In this podcast, Motley Fool host Mary Long and analyst Asit Sharma discuss:
- The evolution of payments in India: micropayments vs. credit cards.
- How MercadoLibre is gaining traction in cross-border payments in Latin America.
- The move for payments companies to become super-apps.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Sept. 30, 2023.
Asit Sharma: The thing that I'm interested in with MercadoLibre is they've done a lot of on the ground work with their Mercado Pago product to be able to adhere to local laws. Latin America, as we know, is not this one uniform space. It's this homogeneous collection of different countries, each of them having their own payment systems and rules and regulations. Over time, MercadoLibre has become very good with this payment on Mercado Pago.
Mary Long: I'm Mary Long, and that's Motley Fool Senior Analyst Asit Sharma. A couple of weeks ago, Asit mentioned that he'd seen mobile payments evolve during his recent trip to India. On today's show, we're taking a deeper dive. We talk about the growth of QR codes and micropayments and the companies gaining share of people's wallets in Asia and Latin America. Maybe we should start by having you set the table a little bit. Both of us first took an interest in the global mobile payment story while following something called Vodafone M-PESA. What is M-PESA?
Asit Sharma: Mary, M-PESA is a payment system that is in wide use throughout Africa. I first heard about it in the early 2010s, I believe. This is a technology that is SIM card and phone-based and cash-based. It was formed as a joint venture between Vodafone in Kenya and Safaricom in 2007. The way it works is, if you are unbanked, let's say that you're a cash player in an economy, but you've got a phone with a SIM card, you can use M-PESA as a payment system. Now the downside or the hard thing about this technology, it relies on tons of intermediaries. These are called agents. They could be small corner shops in a village, but they basically take your cash and then they load up your M-PESA account. But once you have this account, Mary, even if you don't have a bank, you and I can transact between each other. You can add money to your account. You can withdraw it from your account. You need the help of these so called intermediaries or agents, but it gives you the ability to go from someone who is cash-based without any type of banking at all into someone who's playing in the current global monetary system. Now by coincidence, Mary, we found out that you also have an interest and actually some experience with M-PESA in a country in which it first went to outside of Africa, and that's India.
Mary Long: Yeah. In 2016, I found myself in Tamil Nadu, which is a state in southern India. I was there doing research, in conjunction with Vodafone. I was in college and had two good friends, and we had developed this interest through research and reading, and just following the story through the news, I had developed this interest in mobile money and how it was being used, especially throughout the developing world, and so we wound up doubling our research project and applying for funding from our school, shout out UVA. That summer we found ourselves in Tamil Nadu interviewing women who used M-PESA. We were really curious about the social impacts of the technology. We worked with Vodafone. Vodafone India was headquartered in Mumbai at the time, I'd assume it still is, and those headquarter Vodafone employees connected us to those agents that you mentioned, Asit, that were in local cities throughout Tamil Nadu. Through those local agents, we were then connected with actual M-PESA users and some non-users, and we got to interview them and ask them questions about, basically, their habits surrounding M-PESA, how they had used money before having access on their phone, and how they were using money and using M-PESA after having access through M-PESA. Again the focus was on social impact.
The important thing to remember here is you mentioned unbanked people. A lot of the women that we talked to, we were in really rural areas, they had a phone. Everyone had a phone. But if they wanted to go to a bank, oftentimes, that was a really long journey to get to a safe bank. When I say long journey, I mean walking or taking a bus, and that took up half a day or even a full day in some instances. At the same time, a lot of these women also worked jobs where they were paid hourly or daily, so going to the bank just to conduct a really simple transaction or take out money required not only a whole day's journey but also lost wages. You were spending money on bus fare, but also you were losing money because you couldn't work. Something that we think of as so simple was actually quite a complicated and expensive proposition. The biggest thing about M-PESA was access. We talked to a lot of people who used it for peer-to-peer transactions. They could send money to family members that were working or living overseas. They could receive money from family members that were living or working overseas. The biggest, but also most basic social impact that we found M-PESA had was granting access and that access led to increased autonomy. When I heard that you had recently visited India this past summer, you had reported that the landscape of mobile money had changed a bit, so I was really curious to hear how it had changed.
Asit Sharma: Yeah, it's so totally different today, Mary. But it does have its roots in those early innovations in the 2010s. Now, if I'm not mistaken, you were in India in 2016, correct?
Mary Long: Yeah.
Asit Sharma: That's such an interesting year because that's the year that everything started changing in India, probably you boarded the plane flying back from this great summer experience. By the way, I cringe with embarrassment when I think about the way I spent my summers in college. We should all be this motivated to find interesting projects, to go after money that an institution will give us, and to do great things out in the field, empowering women. Gosh, let's not even go into how I spent my summers.
But I'm thinking you got on the plane, flew back home thinking, wow, I've seen the future, and you saw the seeds of the future. But in that year and in the next year, so many things happened. One, the government launched some payment applications, most notable being UPI. This is an interface that lets you make those peer-to-peer transactions. There's an app built on that that's also made by the Indian government, the National Payments Corporation, I believe. It's called Beam. Beam is this facilitator to make quick payments back and forth. The Indian government stepped in and really put in a solid interface, a backbone, if you will, on which future apps could run. The other thing is that a company which has long been influential in Indian industry and retail reliance industries, launched a telephone company called Jio, J-I-O. It was so influential because it brought 4G broadband into India, all over India. In fact, if you read about the history of Indian Telecoms, you'll see some experts divide India into the post-Jio era and the pre-Jio era because, right around 2016, 2017, everything changed.
Now something else has been going on for the last several years which you all heard about is demonetization in India. That's the government trying to take out cash from the system. We think here in the States, why would you want to force cash out of the system? The reason is that, since time immemorial, there's always existed this system of black money in India, where people try to avoid paying their taxes by taking some money under the table, if you will, and unscrupulous folks will stash large denomination bills in their house or in their businesses to avoid having to pay tax to the government. One simple brush stroke that the government used was to say, no more of these huge notes. After this date, you cannot use the x thousand rupee note. In fact, that's still going on. There's a Wave 2. It happened just this year. The 2000 rupee note is being taken out of the system, so you're down to what's the most used note that I saw in India, which is the 500 rupee note. If you get money out of an ATM, you'll see a flurry of these 500 notes come out.
Right around that time, M-PESA was poised to be this big system in India, just as it had in Africa, but I think the difficulty of this labor-intensive reach, having to invest in these intermediaries, then having to invest in the marketing in India, which even though it's granted a very populous country, has so many spread out villages in these different states, I think that M-PESA was just blindsided by the innovation that came about. It started, I think, with the government just putting in this solid interface system. One more thing that is different besides so many different payment methods is Google Pay is pretty big in India among other apps that you can use. We'll talk about something called Paytm which is an app lots of folks like to use, but Google Pay adapted to the local payment methodologies, and it incorporates everything, credit card payments, you can use Beam, and the UPI methods I was mentioning earlier. It's really popular to use Google Pay to pay for your Zomato and Swiggy accounts. These are very popular food delivery apps. Folks in Indian cities love to order out, and it's become so easy to use these tools. They've been widely adopted.
Mary Long: Those food delivery apps that you mentioned are a great segue because I feel as though, up to this point, we've talked primarily about mobile payments as being a facilitator of pretty basic economic transactions, peer-to-peer transactions, sending money to a family member, saving, just having basic accessibility, but you start talking about these food delivery apps and the possibilities of mobile payments extend far beyond just basic economic transactions. One of the places you see that play out is in what's called micropayments, which I think you saw a lot of. But Basically, the idea behind this is many people might have heard of microloans. Micropayments are the same kind of concept. Rather than going to Costco and buying something in bulk to get a discount or going to not a bulk-size store and buying a number of detergents, micropayments would enable a purchaser or a consumer to buy a single detergent at a small price.
Asit Sharma: Absolutely. This was pioneered again in Africa and also in Asia by the big multinational consumer goods conglomerates. We think of Procter and Gamble is selling tons of the packets that we put in our machines, Tide PODS, etc., and all different food and consumer staples, but most of us don't ever pause to think that part of their revenue stream also comes from selling these individual packs, like micro packs of toothpaste, of detergent, of food. They pioneered this. Now in the developing world, you also have ways to pay for these things which are efficient. Why don't we have micro-payments in the States? Primarily because we operate off of credit cards. When there's a credit card transaction, there's a 2%-3% fee that the merchant is picking up just to make that transaction. Very small transactions here aren't worth it for merchants. My dentist, when I walk in now there's a sign that says, look, if you pay with a debit card or check, you'll save 3%, and otherwise, we're going to put that 3% fee on, and I think most of the people who are listening today have seen instances where you're encouraged to use a debit card rather than a credit card. You really can't, in this system, have a micro payment system that works for both parties, but you can in places that bypass the bank card process altogether and go directly peer-to-peer. I saw fruit sellers on the streets with their stands that could take micropayments. We could pay the local goods store to send stuff up to my wife's mother who lives on the 15th floor of this Mumbai high-rise, and you just instantly pay for really small denomination services and goods.
Mary Long: A lot of those payments can also happen through a QR code. I think in the US where the place that I most often see a QR code payment is in a restaurant maybe and even then I bristle at it. I want the old-fashioned interaction, I want the physical menu, etc., but elsewhere in the world, QR codes are ubiquitous. They're used for payments all over the place.
Asit Sharma: There's a company called Paytm, which I mentioned. They are really big with QR codes. The QR code technology is great because it is basically functioning as a virtual wallet. It's not really hitting your bank account per se, but you're loading money from your bank account into the virtual wallet, and then there's an API call on the merchant side. It's really seamless, easy to use, and I think that's another very popular payment method there. Unlike you, I loved the QR code when it came out because it was the middle of the pandemic. There's a great restaurant in downtown Raleigh. My wife and I like to go to great outdoor seating. They put in the QR codes, and you didn't have that human interaction, and at that point, we didn't really care. We would scan the QR codes and get the menu and pay through Toast, which is yet another payment technology in the restaurant space. But now in this day and age, I do want that interaction as well. I was curious, Mary, PayPal went big into QR codes, putting that functionality into their system. I'm a PayPal user, but I don't really use QR codes in my daily life. I was curious. Do you use them at all?
Mary Long: Not really. Again the only time I can really think of is a few restaurants. Not all of them will allow. There's one right around the corner from where I live in Denver where I can pay through QR code, and when given the option, I don't like to do it. But that's the extent of where I've seen it in the States, at least.
Asit Sharma: Yeah, so weird just to see the difference in adoption, but necessity being the one that drives that global uptake of the QR code because it's just simpler, and you don't have to have a credit card to function in that system.
Mary Long: Yeah, for sure. We talked a lot about India, and I want to pivot and talk a little bit about investment opportunities, maybe some that are global, but that aren't focused solely on India. Is there a company you're watching that's making some interesting moves in the mobile payments, mobile wallet space?
Asit Sharma: Yeah, I think Mercado Libre is interesting. They're well known as a big e-commerce provider in Latin America. This company has a big concentration in a few countries, Brazil, Argentina, and Mexico. Those are its biggest markets, and they have, of course, a very well-known payment system and functionality called Mercado Pago, if I pronounced that correctly, and that serves both users and merchants. It's a two-sided system much like PayPal. The way PayPal operates in the United States, they have a lot of functionality built in for merchants, make it super easy for consumers who want to buy things online or in physical channels. The thing that I'm interested in with Mercado Libre is they've done a lot of on the ground work with their Mercado Pago product to be able to adhere to local laws. Latin America, as we know, is not this one uniform space. It's this homogeneous collection of different countries, each of them having their own payment systems and rules and regulations. Over time, Mercado Libre has become very good with this payment on Mercado Pago in going into a jurisdiction, local and then national, being able to get approvals and helping people transact from the merchant side and from the customer side where that has an increasing future for this company in payments is the ability to now take that cross border. As Latin America grows, I think you'll see some of the functionality they're offering to merchants extend. If you start as a merchant in Mexico and want to sell in Uruguay, Mercado Libre through Mercado Pago is going to make this happen for you. There are some competitors in that space. dLocal is a publicly traded company that does just this. It goes in and builds functionality country by country, and they actually hired away Mercado Libre's really great CFO this year. We've seen Mercado Libre as a very successful investment here at the Motley Fool. We just reupped in some different services across the Fool, and Stock Advisor introduces it as a recent recommendation. Many people think, how much more can this company grow? The answer is it can still grow a lot. It's a big continent with a lot of people who are coming into wealth and using more and more different payment methods, so that's why I'm interested in. What about you? I had a sense from a conversation we had the other day that you're also looking at a pretty well-known name in this space.
Mary Long: I am. I feel like you can't talk about mobile money without talking about Alibaba, which is a Chinese company, and like Mercado Libre, when described to people that are less familiar with it, it's often described as like the Amazon of that region. That's in large part because Alibaba has an e-commerce arm, but it also just has its hands in a million different pots. One of those pots is mobile money. When I talk about Alibaba and mobile money, what I'm really talking about is Alipay. It works similar to a lot of the different mobile money platforms that we've discussed so far today. You can link it to your bank account, to your credit card, to your debit card, but it also has the capability to conduct some really robust and impressive financial transactions. You can use Alipay in China to do everything from buy tickets to the theater, to pay for a taxi, likely through a QR code. You can also use it to invest in a money market fund, to get insurance, to get a micro loan. The possibilities are really endless, and Alipay, being a part of Alibaba, a really key facet of that mobile money app is that it seamlessly integrates into basically all of Alibaba's other functions.
Asit Sharma: It's such a fascinating company. For quick reference, I chatted with Dylan Lewis earlier this week on Motley Fool Money. We talked about the progression of some spin-offs that Alibaba is going to have to increase value for shareholders. That's even another interesting sidelight to this story. I want to pick up on Alibaba in terms of another well-known name which is PayPal. PayPal is a company that has also come under hard times in terms of its share price rising. That's because its total payment volume has slowed. It's seen a little bit of decrease in activity on its platform, even though it's a hugely strong free cash-flow generator. Recently, Dan Schulman, the longtime CEO, gave investors no end of angst because it took a long time to work with the board to find a successor, but they have named a successor in a youngish veteran from Intuit, Alex Chriss. Alex Chriss managed Intuit's small business and self-employed group, which itself is a really large business. Why this is all related to Alibaba is that Dan Schulman is actually a huge fan of super apps like Alipay and WePay. He's been a long time admirer of these Chinese conglomerates that seem to offer everything in one interface. You have one [inaudible 00:21:06] your phone, it does almost everything for you.
I sometimes wonder if PayPal overreached under Dan Schulman who tried to branch out in too many parts of the payment space. They're everywhere. They have this cash cow little known outside of those who invest in PayPal called Braintree, but that's the nuts and bolts engine of their payment solutions. Braintree brings in a lot of cash for PayPal. Now outside of that, they've offered so much functionality, small business loans to merchants, incentives for customers, they bought a browser extension basically called Honey that helps you hunt for a lower price when you're shopping online, all of this diversification, but I wonder, did they get away from the core mission, which is to provide just a truly great payments app for both sides, for the merchant's side and for the customer's side? I wonder if Alex Chriss might not bring some of the same thought process to PayPal, but maybe in a crisper strategic fashion. The reason I say this is that Sasan Goodarzi, who's the CEO of Intuit, who I've had the pleasure to talk to a couple of times about their business, has been very keen to add on modern-day pieces that make Intuit stronger. We know Intuit as a tax business and a business that offers online accounting software, but they acquired Mailchimp. They have a consumer finance business. Alex Chriss is part of that leadership team that has seen how to effectively merge these disparate pieces and make that whole greater than the sum of its parts. I think he's still going to try to fulfill this mission of PayPal's.
Mary Long: You mentioned the diversification that PayPal had been exploring. This space, we've spent all this time talking about mobile payments and all the different companies that are popping up and different innovations and different paths that companies are pursuing in regards to mobile money. If this space is so ripe with innovation, why hasn't it taken off?
Asit Sharma: That's curious. I've got an idea about it, and I'd love to hear your thoughts. One is that the industry is always moving toward commoditization. What you've got, if you're a payments company, is some amount of volume crossing through your platform, and then you've got a take on that. You've got a slice of every transaction. At the end of the day, that's what you're bringing home to the bottom line. To get beyond that destiny of being a company, however innovative today, at some point in the future, it's going to be attacked by rivals and then get into this race to the bottom in pricing and commoditization, so your take rate will be declining. That seems like a really hard feat to pull off. I used to be so interested in this space because I was lured by just the innovation. I'm fascinated to travel around the world and see all the different new techniques that are used to make payments. But at the end of the day, it's really hard to survive over the long term and bring a lot of value to shareholders, so most companies, I think, do try to become more Alibaba-like versus focusing on that one product that got them to the dance. I like a company called Adyen, pretty well-known, in that, while they're also playing a little bit at this game, they do focus on their core competencies. They just secured a banking license in the UK, which is notoriously difficult to do. Adyen also, their shares have slumped this year as they've seen some competition on pricing in their business. But it's a company that really invests in its core product. I think that it's one of the few that might be able to emerge from that destiny of trying to do everything at once, facing price competition, and then just becoming this mature company that people are [inaudible 00:25:01] to invest in. They almost look like value traps, some of these companies. PayPal, being maybe the biggest potential value trap out there, although we'll see with the new CEO what his direction is. That's my view of it, Mary, but I'm curious. You're so interested in this space. What do you think about this as an investable thing for listeners?
Mary Long: I think it's really fascinating to watch, but like you, I feel as though a lot of the big players in this space are preoccupied with becoming a super app. There are some companies, Mercado Libre, Alibaba, which we've mentioned, that seem to have proven if they haven't done it, they're doing it. They're on their way to doing it. But I wonder if just trying to be everything at once, if that's really the best path forward here, if that causes more distraction rather than allowing a company to focus on its niche.
As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.
