How To Profit From The Death of Cash

There is a slow, creeping trend starting to take hold in the global economic system.  I am not talking about any of the traditional economic trends like inflation, deflation, expansion, contraction or anything like that.

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  • What I am talking about is something totally new in the history of economics.  In fact, this change will be so profound that it will completely change the way commerce is transacted forever.

    Don’t worry, the change will be gradual and everyone will have plenty of time to morph into the new way of doing things.  Actually, many of you, myself included, are already using the tools of this economic revolution.

    There is a single company that is poised to continue to profit wildly due to this slow, grinding change.  This company was one of the first movers to react to and provide a solution to this change.  It already has a huge user base and is rapidly growing.

    Even if I am way off on the economic trend timing, this company will still thrive due to an already established way of doing business around the world.

    First, let’s look closer at this revolutionary trend.

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  • The trend I am talking about is the death of cash.  Yes, that’s right, cash or money as we know it, will eventually be a thing of the past.  While it may always exist in the underground economy, its wide-spread use is downward trending.

    The reasons for the eventual death of cash are many.

    One of the primary reasons is the rise of the internet.  The internet has enabled people from all over the globe to transact business with each other, without even seeing each other face to face.  There is no handshake or direct transaction.  All internet transactions take place at arm’s length.   This means that there needs to be a way to transfer value from one person to another without physically passing cash back and forth.  If you have ever bought or sold anything on e-bay, you are well aware of how the new cashless payment process works.

    Other reasons include fraud prevention and frankly greater government control of commerce for taxation and other purposes.  I know this sounds a little frightening, but the truth is, as long as the government is under the control of the people, things should be ok.

    Right now, there is a lesser known, but much more powerful catalyst causing the death of cash.  This catalysts is negative interest rates.

    Let me explain how this works:

    J.P. Morgan started the trend in May, 2015.  You see, negative interest rates make it too expensive for banks to hold cash.  J.P. Morgan is dealing with this phenomena by charging a “balance sheet utilization” fee.   Right now, this fee is 1% annually on all money that is in excess of what the bank needs to operate.

    This means that some depositors are already “paying” to have their money in the bank.   J.P. Morgan, for example, has a goal of sharply decreasing their deposit base due to the negative rates.  Many large institutions have already started to pull their money out of the bank.

    A very insightful article appeared in Bloomberg Businessweek by Peter Coy regarding this trend.

    Mr. Coy wrote:

    Abolishing paper money and forcing people to use electronic accounts could free central banks to lower interest rates as much as they feel necessary while crimping the underground economy, Buiter and Rahbari write: “In our view, the net benefit to society from giving up the anonymity of currency holdings is likely to be positive (including for tax compliance).” Taxing cash, an idea that goes back to German economist Silvio Gesell in 1916, is probably unworkable, the economists conclude: You’d have to stamp bills to show tax had been paid on them. The third idea involves declaring that all wages and prices are set in terms of the official reserve currency—and that paper money is a depreciating asset, almost like a weak foreign currency. That approach, the Citi economists write, “is both practical and likely to be effective.” Last year, Harvard University economist Kenneth Rogoff wrote a paper favoring exploration of “a more proactive strategy for phasing out the use of paper currency.”

    Ok, now that you understand why cash is slowly dying, how can you make money from this very long term trend?

    There are multiple ways investors can ride this trend far into the future.  However, we have identified one company that is already profitable and ready to skyrocket in value as cash slowly slips from economic relevance.

    The company is the ubiquitous PayPal (Nasdaq:PYPL).   Yes, that’s correct, the company that most know as a way to pay for online purchases at E*Bay and other on-line sources, is leading the digital payment revolution.

    This newly minted IPO of the established internet payment company PayPal has set up to be an ideal buy candidate.

    The company was spun off from its Ebay parent and boasts a higher valuation than Ebay at a $45 billion market cap.

    Remember, PayPal accounted for half of Ebay’s valuation in the second quarter.

    Some investors are skeptical about PayPal’s future due to aggressive competition in the space from Google, Apple, and Yahoo.  We believe that the competition is greatly over exaggerated due to PayPal’s first mover, leading position in the digital payment sector.

    The company boasts over 165 million users and is accepted by 74% of the leading U.S. online retailers, 70% of all global online retailers and 67% of mobile applications.  Talk about huge market penetration!

    PayPal can function in 200 countries and when combined with the above facts makes it extremely difficult for competition to gain much traction on a global scale.

    The recently spun off company has about $6 billion cash on its balance sheet creating a solid war chest for acquisitions and expansion.

    PayPal has recently acquired Xoom to help facilitate cross border payments.  Xoom is a global money transfer company that permits users to transfer money without owning a bank account or even an Internet connection to receive funds.

    This technology lets billions of unbanked citizens to seamlessly transfer money.

    It is estimated that there are  nearly two billion adults without a bank account.  As you likely imagine, Xoom is on a sharp upward trajectory.

    Payment volume has been grown at over 20% per year since 2012 and with $4 billion in cash/short term investments, PayPal is well established to purchase or out spend any novel technology start up in the space.

    Remember, digital payments are expected to grow from $50 billion to close to $150 billion by 2019.  This alone should help supercharge PayPal’s progression.

    What I like best is that now PayPal has spun off from eBay, it is free to partner with anyone it likes.  This means that former restrictions about who it can work with have been removed.  Some analysts believe that a partnership with Amazon is possible.  Should this happen, PayPal will explode in popularity.

    Not to mention, the gradual phasing out of cash will continue to provide a steady stream of new clients to this digital payment giant.

    PayPal’s cash position, market penetration, and infrastructure makes it one company that will be extremely difficult to compete with as cash makes way for the digital revolution.

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