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Hedge Funds See Big Potential in Block, Inc. (NYSE:SQ) for Digital Payments Block, Inc.

We recently compiled the list of the 10 Best Digital Payments Stocks To Buy according to the hedge funds using the latest sentiment data. In this article, we are going to take a look at where Block Inc (SQ) stand against the other digital payments stocks.

The boom of the internet coupled with the near ubiquity of smartphones has changed the way in which most people interact with the world. Before the current technological era, users had to visit retail locations of payment providers such as Western Union or have access to bank accounts to transfer money across borders and over long distances locally.

Now, a plethora of payment service providers enable their customers to transfer money through their smartphones or the Internet. Companies like Visa and Mastercard are also called payment gateways because they operate networks that enable bank accounts, retailers, and consumers to send money to each other. On the flip side, Paypal's Venmo and Jack Dorsey's Square are more pure play payments stocks since they enable virtually anyone with a phone that can access the service to send money.

The fact that they move money means that digital payments stocks move in tune with the economy. If the economy is robust and money is changing hands, then these firms see higher volumes. This allows them to earn more money through fees and commissions. To track digital payments stock index performance, we can look at the Nasdaq CTA Global Digital Payments Index. Between February 2022 and October 2023, when investors were worried about inflation and the impact of high interest rates on the economy, this index lost nearly 38%. However, since October, it is up by 46%. The American economy has surprised investors and policymakers over the past two quarters, and the potential for digital payments stocks to benefit from artificial intelligence and improve customer services does not appear to be lost on investors either.

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In fact, artificial intelligence has already started to make inroads into digital payments. One such initiative is underway at Mastercard, which made an important announcement recently. A customer's card number is one of the most sensitive pieces of information in their bio-metric profile, and access to this information carries the risk of significant losses via fraudulent payments. The company now intends to leverage artificial intelligence to enhance the security of compromised retailer networks and merchant point of sale (POS) systems.

Through this service, the company hopes to catch compromised cards before their data is used nefariously. It also hopes to improve the detection rate of merchants at risk from fraudsters by 300%. Mastercard's announcement came just days after Visa introduced one of the biggest upgrades to US payment cards since chip based cards were introduced. This will allow users to consolidate their different bank cards under one umbrella and enable them to automatically categorize payments processing through a debit or a credit card depending on the value of the transaction.

These two biggest players in payments market are at the center of important legislative proposals in the UK. The British Payments Systems Regulator is suggesting new rules on how the two share information with regulators and decide on their merchant fee increases. Businesses pay processing and other fees to the two every time a transaction is made through their network, and while British businesses have decried the high fees, Visa and Mastercard have defended their actions by pointing towards the value their networks provide.

The changes in the UK come after a historic settlement that forced the two companies to reduce their fees in the US. In fact, regulators on this side of the pond also issued a new rule that now recognizes popular new companies called buy now, pay later (BNPL) firms as credit card providers. This means that firms like Block, PayPal, and Affirm have to now adhere to the same rules as credit card providers when it comes to disputes and refunds. Naturally, this increases business costs.

These trends show that the digital payments industry is constantly on its toes for changes ushered in by new technologies and regulatory changes. The fact that internet use is only expected to grow means that these firms can experience rapid user growth as well. This opens them up to new avenues to improve their services, and it also increases the stakes for their operations. If you're interested in learning more about consumer spending and its future, then you can check out 20 Countries with the Highest Consumer Spending in the World.

People using the Cash App paying for goods and services, highlighting the impact the of the company's payment tools.

Our Methodology

To make our list of the best digital payments stocks to buy, we ranked the holdings of the Amplify Mobile Payments ETF, which tracks the Nasdaq CTA Global Digital Payments Index, by the number of hedge funds that had bought the shares in Q1 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

Block, Inc. (NYSE:SQ)

Number of Hedge Fund Investors In Q1 2024: 65

Quite a well known firm, Block, Inc. (NYSE:SQ) provides users with the ability to make payments with their phones to merchants, retailers, and others. Even though its shares jumped after the latest earnings report in May 2024, an NBC report claimed that regulators were taking a look at its payments history to see if it involved terrorist financing.

After sifting through Q1 2023 hedge fund regulatory filings, Insider Monkey found that 65 funds had held a stake in Block, Inc. (NYSE:SQ). Catherine D. Wood's ARK Investment Management held one of the largest stakes, which was worth $850 million.

As a result, SQ ranks 7th among the 10 best digital payments stocks to buy now. You can visit 10 Best Digital Payments Stocks To Buy Now to see the other digital payment stocks that are on the hedge fund radar.

Disclosure: None. This article is originally published at Insider Monkey.