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Financial Transaction Services Industry: Outlook Bright

Sapna Bagaria

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 solutions 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 and influence 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 (B2B). 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 AI to help detect and prevent fraud. Advances in these fields have helped improve risk tools and solutions, and prevent fraud threats to the entire payments ecosystem.

Strong consumer confidence and a favorable employment scenario would lead to an increase in spending. Ecommerce is forming an increasing proportion of overall purchases and leading to online payments, which utilize the network and services of payment processors, thus driving demand for their products and services. Also, for purchases made through brick and mortar stores, consumers prefer to use mobiles and cards. So, the growth in transaction processing volumes should continue going forward.

Despite the growing share of plastic money and increased digital transaction, cash and checks still account for approximately $17 trillion in consumer spending worldwide, and there is a sizable market for Peer-to-Peer, B2B and Business-to-Consumer payments. According to Mastercard, B2B is a $120 trillion opportunity. Given the still-low penetration of plastic money and electronic medium, the industry holds ample scope of growth for players. Moreover, the high rate of adoption of alternative modes of payments signifies that soon cash and checks will largely replace the new techniques of payments. Thus, players, in an effort to grab a greater share of the market, are resorting to mergers and acquisitions, which have been very high in recent years. The industry is also witnessing rapid invasion by many new fintech companies eager to make it big in the lucrative payments industry.   

Zacks Industry Rank Indicates Strong Near-Term Prospects

The Zacks Financial Transaction Services industry 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 relatively unfavorable earnings outlook for the industry.

It carries a Zacks Industry Rank #80, which places it at the top 31% of more than 250 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 28% 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 in 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.

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 25% over this period compared with the S&P 500 index and the broader sector’s rise of 5.9% and 0.8%, respectively.

One-Year Price Performance

Industry’s Current Valuation

Comparing the industry 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 27.17X is higher than the S&P 500’s 17.17X 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.

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

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

Bottom Line
 

Since the industry has wide international operations, 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 growth for the industry.

The industry is also expected to witness higher outlays on technological investment, which might increase overall operating cost. Higher marketing and promotional spend 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.

QIWI Plc (QIWI) 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 #1, has gained 24% year to date and surpassed earnings estimates in three of the last four reported quarters with an average positive earnings surprise of 54.9%.



Green Dot Corporation (GDOT) is the largest provider of prepaid debit card products, and prepaid card reloading services in the United States. It is also a leader in mobile banking with its GoBank mobile bank account offering.

The stock, with a Zacks Rank #2, has declined 38% year to date but surpassed earnings estimates in each of the trailing four reported quarters, with an average positive earnings surprise of 17.5%.



EVO Payments, Inc. (EVOP) is a payments service provider of merchant acquiring and processing solutions, independent software vendors, financial institutions, independent sales organizations, government organizations, and multinational corporations.

The Zacks Rank #2 stock has gained 36% in a year’s time and surpassed earnings estimates in three of the last four reported quarters with an average positive earnings surprise of 34.9%.


Visa Inc. (V), with a Zacks Rank #2, is a global payment technology company that connects consumers, businesses, banks and governments, enabling them to use digital currency instead of cash and checks. The stock has gained 28% year to date and surpassed earnings estimates in each of the four reported quarters with an average positive earnings surprise of 5.4%.




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Visa Inc. (V) : Free Stock Analysis Report
 
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