How to invest in the cashless revolution - Nicola Wealth

How to invest in the cashless revolution


Joel Schlesinger

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The rise of e-commerce, financial technology, and, of course, cryptocurrencies are all signs that the world is increasingly going cashless – and the COVID-19 pandemic has only accelerated this trend. For financial advisors and their clients, this shift provides plenty of opportunities for investments.

Certainly, the data points are there to support the thesis that investments in this theme are likely to be profitable in the long run. According to Payments Canada’s Canadian Payments: Methods and Trends 2020 report, 77 per cent or 16.9-billion of the 22-billion-plus transactions among both consumers and businesses in 2019 were electronic. That accounted for 62 per cent of the total payments value of $9.9-trillion.

In addition, the report notes that the COVID-19 pandemic, with its restrictions on in-person retail, has likely entrenched the predominance of e-commerce and contactless payments using smartphones and payment cards even further.

The challenge for advisors and investors is gaining exposure to an already frothy, yet promising sector while mitigating its risks.

As with any newer industry, there is going to be increased uncertainty and also the potential for huge returns,” says Mark Therriault, financial advisor with Nicola Wealth Management Ltd. in Vancouver. “It’s also difficult to pick out which [companies] will ultimately be the winners.

Nevertheless, many advisors have likely already included firms involved in the cashless revolution in clients’ portfolios.

“In my opinion, every company in the world is going to be a tech company at some point if they’re not one already,” says Nick Waddell, founder and editor of the Cantech Letter, which covers technology in Canada, in North Vancouver, B.C.

That includes the financial services sector, with the Big Five banks and a new generation of Canadian success stories, such as Shopify Inc. SHOP-T -0.44%decrease, Nuvei Corp. NVEI-T +0.17% increase and Lightspeed POS Inc. LSPD-T -0.50%decrease, he adds.

“It’s just that ubiquitous,” Mr. Waddell says. “So, it’s the job of advisors to expose their clients to the economy of the future without overpaying.”

Despite high valuations, Sean Oye, portfolio manager at Nicola Wealth in Vancouver, says the space still has room to grow, pointing to Visa Inc. V-N -0.09%decrease as a case for future profitability.

“Our research sources indicate the global consumer-to-payments market – excluding China – is approximately US$33-trillion [on per annual volume] and is less than 50 per cent penetrated by card payments,” he says. “This suggests Visa’s addressable target market for its core consumer payments business is [about US$16-trillion to US$18-trillion].”

Yet, Mr. Oye adds that the consumer market is only the beginning as the business-to-business market is much larger with US$200-trillion in annual transactions.

For example, he notes that Nicola Canadian Equity Income Fund and Nicola Canadian Tactical High Income Fund hold Nuvei, a Montreal-based electronic payments processing company that raised $805-million in its initial public offering in September, 2020.

Don Cromar, director and senior vice-president, private client services at PI Financial Corp. in Vancouver, says that it’s not just the larger, more high-profile names in Canada where opportunities lie.

“There are a lot of smaller technology companies connected to electronic payments or financial services,” he says, adding that his firm was involved in early-stage fundraising for Bigg Digital Assets BIGG-CN +1.16%increase, which owns, operates, and invests in businesses involved in blockchain technologies, and went public in 2017.

Of course, companies involved in blockchain, which underpins cryptocurrencies like Bitcoin, represent among the highest risk and speculative segments in fintech, says Alan Fustey, vice-president and portfolio manager at Adaptive ETF, a division of Bellwether Investment Management Inc., in Winnipeg.

“While it is interesting and growing, it is still a developing and volatile industry,” he says.

Nevertheless, Mr. Fustey says there are larger financial services companies that provide exposure to crypto and fintech, more generally, at a lower level of risk. As an example, he points to Mastercard Inc. MA-N -0.18% decrease which announced recently it would begin to accept certain cryptocurrencies on its payments network later this year.

“Focusing on … Mastercard would be a conservative way of gaining … exposure to both the cashless payment and cryptocurrency trends,” he says.

Another tactic is investing in the new crop of fintech and cryptocurrency exchange-traded funds (ETFs) and mutual funds, Mr. Cromar says.

“Funds can provide diversified exposure to many companies in this space with limited risk,” he says.

As an example, Mr. Cromar points to U.S. listed Ark Fintech Innovation ETF ARKF-A +0.56%increase, which launched in 2019, provides exposure to fintech innovations such as mobile payments, digital wallets, and blockchain, and has about US$4-billion in assets under management as a way to get exposure.

While Mr. Therriault also sees ETFs as an option for clients to get access to this space, he recommends they make the allocation outside of their core portfolios.

“Most of the clients investing in this space are doing so with small amounts and caution,” he says.