expecting
Initiatives to expand into new payment flows Ongoing We believe Visa Direct is the highest likelihood source of upside to our
(e.g. Visa Direct, B2B, Fast ACH) forecasts in the near- to medium-term
Performance gap relative to Mastercard in 2H19 Watching whether gap begins to narrow now that Visa Europe
Europe integration is nearly complete
Source: Company reports, MoffettNathanson estimates and analysis

Exhibit 2)
Mastercard Summary Financials
Mastercard - Key Metrics

2017 2018 2019E 2020E 4Q19E '19-'22E CAGR
Net Revenue 12,497 14,950 16,843 19,364 4,374
Yoy growth - FXN 15% 20% 13% 15% 17% 15%
Yoy growth - FXN, organic, adj. rev rec 13% 16% 15% 15% 16%
Non-GAAP Operating Income 6,804 8,410 9,596 11,215 2,331

Yoy growth 16% 24% 14% 17% 17% 17%
Non-GAAP Diluted EPS 4.58 6.49 7.65 9.18 1.83

Yoy growth 21% 42% 18% 20% 18% 20%
Key Operational Metrics
Purchase Volume Growth - FXN 11.0% 15.1% 13.2% 12.5% 12.6% 12.5%
Switched Transaction Growth* 16.7% 17.0% 18.0% 15.5% 17.1% 15.4%
European Purchase Volume Growth - FXN** 18% 23%
Cross-border Volume Fees Growth 17% 19% 13% 18% 15% 17%
Net Revenue Yield Growth 6.8% 5.2% 2.5% 2.2% 2.8% 2.3%
Initiatives to expand into new payment flows Ongoing Limited financial impact in short-term, but we expect update on long-
(e.g. B2B, Fast ACH) term strategy at upcoming Investor Day and with close of Nets
acquisition in 1H20
Performance gap relative to Visa in Europe 2H19 Watching whether gap begins to narrow now that Visa Europe
integration is nearly complete

Exhibit 3)
PayPal Summary Financials

Exhibit 4)
Square Summary Financials

Exhibit 5)
FIS Summary Financials
FIS Key Metrics ($M)

FY18 FY19E FY20E 4Q19E 19-'22E CAGR
Total Revenue 12,417 12,747 13,638 3,341
nominal growth 22.7% 32.0% 54.2% 15.6%
Pro forma growth 5.2% 7.0% 6.4% 7.8%
Non-GAAP EBITDA 4,932 5,417 6,141 1,509

Pro forma growth 9.8% 13.4% 10.2% 12.4%
EBITDA margin 39.7% 42.5% 45.0% 45.2% 193
Non-GAAP EPS 5.23 5.55 6.26 1.54

growth 6.0% 12.8% -4% 14.2%
Key Operating Metrics

Revenue synergies 30 130 0
Cost synergies 175 250 75
Merchant Acquiring revenue growth 8.7% 11.8% 11.9% 13.0%
Non-Merchant Acquiring revenue growth 3.4% 4.6% 1.8% 4.9%

Closely tracking the rate and pace of planned revenue
Attainment of deal synergies Ongoing
and cost synergies.
We expect 10% growth in the merchant acquiring
Performance of Merchant acquiring
Ongoing business driven by Worldpay's exposure to
franchise
accelerators, international markets and eComm.

Exhibit 6)
Fiserv Summary Financials

Exhibit 7)
Global Payments Summary Financials
GPN Key Metrics - Published Actuals ($M)

Total Revenue 6,967 7,533 8,260 1,891
nominal growth 50.9% 76.7% 130.9% 28.3%
organic growth 7.1% 9.0% 6.6% 9.2%
Non-GAAP EBITDA 2,772 3,086 3,539 792

Pro forma growth 11.3% 14.7% 11.0% 13.3%
EBITDA margin 39.8% 41.0% 42.8% 41.9% 150
Non-GAAP EPS 5.19 6.19 7.46 1.59

Pro forma growth 19.3% 20.5% 19.2% 16.9%
Key Operating Metrics

Revenue synergies 0 39 0
Cost synergies 0 137 0
Merchant Acquiring revenue growth 9.5% 10.8% 8.9% 10.7%
Non Merchant Acquiring revenue growth 2.5% 5.3% 2.1% 5.9%

GPN to continue investing in a "mixed bag" of assets some with
New investment areas on-going direct relevance to the core Payments business and some
software assets providing limited synergies with the core.

Risks
Visa
Downside risks for Visa include: Slower card volume growth, significant loss of share of
transaction volume to a competitive solution, dilutive acquisitions at inflated valuations, faster
operating expense growth, increase in government regulation of the payments industry, cyber
security failures, and general downturn in the global economy.
Mastercard
Downside risks for Mastercard include: Slower card volume growth, significant loss of share of
PayPal
Downside risks for PayPal include: Slower eCommerce growth, significant loss of share of
Square
Downside risks for Square include: Slower small business growth in the U.S., lower share of
small business payment processing, weaker client retention and fewer new merchant wins,
greater operating expense growth, dilutive acquisitions at inflated valuations, and general
downturn in the global economy.
Fiserv
Downside risks for Fiserv include: Failure to obtain regulatory approval for First Data
acquisition, significant loss of share for First Data of transaction volume to a competitive
solution, delay in or failure to recognize revenue and cost synergies, slower card volume growth,
weaker client retention, fewer new client wins, increase in government regulation of the
payments industry, and general downturn in the global economy.

Fidelity National Information Services
Downside risks for Fidelity National Information Services include: Failure to retain key
Worldpay executives, lower than expected investment by FIS into innovation and product
development in merchant acquiring, delay in or failure to recognize revenue and cost synergies,
slower card volume growth, weaker client retention, fewer new merchant wins, increase in
government regulation of the payments industry, and general downturn in the global economy.
Global Payments
Upside risks for Global Payments include: Faster small business growth in the U.S., greater
share of small business payment processing, stronger client retention and greater new
merchants wins, technological innovation, greater operating margin improvements, strategic
acquisitions, and general upswing in the global economy.
Downside risks for Global Payments include: Slower small business growth in the U.S., lower
share of small business payment processing, dilutive acquisitions at inflated valuations, weaker
client retention and fewer new merchant wins, greater operating expense growth, dilutive
acquisitions at inflated valuations, and general downturn in the global economy.

DISCLOSURES AND DISCLAIMERS
Independence of Research.
MoffettNathanson LLC (the “Company”) is an independent equity research provider. The Company is not a member of the
FINRA or the SIPC and is not a registered broker dealer or investment adviser. MoffettNathanson LLC has no other regulated or
unregulated business activities which conflict with its provision of independent research. No employee or member of the
Company, or immediate family member thereof, exercises investment discretion over, or holds any positions in, securities of any
issuer analyzed in this research report (this “Report”).
Limitations of Research and Information; Analyst Certifications.

This Report has been prepared for distribution to only qualified institutional or professional clients of MoffettNathanson LLC.
The contents of this Report represent the views, opinions, and analyses of its authors. The information contained herein does not
constitute financial, legal, tax or any other advice. All third party data presented herein were obtained from publicly available
sources which are believed to be reliable; however, the Company makes no warranty, express or implied, concerning the
accuracy or completeness of such information. In no event shall the Company be responsible or liable for the correctness of, or
update to, any such material or for any damage or lost opportunities resulting from use of this data.
Nothing contained in this Report or any distribution by the Company should be construed as any offer to sell, or any solicitation
of an offer to buy, any security or investment. Any research or other material received should not be construed as individualized
investment advice. Investment decisions should be made as part of an overall portfolio strategy and you should consult with a
professional financial advisor, legal and tax advisor prior to making any investment decision. MoffettNathanson LLC shall not be
liable for any direct or indirect, incidental or consequential loss or damage (including loss of profits, revenue or goodwill) arising
from any investment decisions based on information or research obtained from MoffettNathanson LLC.
I, Lisa Ellis, Senior Research Analyst at MoffettNathanson LLC, hereby certify that all of the views expressed in this Report
accurately reflect my personal views about any and all of the subject securities or issuers and that no part of my compensation
was, is, or will be, directly or indirectly, related to the specific recommendations or views of in this Report.
I, Eugene Simuni, Research Analyst at MoffettNathanson LLC, hereby certify that all of the views expressed in this Report
I, Ariel Hughes, CFA, Research Analyst at MoffettNathanson LLC, hereby certify that all of the views expressed in this Report
I, Kate Zolner, Research Analyst at MoffettNathanson LLC, hereby certify that all of the views expressed in this Report
Reproduction and Distribution Strictly Prohibited.
No user of this Report may reproduce, modify, copy, distribute, sell, resell, transmit, transfer, license, assign or publish the
Report itself or any information contained therein. Notwithstanding the foregoing, clients with access to working models are
permitted to alter or modify the information contained therein, provided that it is solely for such client’s own use. This Report is
not intended to be available or distributed for any purpose that would be deemed unlawful or otherwise prohibited by any local,
state, national or international laws or regulations or would otherwise subject the Company to registration or regulation of any
kind within such jurisdiction.
Copyrights, Trademarks, Intellectual Property.

MoffettNathanson LLC, and any logos or marks included in this Report are proprietary materials. The use of such terms and
logos and marks without the express written consent of MoffettNathanson LLC is strictly prohibited. The copyright in the pages
or in the screens of the Report, and in the information and material therein, is proprietary material owned by MoffettNathanson
LLC unless otherwise indicated. The unauthorized use of any material on this Report may violate numerous statutes, regulations
and laws, including, but not limited to, copyright, trademark, trade secret or patent laws.
Ratings Definitions and Distribution of Ratings.

Buy recommendations typically offer 15% or more upside, Neutral recommendations are typically within 15% of fair value, and
Sell recommendations typically offer 15% or more downside. Investment horizons are typically one year. As of September 3,
2019, MoffettNathanson LLC had 48 stocks under coverage: Buy 18 (38%), Neutral 25 (52%), Sell 5 (10%).
For further information please ask your salesperson to consult the Research Department on your behalf.
Copyright © 2019 MoffettNathanson LLC, All Rights Reserved

Payments - Big Tech, Neobankng and Many More

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Payments - Big Tech, Neobankng and Many More

Uploaded by

Copyright:

Available Formats

Lisa Ellis

November 25, 2019

Payments: Big Tech, Neobanks, and Many More – Top

Payments, Processors, and IT Services

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

PayPal (Buy, TP = $135) is an eComm pure-play with an under-appreciated competitive

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

1. Sustained cash displacement-driven secular growth in card payments: we expect

3. Increasing role of governments in driving and shaping digital payment

4. Rapid ‘land grab’ in merchant acquiring: the merchant acquiring industry is

Payments mega-trend #1. Sustained cash displacement-driven secular growth in card

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Payments mega-trend #2. Rise of eCommerce

Payments mega-trend #4. Rapid ‘land grab’ in merchant acquiring.

The Merchant Acquirer M&A Chessboard - Who is Next? (April 3, 2019)

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Payments mega-trend #5. The rise of digital wallets and neobanks.

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

V, MA, PYPL: The Amazon Risk (March 8, 2019)

Payments mega-trend #7. Expansion into payment flows beyond C2B.

Payments mega-trend #8. Existential threat of Crypto.

These deep dives into Payments ‘hot spots’ include:

 The emergence of ‘beyond-omni’ commerce (e.g., voice, AR/VR, experiential retail,

 Advancements in cross-border payments. The highly lucrative, and historically-

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

as both an opportunity and a threat to cross-border incumbents Visa,

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Deep-dive #1. Big Tech continues to expand in Payments / FinTech, a long-term

Second, online commerce platforms are playing an increasingly important role in

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Amazon (threat level: MEDIUM) is a threatening competitor to digital wallets (e.g.,

Amazon’s major initiatives in FinTech/Payments: Amazon’s most significant

Amazon’s goals in FinTech/Payments: Similar to other major online commerce platforms

Apple (threat level: LOW/MEDIUM) is important to watch as a leader in in-store digital

Apple’s major initiatives in FinTech/Payments: Apple’s most significant

Apple’s goals in FinTech/Payments: As with most Big Tech entrants to Payments/FinTech,

Google (threat level: LOW/MEDIUM) is also an important player in the omnichannel

Google’s goals in FinTech/Payments: It appears that for now Google is approaching

Facebook’s major initiatives in FinTech/Payments: Facebook is pursuing two major

Facebook’s goals in FinTech/Payments: We believe that Facebook is primarily pursuing

Uber’s major initiatives in FinTech/Payments: A keynote address by Uber’s Head of

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

eBay’s major initiatives in FinTech/Payments: One of the sessions we attended at

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

a feature offered by most neobanks (e.g., Stash’s registered online domain:

The attributes and business models of neobanks vary greatly. We differentiate

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

We view differences in customer acquisition as one of the primary competitive

Impact on our covered companies:

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Deep-dive #3. The emergence of ‘beyond-omni’ commerce – All Payments

A few of the ‘beyond-omnichannel’ commerce trends:

IoT/voice commerce and – eventually – AR/VR: “Alexa, please order me some

Advanced omnichannel. The clear-cut distinction between brick-and-mortar and

Implications on our covered companies:

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Deep-dive #4. The groundswell of financial inclusion and alternative lending

Consumer financial inclusion remains a significant issue, with increasing

The scope the consumer financial inclusion opportunity/problem remains

Printed by stephanie.ferris@​worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution

Printed by stephanie.ferris@worldpay.com | Property of MoffettNathanson LLC - Not for Redistribution