Earlier this year, we went through many of our very favorite industries to go hunting for investments in. One of the industries we highlighted was the payment processing industry.
There are so many wonderful attributes of this business. For one, payment processing is a very stable business, with a very high percentage of recurring revenues. These companies process millions of transactions per day from their customers, taking a small percentage cut of each. While certainly transaction volume would fall in a recession, the fact is that a lot of these transactions are non-discretionary, for items like food, housing, child care, transportation, and so forth. Payment processing companies can rely on stable cash flows.
Another great aspect is the fact that there is a global “war on cash” occurring right now. Electronic payments are faster than cash, safer than cash, and easier to track and record than cash. Consumers, merchants, and governments all three prefer electronic payment for the most part – a real rarity. This sets up an enormous addressable markets where there will be 750 billion electronic payments per year by 2020 – and increasing at double digit rates. There are few markets in the world as enormous that are growing this rapidly.
Finally, payment processors have what we call a “sticky” business. Payment acceptance is one of the very core processes of any business, and once a working system is in place, most merchants are loathe to switch out of it. This creates inertia that allows payment processors to keep their customers, benefiting as they grow their sales.
So, clearly payment processing is a wonderful business. However, a lot of the major names in this space – companies like , , and are big, over $100 billion dollar companies. While all three of these are damn good companies – and likely successful investments – the real impressive gains come from finding somewhat smaller companies with similar market potential.
