The most influential restaurant in New York is not known for its food. It is an establishment with a name that lives long in the memory of finance. Major’s Cabin Grill was located in the heart of Manhattan in 1949. One day, Frank McNamara, a middling businessman, enjoyed a steak lunch there with his friends.
When the waiter brought the bill for US$8 (about US$102 or $137 in today’s money), McNamara was horrified to find that he had left his wallet at home.
This was long before Apple Pay or the credit card era. Cash was the only form of payment. The grim alternative was washing dishes. He had to call his wife to bring him some money and bail him out of his embarrassment.
For McNamara, who had little success as a businessman, this awkward episode was the making of his fortune. He thought of a charge card to avoid payment problems. He started a payment service called Diners Club.
The first Diners Club card was made of cardboard. It spawned a revolution in payments. Today, many people in rich countries pay mainly with credit cards.
The global credit card business is now worth about US$150 billion. It could double in the next decade.
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In Singapore, which has one of the highest credit card penetration rates, the average Singaporean has two credit cards, and some have 15 to 20.
However, there is a new challenge in the payment industry. It is similar to the one that McNamara sensed 74 years ago.
The driver is not restaurant payments but online shopping, which has exploded in scale in the last 20 years.
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In Asean alone, e-commerce gross merchandise value in 2022 was nearly four times the level in 2019. Grab delivery vehicles are a common sight in Singapore. There are about 10 million online merchants in Indonesia.
These merchants are similar to the sari vendors in Little India or teh tarik sellers — these businesses have single owners. Many of these small businesses lack the ability to collect payments through credit cards. The small merchants need to sign up with a bank to get access to a credit card network. This is cumbersome and can take up to a year.
Stripe Inc, a company founded by a pair of Irish brothers in 2010, has a solution. Patrick and John Collison hail from Tipperary, an isolated town. Their ambitions were global from an early age. The duo studied at MIT and Harvard.
The Collisons have realised that the problem with payments was not finance. It was coding. They have devised an API — application programming interface, or code that enables two software programs to communicate — that can be used by any merchant.
This API contains the credit card number, the payment amount and other key details. It works well for an online merchant in a remote village in Sumatra. It can also work for someone in an advanced country.
I held a book sale at a restaurant in Dubai once, where there was a stampede for my book. Instead of collecting cash, I received payment through Stripe. It was seamless and easy.
Players like Stripe and PayPal are the lubricant of the e-commerce industry. Visa, Amex and Mastercard are the traditional players. Their growth has been in the offline world.
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The new players have thrived with the rise of e-commerce. Stripe processed US$800 billion of payments in 2022. This is more than twice the pre-Covid level. It is only the beginning.
Most people in emerging markets are new to digital payments, which could double over the next decade, according to McKinsey.
One must be wary of the exuberance of this sector. The valuations of tech companies skyrocketed during the pandemic.
In 2021, Stripe was valued at US$90 billion. But now, the tech selloff has now taken its toll. Stripe recently raised US$6 billion at a valuation of US$50 billion. At this level, it is about 3.5x Ev/Ebitda. This places it at a discount to its listed rival Adyen. It could be a proxy for digital payment growth.
In emerging markets, 1.7 billion people still have not used digital payments, but this figure could fall quickly. Covid has accelerated the shift to online shopping. McNamara started a revolution in 1949 by forgetting his wallet. It has not ended. Investors should remember that.
Nirgunan Tiruchelvam is head of consumer and Internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column. This column does not constitute investment advice of any kind
