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Financial Transaction Services Industry: Sanguine Outlook

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The 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.

Here we shall highlight the card and payment network companies, which majorly represent this industry. 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.
Here are the industry’s three major themes:

  • Technology has been and continues to be the single-most capricious factor disrupting or to better say revolutionizing the payments industry. The impact of digital payments is rapidly percolating the industry, fueled by the proliferation of smart connected devices, adoption of technology that enables payments in new environments, and growth in under-penetrated payment segments like business-to-business. Companies are constantly focusing on improving the speed, security and accessibility of digital transactions in face-to-face and online environments. Investments are being made in contactless, scan-to-pay and Secure Remote Commerce, which makes it faster, safer and easier for consumers to pay and businesses to receive payment. Players are now turning to the use of blockchain technology, which should further revolutionize the payments industry by making transactions secure, less costly, speedier and seamless across the globe. Companies continue to invest in artificial intelligence to help detect and prevent fraud. Advances in these fields should continue to help improve risk tools and solutions, and prevent fraud threats in the entire payments ecosystem.
  • The financial transaction services industry is witnessing consolidation. Players are resorting to inorganic growth strategies such as mergers and acquisitions in order to increase their size and business scope so as to counter growing competition. Some of the recent big ticket deals in this space are Fiserv's acquisition of First Data for $22 billion, Fidelity National Information Services' $43 billion purchase of Worldpay and the $21 billion deal of Global Payments to acquire Total Systems.
  • Upbeat retail sales, strong consumer confidence and a favorable employment scenario would lead to an increase in spending. Given the popularity that ecommerce enjoys, online purchases are forming an increasing proportion of overall purchases. Online payments are driving demand for the network and services of payment processors. Also for purchases made through brick and mortar stores, consumers prefer to use mobile phones and cards for making payments. A secular growth is being witnessed by all major players like Visa and Mastercard, in transactions’ processing volumes and the trend should continue.

Zacks Industry Rank Indicates Strong Near-Term Prospects

The Zacks Financial Transaction Services is housed within the broader Zacks Business Services Sector.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates a favorable earnings outlook for the industry.

It carries a Zacks Industry Rank #78, which places it at the top 31% of 253 Zacks industries. 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 top 31% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.

Looking at the aggregate earnings estimate revisions, it appears that analysts are upbeat on this group’s earnings growth potential.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Forward 12 Month Price-to-Earnings (P/E) Ratio

Forward 12 Month Price-to-Earnings (P/E) Ratio

Industry Outperforms Sector and S&P 500

The Financial Transaction Services industry has outperformed the broader Zacks Business Services Sector as well as the S&P 500 Index over the past year.

The industry has gained nearly 31.1% over this period compared with the S&P 500 Index and the broader sector’s rise of 25.3% and 19.6%, respectively.

One-Year Price Performance

Industry’s Current Valuation

Comparing with the S&P 500 Index on the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for the industry, we see that the industry’s ratio of 26.38X is higher than the S&P 500’s 17.99X and the sector’s 13.99X.

Over the last five years, the industry has traded as high as 27.17X, as low as 19.42X and median of 22.3X, as the chart below shows.

Bottom Line

Since the industry has wide international operations, a tepid global economic growth might exert pressure on overall business volumes of the industry, which is largely dependent on consumer and business spending.

Nevertheless, the simplicity, ease, flexibility and numerous other benefits offered by online and card spending will continue to fuel the industry’s growth.
The industry is also expected to witness higher outlays on technological investment, which might increase overall operating cost. Higher marketing and promotional expenditure in the face of stiff competition, will be another limiting factor to bottom-line growth.

Here are some stocks from the industry that carry a Zacks Rank 1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Global Payments Inc. (GPN - Free Report) is a provider of financial technology services, with a global presence. It provides highly competitive ecommerce and unified commerce solutions in a global economy.

The stock carries a Zacks Rank #1 and has gained 74% year to date. It surpassed earnings estimates in each of the last four quarters, with an average positive surprise of 2.42%.

QIWI Plc (QIWI - Free Report) operates as a provider of next-generation payment services primarily in Russia and the CIS. The company has an integrated network that enables payment services across physical, online and mobile channels.

The stock carrying a Zacks Rank #2 has gained 40% year to date and surpassed earnings estimates in each of the trailing four quarters, with an average positive surprise of 82.78%.

Mastercard Incorporated (MA - Free Report) is a leading global payments and technology company that connects consumers, businesses, merchants, issuers and governments around the world.

The stock with a Zacks Rank #2, has gained 49% year to date and surpassed earnings estimates in each of the last four quarters, with an average positive surprise of 4.84%.

Fiserv, Inc. (FISV - Free Report) is a global provider of financial services technology. The company's clients include banks, thrifts, credit unions, securities broker dealers, leasing and finance companies, and retailers.

The stock has a Zacks Rank #2 and has gained 55.8% year to date. It surpassed earnings estimates in two of the last four reported quarters, with an average positive surprise of 0.99%.In the other two quarters, the company missed estimates  once one and met the other time.

Envestnet, Inc. (ENV - Free Report) , with a Zacks Rank #2, provides unified wealth management technology and products to financial advisors and institutions. Their flagship product is an advisory platform that integrates the services and software used by financial advisors in wealth management.

The stock has gained 31.7% year to date and surpassed earnings estimates in each of the trailing four reported quarters, with an average positive surprise of 3.51%.

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