There are nine million Australians using PayPal. Fund manager Insync says it's going to remain difficult for Afterpay to beat them in the local market.

Even harder to catch PayPal globally when it has 361 million active users producing 87.5% of all online buyers.

Investing isn't easy but it often begins with asking simple questions.

If I am a merchant, I might ask ...

Do I want to pay less for a 'Buy Now Pay Later (BNPL) service for my customers? (That's a no-brainer)

Do I want fraud protection, and the ability to raise invoices on the same system?

Perhaps I might need a small bridging loan and find that a bank overdraft is too costly and onerous?

PayPal can advance the cash a store needs, who then selects the set the automatic % deduction from each sale until the loan is paid back. Cheaper, faster, easier!

So the store pays less for far more, and so do their customers. There is a real win-win!

As a consumer I might consider ...

Do I also value fraud protection?

Do I value being able to link many types of payments into one easy place?

What about range of merchants available and how many I can buy from?

Do I buy just locally or a lot from overseas?

PayPal enables easy payment in just a few clicks from my credit, savings, debit or BNPL accounts in the one app. There are a few thousand merchants or from over 20 million globally for almost anything imaginable.

PayPal is the world's largest payment system with an 11% share, and Apple ranks 3rd at around 4%. The Chinese behemoth Alipay sits at just 0.97%. Afterpay? ...they're not even close to Alipay.

Scale in the payments business counts. Greater reach, lower cost and more choice to offer customers and for far less. It delivers resources to extract insights about spending patterns and assessing credit risk at levels smaller players struggle to match, thus delivering less shareholder risk and more opportunities. The growth outlook is greater when you think global and have the talent, the resources and the reach to do so.

The challenge facing a local entrant to the global game can be summed up as this: Imagine you are an existing PayPal account user. A small local merchant offers you BNPL for your next purchase. As one of the existing 9 million Australian PayPal account holders (361 million active users globally, producing 87.5% of all online buyers) you check your PayPal account and notice a new button. One click and you have BNPL without being assessed and signing-up for yet another provider. Knowing the above facts, which would you choose? Why go through even the hassle to sign up with another provider?

The local entrant relies on Late Fees for a crucial part of its revenue. It also charges more. PayPal doesn't charge Late Fees, remember it does more and on far less. To compete with this, a local competitor needs something exceptional and hard for the goliath to counter; and that can spread exceptionally fast.

John Lobb, Portfolio Manager for Insync noted "We are nowhere near the end of the exponential expansion in the payments sector, it's forecast to grow above 17% p.a. over the next 4 years alone. Covid simply gave it a big push."

He added "PayPal is not the only global company Insync invests in that is benefiting from the payment's revolution, and we are tuned in to 16 Global Megatrends like this one"

"My team identifies which firms will clearly dominate and produce superior returns for investors in each Megatrend in the long term. We have been doing this consistently now for over 11 years with exceptional results" said Joh.

We recently made a plea which fell on deaf ears - https://www.delftpartners.com/news/views/a-fictitious-memo-to-jay-powell-from-a-staffer-at-the-fed.html

Instead of some precautionary monetary tightening, for which we pleaded, we got the same monetary settings but an additional stimulative policy, aka a large pro-cyclical fiscal boost, of up to $6trillion (Yes TRILLION) some of which may go on productivity enhancing investment. The combination of fiscal and monetary stimulus in the USA is now at a level not seen since WW2.

Not surprisingly this is having inflationary consequences, and these are now getting harder to conceal from the 'great unwashed' with hedonic pricing and 'transitory' arguments. The 'geeky' should also concern themselves about how big the output gap actually is in the USA. Large output gaps tend to mean one can be relaxed about inflation in periods of easy money and loose fiscal policy and vice versa. Those in favour of this extraordinary stimulus argue the output gap is large. Recent studies from the Congressional Budget Office would indicate the opposite and that we should be concerned if we don't change course soon by tightening money. Essentially there is a lot less room to manoeuvre; time is running out if we wish to avoid inflation or stagflation.

Inflation is unlikely to be transitory and we have invested as such. Add in temporary (?) supply chain problems from Covid, permanent supply chain changes from National Industrial Policies (aka a dismantling of the global trade just in time system), and the supply side reductions caused by the "Green Revolution" and now hot weather, wet weather and not enough wet weather, and we will see the commodity complex, both hard and soft, on a strong upward trend. Wages are going up too and so we are looking at quite a well-entrenched bout of inflation and inflationary expectations. This will have consequences for companies with stretched balance sheets, and for those companies who provide goods and services with elasticity of demand and high fixed costs.

Companies can either take the inflation in input prices as a hit on margins and keep retail prices where they are, and/or they can raise retail prices and try to preserve margins. We believe that the latter is more likely. Prepare for persistent inflation. If we're wrong and it's the former, prepare for lower returns and profit growth from equities. Neither is particularly great for equity markets and the discount rates that will be applied to future earnings and dividends.

Consequently, one needs to invest now in companies with quality balance sheets, low elasticity of demand for their products, and not in danger of being targeted for regulation.

https://www.delftpartners.com/news/views/corporate-america-an-update-on-q1-results-and-beware-inflation.html

https://www.delftpartners.com/news/views/from-zirp-to-splurge.html

The Biden administration has recently introduced a potential 3rd policy tool in its attempt to generate sustainable economic growth, where sustainable means a reduction in wealth inequality, wage growth relative to profit growth, and a reduction in corporate pricing and employment power (monopolies and monopsonies). This policy tool is the use of anti-trust legislation to break up 'Big Tech' and more recently an Executive Order directed at the rail roads and has been accompanied by the appointment of Big Tech critics to the Federal Trade Commission which oversees policy toward protecting consumers. Our guess is that this is to be used as an attempt to reduce the inflationary consequences of easy money and incontinent fiscal policies.      

https://www.ftc.gov/about-ftc/what-we-do

The FTC is a bipartisan federal agency with a unique dual mission to protect consumers and promote competition.

While the USA dithers about monopoly power and is "putting out the (inflation) fire with (fiscal) gasoline", elsewhere in the world a set of policy makers is acting in a more orthodox manner by moving counter-cyclically to reduce the build-up of inflationary expectations consequences; squeeze moral hazard out of its financial system; and prevent monopoly power from building early by applying regulatory pressure. Yes, and ironically, it's the Chinese who seem to be doing what the "Imperialist Running Dogs" used to do. It is a topsy turvy world when the Chinese adopt the capitalist play book.

Namely:-

Be countercyclical in monetary and fiscal policy  -  China 1 USA 0

Let owners of the risk capital be at risk  -  China 1 USA 0

Prevent state sponsored monopolies and encourage competition such that capitalism serves the consumer   - China 1 USA 0

Some of the regulations seem somewhat draconian, capricious and counter-productive and we have been somewhat caught in our portfolios by the severity of the Chinese regulatory crackdown. We own Ali Baba and some collateral share price damage has been seen in other large Chinese dual-listed companies such as Ping An. On the other hand we are underweight Tech in our global portfolios; own none of the likely targets of the FTC in the USA and so from a portfolio perspective are underweight this risk. Additionally, and crucially, any increase in regulation is typically aimed at large companies and not smaller ones. As at end July, 6 USA stocks constituted about 25% of the market. We won't get badly hit by any USA legislation against large "Tech". Our portfolios have a substantial underweight position in the risk factor known as 'Size'. Small is (once again) beautiful?

Prepare for a more inflationary environment.

Part of your portfolio of equity risk should consequently be in infrastructure companies. Part of the proposed $3.5 trillion infrastructure package has just passed Congress. This represents additional positive news flow and a potential revenue boost for companies operating in this space. If done properly, and invested sensibly, the improved productivity should also reduce inflationary pressures in the long run.

We will shortly be running a risk-based analysis of the inflation protection properties of the listed infrastructure stock universe. There isn't a lot of long-term data on this and much of the promotion of listed infrastructure as an inflation hedge is opinion. Fair enough, and that is what we think too based on the terms under which they (are allowed to) operate, but we'll do an ex-ante risk analysis of the properties of these stocks and publish shortly.  

We would also advise investors to have a look at Asian and Japanese smaller companies. Inexpensive, improving governance, and operating in an environment of prudent macro-economic policy, we believe prospective returns look very good. We have managed a trust successfully for 4 years here and have many more years' experience than that in Asian and Japanese equity markets.

Please see https://www.delftpartners.com/pdf/DP_ASC_Factsheet_AUD_20210721.pdf for more information.