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.
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 a secure payment method in several currencies (nearly 150) across the globe.
Here are the industry’s three major themes:
• The COVID-19 Pandemic and Shift in Business: The payments industry has been one of the beneficiaries of the COVID-19 pandemic as it led to a rise in digital payments. Since the outbreak prompted people to avoid physical contacts, the online mode of payments gained a huge prominence. Notably, the payments industry has been gaining traction from the surge in e-commerce and online sales. Moreover, the ongoing coronavirus episode expedited this transition. More and more Americans are now shopping online and resorting to touchless payments. Per a new Crowdfund Insider research, in May, 50% U.S. consumers reported to have accessed online payment modes at least four times with 69% agreeing that this process is more convenient than cash. Research also suggests that this shift to contactless payment is likely to create a sustainable change in attitudes that will last long even after all the restrictions tied to the pandemic get lifted.
• Investment in Technology: Technological advancements continue to be a catalyst for revolutionizing the payments industry. The impact of digital payments is rapidly percolating the industry, fueled by the proliferation of smart connected devices and an adoption of technology that enables payments in new environments. Companies are constantly focusing on accelerating the speed, security and accessibility of digital transactions on face-to-face and online landscapes. Investments are being made in contactless, scan-to-pay and Secure Remote Commerce transactions to facilitate a faster, safer and easier process for consumers to pay and businesses to receive payments. Players are now turning to the usage of blockchain technology, which should further revolutionize the payments industry by making transactions secure, cost-effective, speedy and seamless across the globe. Companies consistently invest in artificial intelligence to help detect and prevent fraud. Progress in these fields should continue to help improve risk tools and solutions, and prevent deceptions in the entire payments ecosystem, thereby making it more agile.
• Consolidation: The power of scale and explosive changes taking place in the payments business are the two primary driving forces, hurtling toward consolidation in the payments space. Payments processing is a sticky business, which tends to growth more through acquisitions than organically. This pushes players to get a bigger market share instantaneously and grow both vertically and horizontally. This inorganic growth momentum should see greater sustenance as players seek to increase their size and business scope to counter the stiffening competition.The economic environment in 2020 has not been conducive for mergers and acquisitions (M&A) so far but 2019 marked a record year in expanding M&A volume for the industry with $116.6 billion earned in the first six months alone compared with $31.8 billion in the first half of 2018. The 2019 M&A volume included big-ticket deals, namely Fiserv (FISV)'s acquisition of First Data for $22 billion, Fidelity National Information Services' $35-billion purchase of Worldpay and the $21-billion deal of Global Payments and Total Systems
Zacks Industry Rank Indicates Upbeat Prospects
The Zacks Financial Transaction Services industry is housed within the broader Zacks Business Services sector. It carries a Zacks Industry Rank #61, which places it in the top 24% of more than 250 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 24% 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 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 grown nearly 3.7% over this period compared with the S&P 500 Index’s gain of 8.03%. However, the broader sector declined 13.8%.
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, a commonly used multiple for the industry, we see that the industry’s ratio of 30.87X is higher than the S&P 500’s 22.46X and the sector’s 16.32X.
Over the last five years, the industry has traded as high as 28.03X, as low as 18.09X and at the median of 23X as the chart below shows.
Price-to-Earnings Ratio (F12M)
Price-to-Earnings Ratio (F12M)
Due to an increasing share of digital payments and the growing e-commerce trend, payment companies are expected to maintain solid revenue growth in the upcoming years.
Since the industry has a wide international presence, the current global economic uncertainty might exert pressure on its overall business volumes, which are largely dependent on consumer and business spending.
Nevertheless, the simplicity, ease, flexibility and numerous other benefits offered by the online and card spending will continue to fuel the industry’s growth. Also, the rise in Gen Z population, which is more tech savvy and highly inclined toward using new-age payment methods, will extend the size of the industry.
However, the industry is expected to witness increased outlays due to technological investment, which might shoot up the overall operating cost.
Elevated marketing and promotional expenditure in the face of stiff competition will be another hindrance to bottom-line growth.
Here are some stocks from the industry that currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Cardtronics PLC (CATM) is the world's largest non-bank ATM operator. It is a leading provider of fully-integrated ATM and financial kiosk products and services. The stock presently carries a Zacks Rank of 2.
The stock has witnessed a 3.65% upward revision in 2020 earnings estimates to 85 cents per share over the past 60 days.
Price and Consensus: CATM
Fiserv Inc. (FISV) provides financial services technology solutions to more than 12,000 clients worldwide in the banking, insurance, healthcare and investment industries.
The company’s 2020 earnings and revenues suggest 10.5% and 35.35% growth each from the respective year-ago reported figures.
Price and Consensus: FISV
QIWI PLC (QIWI) operates as a provider of next-generation payment services, primarily in Russia and the CIS. The company boasts an integrated network that enables payment services across physical, online and mobile platforms. The stock is Zacks #2 Ranked at present.
The company’s 2020 earnings indicate a 3.47% improvement from the figure reported in the comparable quarter last year.
Price and Consensus: QIWI
Envestnet Inc. (ENV) is a leading provider of intelligent systems for wealth management and financial systems. The company’s financial network connects software, services and data.
The stock has witnessed an upward revision of 1.4% in 2020 earnings estimates to $2.10 per share over the past 30 days.
Price and Consensus: ENV
FleetCor Technologies Inc. (FLT) is a global commercial payments solution provider. Through its portfolio of brands, FleetCor helps companies automate, secure, digitize and control payments to, or on behalf of, their employees and suppliers.
The stock has witnessed a 0.9% northward estimate revision in 2020 earnings to $10.89 per share over the past 30 days.
Price and Consensus: FLT
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