Digital Wallets: Epicenters of Financial Services Disruption
Fintech itself is a major disruptor to traditional banking, and other financial services and digital wallets are among the major frontiers of this disruption.
the ARK Fintech Innovation ETF (NYSEARCA: ARKF) is a great example of an exchange-traded fund that leverages the digital wallet theme. The evolution of the digital wallet adds to the appeal of ARKF. Digital wallets initially got their start as a faster and cheaper way for people to send money to each other. While that’s still the case, technology is disrupting other corners of the old-guard banking universe, and that could lead to significant long-term market capitalization appreciation.
“Today, digital wallets like Venmo, Cash App and others around the world are penetrating traditional financial services, including brokerage and lending, thanks to what we believe are superior user experiences and lower transaction costs. much lower acquisition,” according to research by ARK Investment Management. . “In ARK’s view, digital wallets could grow at an annual rate of 69% in the US, growing from over $400 billion in market capitalization to $5.7 trillion, and 78% in the world, from $1.1 trillion to $20 trillion, over the next five years.”
Spurred in part by the coronavirus pandemic, digital wallets were the main point-of-sale payment option last year. However, as ARK research notes, digital wallets have been growing on this front for several years, indicating sustainability in store when the world finally recovers. Since 2018, digital wallets have grown as point-of-sale payments decline while cash dwindles and credit and debit cards stagnate.
“Based on publicly available data, Square’s Cash App and PayPal’s Venmo have amassed 74 million and 82 million annual active users over the past 8 and 11 years, respectively. JP Morgan has reached 60 million account holders from filing after five acquisitions in more than 30 years,” adds ARK.
Square, now Block Inc (NYSE:SQ) and PayPal Inc (NASDAQ:PYPL) combine for 11% of ARKF’s weight, with the former being the fund’s largest holding.
Another reason why digital wallets are viable as an investment thesis is customer acquisition costs. ARK estimates that Cash App’s customer acquisition costs are $5 for each customer, while some “naked banks” cost as little as $1. However, traditional banks spend a lot more to attract new customers.
“On a net basis, traditional banks in the United States spend about $750 on paid marketing and about $2,500 in total, including branch network occupancy costs, to acquire a new customer,” ARK notes. “Based on network effects, viral marketing, and arguably superior value propositions, digital wallet providers spend as little as a dollar to acquire new customers, giving them the opportunity to invest and upgrade to a higher range.”
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