The digital economy, made up of companies generating income from online activity, will be a significant driver of the UK’s economic growth over the coming years. What is less appreciated is the scale of its impact.
It is estimated that by 2040, UK gross domestic product (GDP) will be nearly 7% higher than baseline GDP if increased investment in digital technology persists1.
There a number of innovative technology companies in the UK small cap sector that operate in this fast evolving area of the market and have the potential to become global leaders.
Digital payments business Boku has developed and operates a platform that connects merchants with alternative payment methods. Their customers include some of the largest digitally focussed businesses in the world such as: Microsoft, Meta, Alphabet, Netflix, Apple, Spotify and Sony.
The firms partner with Boku to make connections to different payment methods to enrol more customers and sell more of their products. Alternative payment methods such as direct carrier billing, where services are paid through the monthly mobile phone bill, or local payment methods such as digital wallets (e.g. Apple Pay and Google Pay) are still emerging payment systems in the UK.
However, on a global basis, they make up the majority of payment methods. In the UK, debit and credit cards made up 47% of online payments by value in 2023, with digital wallets making up only 38%. You see a similar pattern in the US. However, looking at these statistics globally, digital wallets count for up to 50% of online payments2.
Source: Worldpay; GlobalData; McKinsey & Company; World Bank; IMF; Statista as at March 2024
The importance of Boku's offering was demonstrated by its customer Netflix's results. When discussing growth in subscriber numbers, Netflix said, “the number of new members signing up last year using alternative payment methods more than tripled.”3
Boku has also won a tender against a much larger digital payment company to roll out local payment methods for Amazon globally. Starting in a few territories for digital services but with scope to grow into physical e-commerce products and other Amazon services.
If Boku can expand into physical services from offering solutions to digital services, the target addressable market goes from the billions to the trillions of dollars.
The business made strong profit margins of over 30% on the $83 million revenue generated in 20234. At the company's 2023 Capital Markets Day, they set an ambition over the medium-term of doubling revenue and having a 50% profit margin5.
We believe the targets are very achievable as the company is just in the foothills of rapid and profitable growth. We share the CEO’s enthusiasm for the potential of the business, when in the financial year 2023 results. he said: “If we get this right, Boku could be a rocket ship and to quote a Pixar classic, to infinity and beyond.”6
The continued growth of the internet and e-commerce has meant businesses are dealing with more customers online than ever before and the data being created from these transactions is ever increasing.
Technology solutions are needed to help businesses onboard customers in a safe and efficient manner but without compromising the user experience. This can be achieved through verifying addresses effectively to support e-commerce volumes, combating fraud and mitigating risk not just at the onboarding stage but through the customer lifecycle.
Additionally, with more and more personal data being created, regulation has increased alongside this to ensure customers are protected. These developments have created a highly favourable market dynamic for GB Group (GBG), a company whose solutions provide identity verification, location intelligence and fraud prevention software.
The company recently reported a slowdown in growth, after some very strong years where demand has been driven by crypto and internet-economy customers. We believe the downturn in demand was cyclical and the structural drivers of growth were still in place for GBG to grow over the long-term.
The company’s solutions are critical in helping its customers grow their business globally whilst combating fraud. The scale and cost of the problem are only growing bigger, with artificial intelligence (AI) also being deployed by bad actors (e.g. deepfakes) and the regulatory environment getting more onerous.
GBG has over 30 years of experience7 and a capability developed in the space by helping customers in over 70 countries8.
The company is another example of a UK-listed business at the forefront of emerging global trends in the digital economy. It also functions in an area of the digital economy that has seen a lot of corporate activity.
The Auction Technology Group (ATG) is the global market leader in operating marketplaces that enable independent auction houses to connect with bidders worldwide. It is at the forefront of transforming the global auction industry.
In addition, through the onward sales of second-hand goods, the company plays an important role in supporting a more circular economy. The Covid-19 pandemic has transformed the auction industry and accelerated the move from in-person physical events to online auctions9.
Growth is largely driven by the structural shift of physical auctions to online with ancillary services improving ATG’s end-to-end offering as well as its take rate. We like the network effects of the business model, where the dominant platform attracts the most bidders and therefore the most auction houses and vice versa.
ATG has a leading market position in the Arts & Antiques and Industrial & Commercial markets in the UK, USA and Germany. Accelerated by the pandemic, the adoption of online auctions has proven the benefits of ATG's proposition with access to a global pool of bidders, often increasing the price for the seller and thus the commission for the auctioneer.
We believe that the market is still in the early development phase of the online transition. ATG is following a well-defined playbook used by other dominant players in industries such as automotive and real estate by expanding the range of services to its customers by offering payment, shipping and marketing solutions.
The structural growth in this industry should underpin earnings growth for many years with ATG expanding its competitive position over its rivals in recent years. We believe that ATG will continue to extend its lead in a ‘winner-takes-all’ global market, becoming the default choice for auction houses wanting to access the largest pool of bidders by migrating to digital auctions.
The structural shift to a digital economy underpins our conviction in these names. Offering unique exposure to exciting and emerging businesses, we believe that UK small caps are becoming an increasingly attractive option for investors.
Franklin Templeton’s UK equity fund range is managed by ClearBridge’s Leeds-based UK equity team.
You don’t need to look very far to be confronted with negative headlines and stories of broken Britain. But, maybe it’s time to change the narrative, take a closer look and discover the real story on UK equities.
Footnotes
1Source: Statista, Virgin Media; CEBR as at 31 May 2022. GDP growth from investment in digital technology in the UK 2020-2040.
2Source: Worldpay as at 2024. The global payments report
3Source: Netflix as at June 2022. Beyond Cards: Giving Members More Ways to Pay
4Source: Boku as at 19 March 2024. Audited Results for the year ended 31 December 2023.
5Source: Boku as at 21 February 2023. Capital Markets Day 2023. https://investors.boku.com/boku-capital-markets-day-2023/
6Source: Boku as at 31 Dember 2023. 2023 Annual Report
7 Source: GBG as at 2023. Building trust in a digital world. Annual report and accounts 2023.
8 Source: GBG as at 31 May 2024. Our History. https://www.gbgplc.com/en/investors/who-we-are/our-history/
9 Source: Auction Technology Group as at 2023. Unlocking the value of the curated secondary goods market.
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