The Financial Transaction Services industry is in a sweet spot owing to the overall strong economy and increase in consumer spending. The industry has been a beneficiary of the pandemic so far, which created a new normal of shopping and making payments online. Even though some customers went back to shopping in physical stores, the preferred mode of payments remains mobile or cards. The shift away from cash, which was already well underway before the pandemic began now became more apparent. This transition opens new opportunities for the players in the industry. Companies with a robust technology platform, wide network and a strong business model are set to gain traction from this evolution in the payments space, which is also welcoming crypto and digital currencies. Leading payment processors, namely Visa Inc. (V Quick QuoteV ) , Mastercard Inc. (MA Quick QuoteMA ) , Fiserv Inc. (FISV Quick QuoteFISV ) and Global Payments Inc. (GPN Quick QuoteGPN ) are a few stocks, which are likely to benefit from the above-mentioned trends.
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 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.
3 Financial Transaction Services Industry Trends to Watch out for
Digital Payments Boom to Continue, Get a Boost From E-commerce: E-commerce and digital payments became the new normal now. Even as restrictions eased, people are sticking to online shopping, given the convenience and flexibility that come along with it. Increased adoption of e-commerce bodes well for the companies in the financial transaction services industry as they are present at different nodal points of the full payment ecosystem, making online transactions successful. Per Meticulous Research, the global e-commerce market is expected to reach $16,215.6 billion by 2027, seeing a CAGR of 22.9% during the 2020-2027 forecast period.
A surge in ecommerce will boost the adoption of digital payments across the globe. A report by Mordor Intelligence predicted that the transaction value of global digital payments is estimated to be worth $11.29 trillion by 2026, aided by the growing preference of e-commerce across various economies, at a CAGR of 11.21% from 2021 to 2026.
Investment in Technology: 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,etc. . As a result, we expect new services and technologies to continue to emerge and evolve, placing the companies at different points in the payment ecosystem for solid growth. Companies consistently invest in AI to help detect and prevent frauds. Advancements in these fields should continue to aid in improving risk tools and solutions, and preventing deceptions in the entire payments ecosystem, thereby making it more agile and hassle free.
Technology is also being deployed for making real-time payments services available far and wide. Real-time payments are considered electronic/digital payments that allow 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, witnessing 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,Finastra Group Holdings Limited, PayPal Holdings, Inc., Mastercard, Inc., Fidelity National Information Services, Inc. , Inc., ACI Worldwide, Inc. are some of the key innovators in the market.
Consolidation: Mergers and acquisitions are rife in the payments industry as players try to build scale to capture a larger market share. According to Cyrus Pocha, partner of financial services regulatory and co-head of the global fintech group London, “the core revenues for companies in the financial transaction services come from taking a very small fee for each transaction they process and once they have technology and infrastructure in place, there is very little additional cost to the business in processing more transactions. So scaling up still makes a lot of sense and M&A has been shown to be and, in his view, remains the best way of achieving this”.
Companies are also resorting to M&A activities to diversify beyond their niche areas and create revenue sources in multiple domains. For instance, companies that were more active in travel and entertainment categories suffered the most last year. Thus, having a varied customer base is crucial to a sustainable business. For diversification in new business, acquiring a specialist company in that domain is the best possible way.
Thus, M&A will harp on twin needs, which are expansion in the existing market and entry into new business, service or markets.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Financial Transaction Services industry is housed within the broader Zacks Business Services sector. It carries a Zacks Industry Rank #109, which places it in the top 43% of the 254 Zacks industries.
The group’s Zacks Industry Rank,, which is basically the average of the Zacks Rank of all the member stocks, indicates bullish 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 top 43% of the Zacks-ranked industries is a result of a positive 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 the S&P 500
The Financial Transaction Services industry has outperformed the broader Zacks Business Services sector but lagged the Zacks S&P 500 composite over the past year.
The industry has declined 6.2% over this period against the S&P 500 Index’s gain of 31.6%. However, the broader sector has lost 21.4%.
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 28.7X is higher than the S&P 500’s 21.47X but lower than the sector’s 30.55X.
Price to Earnings Ratio (F12M)
Price to Earnings Ratio (F12M)
Over the last five years, the industry traded as high as 32.2X, as low as 20.79X and at the median of 24.58X.
Financial Transaction Services Stocks to Keep a Close Eye on
We are presenting four stocks that currently carry a Zacks Rank #3 (Hold) and 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 the company. 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, thereby 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 rate is pegged at 14.68%. The stock beat estimates in each of the past four reported quarters with an average positive surprise of 9.03%.
Price and Consenus: V
Mastercard 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 benefit from its consistent cash-generating abilities from operations on the back of growing business volumes. Its strong capital position drives investment in business and adds shareholder value 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.
The Zacks Consensus Estimate for current-year EPS growth rate is pegged at 25.66%. The stock beat estimates in three of the past four reported quarters (missed in one) with an average positive surprise of 7.8%.
Price and Consenus: MA
Fiserv enjoys a dominant position in the financial and payments solutions business on the back of broad and diverse customer base, and continued technology upgrades. The company’s diversified product portfolio helps attract a steady flow of customers. Acquisitions help expand its product portfolio, enhance offerings, boost its market share and customer base. The company has been consistently rewarding shareholders through share buybacks.
The Zacks Consensus Estimate for current-year EPS growth rate is pegged at 25.79%. The stock beat estimates in each of the past four reported quarters with an average positive surprise of 3.72%.
Price and Consenus: FISV
Global Payments: The company provides payments technology and software solutions to customers, globally. It also enables financial institutions and other financial service providers to manage their card portfolios, reduce technical complexity and overhead, and offer a seamless experience for cardholders on a single platform.
Increased investment in technology to derive most of its business from software services and products augurs well for the company. It is making numerous acquisitions for its fast growth in the expanding payments space.
The Zacks Consensus Estimate for current-year EPS growth rate is pegged at 27.5%. The stock beat estimates in each of the past four reported quarters with an average positive surprise of 4.02%.
Price and Consenus: GPN