Financial Transaction Services industry has emerged as a beneficiary of the pandemic, which created a new normal of shopping and making payments online. Social distancing and other safety guidelines led to this new purchasing habit and accelerated the global movement toward digital payments. The pandemic unleashed a wave of digitalization across the industry, advancing digital transformation by at least three to five years. This shift away from cash was already well underway before the pandemic had hit the earth, further fueling the change at large. This transition opens new opportunities for the players in the industry. Participants with robust technology platform, wide network and a strong business model are set to gain traction from this evolution in the industry. Visa Inc. ( V Quick Quote V - Free Report) and Mastercard Inc. ( MA Quick Quote MA - Free Report) , Fiserv Inc. ( FISV Quick Quote FISV - Free Report) and Western Union Co. ( WU Quick Quote WU - Free Report) are a few stocks, which are likely to benefit from the above-mentioned trends Industry Description
The Zacks Financial Transaction Services industry is part of the Financial Technology or FinTech space, which includes several companies with varying nature of businesses. The industry includes card and payment processors, ATM service providers, card payment solution providers, money remittance service providers, and providers of investment solutions and services to financial advisors.
The players in this segment typically operate their unique and proprietary global payments’ network that links issuers and acquirers around the globe to facilitate the switching of transactions, permitting account holders to use their products at millions of acceptance locations worldwide. Monetary transactions are effectuated through these networks, which offer a convenient, quick and secure payment method in several currencies (nearly 150) across the globe.
What’s Shaping the Future of Financial Transaction Services industry? Partly to the COVID-19 pandemic, there was a significant acceleration in cashless transactions, shifting the mode of payment to digital forms. E-commerce represents only about 14% of global retail spending, reflecting a substantial opportunity for e-commerce growth. Rapid Shift to Electronic and Digital Payments: Notably, per a Grand View Research report, the global digital payment market was valued at $58.3 billion in 2020 and is set to witness a CAGR of 19.4% from 2021 to 2028. It stated that the main factors expected to contribute to growth are the rising adoption of smartphones, increasing e-commerce sales and an improving global Internet penetration. Moreover, governments around the world are taking initiatives to boost the adoption of digital payments. In fact, going by the Grand View Research article, the payment processing segment accounted for more than 25% share of the 2020 global revenues. This growth is owing to the increasing preference for online shopping throughout the world, which is prompting retailers to “adopt payment processing solutions to provide customers with seamless checkout experiences”. The global payments industry is undergoing a substantial and rapid technological change including mobile and in-app payment technologies, e-commerce, tokenization, cryptocurrencies, distributed ledger and blockchain technologies, and the new authentication technologies, such as biometrics, 3D Secure 2.0 and the dynamic cardholder verification values or dCVV2. Investment in Technology:
As a result, we expect new services and technologies to continue emerging and evolving, placing the companies at different points in the payment ecosystem for solid growth. Companies consistently invest in AI to help detect and prevent frauds. Advances in these fields should continue to help improve risk tools and solutions, and prevent deceptions in the entire payments ecosystem, thus making it more agile and hassle free.
Technology is also being deployed to make real-time payment services available far and wide. Real-time payments are electronic/digital payments that allow the speedy transfer of funds with the help of a safe payment gateway. The global real-time payments market size is expected to reach $62.5 billion by 2026, seeing a 32.3% CAGR during the 2020-2026 forecast period.
Apple, Inc. is the major forerunner in the real-time payments market. Companies, such as Fiserv, Inc., Temenos AG, Visa, Inc., Finastra Group Holdings Limited, PayPal Holdings, Inc., Mastercard, Inc., Fidelity Information Services (FIS), Inc., ACI Worldwide, Inc. are some of the key innovators in the market.
Cross-border volume, which constitutes international business, is being heavily impacted by the decline in travel. International cross-border transaction revenues represent a significant chunk of the company’s revenues in this space. Cross-Border Volumes Under Pressure:
Consumers affected by COVID-19 may continue to demonstrate a changed behavior even after the pandemic subsided. For example, they may decrease discretionary spending on a permanent or long-term basis while certain industries may take longer time to recover (particularly those that rely on travel or large gatherings). This can be attributed to consumer hesitancy to return to social interactions.
Also, companies may see a sharp descent in consumer spending on credit products as economic worries remain and all this may have repercussions on businesses at large. Consequently, companies may persistently experience adverse material impacts on their businesses as a result of the global economic gloom including lower domestic and cross-border spending trends.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Financial Transaction Services industry is housed within the broader Zacks
Business Services sector. It carries a Zacks Industry Rank #222, which places it in the bottom 13% of the 254 Zacks industries.
Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates cloudy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the bottom 130% of the Zacks-ranked industries is a result of a negative earnings per share outlook for the constituent companies in aggregate.
Before we present a few stocks that you may still want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and its valuation picture.
Industry Outperforms Sector but Lags S&P 500
The Financial Transaction Services industry has performed better than the broader Zacks Business Services sector but lagged the Zacks S&P 500 composite over the past year.
The industry has rallied nearly 34.75% over this period compared with the S&P 500 Index’s gain of 51.18%. However, the rally came in against the broader sector’s gain of 18.78%.
One-Year Price Performance Industry’s Current Valuation
Comparing with the S&P 500 Index on the basis of the forward 12-month price-to-earnings ratio, which is a commonly used multiple for the industry, we see that the industry’s ratio of 30.9X is higher than the S&P 500’s 23.29X as well as the sector’s 30.1X.
Price to Earnings Ratio (F12M)
Price to Earnings Ratio (F12M)
Over the last five years, the industry traded as high as 32.16X, as low as 20.78X and at the median of 23.94X.
4 Financial Transaction Services Stocks to Keep a Close Eye on
We are presenting four stocks that currently carry a Zacks Rank #2 (Buy) or 3 (Hold). These stocks are well-positioned to grow in the near term. You can see
. the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Visa's numerous acquisitions and alliances paved the way for long-term growth and consistently drove revenues. Technological upgrades bode well for Visa. Shift in payments to the digital modes is a boon too. The acquisition of Visa Europe is a strategic fit as well. The coronavirus vaccine development and the gradual revival of consumer confidence will drive spending, expanding the company's business volumes in turn. A strong balance sheet enables investment in business.
The Zacks Consensus Estimate for current-year EPS growth is 9.13% compared with the industry’s expected growth of 13.5%
. The stock carries a Zacks Rank #3 at present. Price and Consenus: V is gaining from solid demand for digital and contactless solutions amid the COVID crisis. Investment in technology keeps Mastercard at the forefront of the rapidly-evolving payments industry. The company is well-poised to gain from consistent cash-generating abilities from operations on the back of its growing business volumes. Its strong capital position drives investment in business and shareholder value addition via share buybacks and dividend payouts. The company executed several acquisitions, which helped it expand its addressable markets, drive new revenue streams and strengthen core product solutions. Mastercard
The Zacks Consensus Estimate for current-year EPS growth is 24.6%. The stock carries a Zacks Rank of 3 at present.
Price and Consenus: MA Fiserv enjoys a leading position in the financial and payments solutions domain on the back of its broad and diverse customer base, and continued technological upgrades. The company's diversified product portfolio helps attract a steady flow of customers. Acquisitions aid it to expand its product portfolio, enhance its offerings, boost its market share and widen its customer base. The company is consistently rewarding its shareholders through share buybacks.
The Zacks Consensus Estimate for current-year EPS growth is 22.62%. The stock is Zacks #3 Ranked at present.
Price and Consenus: FISV Western Union continues to develop its digital offerings and makes significant investments in customer acquisitions for westernunion.com. A disciplined capital management through share buybacks and dividend payments remains a positive for Western Union. The company provided 2021 earnings guidance, which suggests 9.6% growth from the year-ago reported level. The cost-cutting efforts also look impressive.
The Zacks Consensus Estimate for current-year EPS growth is 10.16%. The stock carries a Zacks Rank #3 at present.
Price and Consenus: WU