Is The Holy Grail Of Digital Payments Just One Click Away?

“Buy now” with one click.

Online shoppers know the payment tool well. It’s a good example of how innovating in digital payments can take a company and its stock a long way.

Other digital-payment players — think PayPal Holdings (PYPL), Square (SQ), and hot startup Stripe — also make it easier for merchants to nail down purchases, whether shoppers are on a PC, using a smartphone or in a store. PayPal and Square have shined in 2017, with their stocks climbing 52% and 90%, respectively, for the year vs. a gain of 11% for the S&P 500.

Innovation in digital payments is making cash and checks go away and someday may even eliminate plastic credit cards. As technology evolves, a battle is raging to draw in merchants to payment ecosystems, along with billions of dollars in transaction fees.

Payment processors are wooing merchants with new software-based sales tools and website services and, in some cases, cash loans to grow their businesses.

“Anything a merchant can do to reduce the amount of friction in the transaction has an immediate effect on the top line, in terms of incremental sales, and the bottom line, in terms of lower transaction costs,” said Thad Peterson, analyst at Aite Group.

IBD’S TAKE: Keep an eye on credit card and payment-processing stocks, which have risen in weeks to rank 31st in price performance among 197 industry groups tracked by Investor’s Business Daily. A leader in the group, PayPal’s stock climbed to a record high after earnings. Use the IBD Stock Checkup to see how PayPal and other stocks stack up on crucial fundamental and technical measures.

But competition is fierce in the crowded digital-payment industry, with well-funded startups challenging corporate giants from the credit card, e-commerce and consumer electronic fields. It’s a tight-margin business, but huge.

Online payment processors generally garner around 2.9% of a transaction value plus a 30-cent fee from merchants. They may pay partners, such as banks, to use their systems. “It has to be a scale (volume) business to make it work,” said Peterson.

The good news is that e-commerce is booming. Global e-commerce sales will jump to $ 4 trillion by 2020, up from $ 2.35 trillion in 2017, accounting for nearly 15% of all retail spending worldwide, says research firm eMarketer.