The Financial Transaction Services industry is likely to be aided by the widespread adoption of digital means. To capitalize on the trend, the industry players remain equipped with efficient digital solutions suite built on collaborations and technology investments. Consumer spending habits remain favorable, which may boost transaction volumes. An uptick in cross-border volumes results from a growing international workforce and international trade. Possible interest rate cuts in 2024 are expected to make way for rebounding merger and acquisition (M&A) deals. Companies like Visa Inc. V , Mastercard Incorporated MA , Fiserv, Inc. FI , Fidelity National Information Services, Inc. FIS and Global Payments Inc. GPN are placed well to gain from the industry's encouraging growth prospects.
About the Industry
The Zacks Financial Transaction Services industry is part of the Financial Technology or the FinTech space, which includes companies with varying natures of businesses. The industry comprises card and payment processing and other solutions providers, ATM services and money remittance service providers and providers of investment solutions 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. Monetary transactions are effectuated through these networks, offering a convenient, quick and secure payment method in several currencies across the globe. The industry is benefiting from the ongoing digitization movement triggered by the pandemic.
4 Trends Influencing the Financial Transaction Services Industry's Future
A Rapidly Expanding Digital Era: The widespread adoption of digital means across every sphere of life provides a perfect ground for industry participants to capitalize on through an enhanced digital solutions suite. They pursue significant technology investments to come up with several flexible digital payment options such as cryptocurrency, biometrics, QR codes and buy now, pay later solutions. Additions of such lucrative solutions, that promise to ease everyday digital payments, within one's portfolio inevitably attract a higher number of customers and diversify the revenue streams of the companies. Apart from building a solid payment solutions suite, the industry participants also remain equipped with effective fraud prevention solutions to counter sophisticated forms of cybercrimes.
Favorable Consumer Spending: Consumers' affinity to spend more results in increased utilization of product and services suite of the industry participants. Therefore, the resultant benefit of increased consumer spending is reaped by them in the form of processing higher transaction volumes and subsequently earning higher revenues. Per Fitch Ratings, consumer spending was resilient across the United States in 2023, and strong wage gains, moderated inflation level and favorable consumer sentiment positively impacted the metric. The continued positive sentiment and excess savings made by consumers made Fitch revise the 2024 forecast for annual real consumer spending from 0.6% to 1.3%.
Solid Cross-Border Volumes: Financial transaction service stocks, having exposure to the cross-border business, benefit from an opportunity to process higher cross-border volumes as a result of an expansion in international trade and steady demand for efficient remittance services. According to The Brainy Market Insights, the global cross-border payments market is anticipated to witness an 8% CAGR over 2024-2033. Companies with enhanced cross-border payment solutions will be a lucrative option as they seamlessly process international transactions and manage currency exchange and settlement. The solutions portfolio remains of great use in enabling easy acceptance of payments from customers across different countries, sending supplier payments and, therefore, ensuring smooth business operations. The emergence of a rising international workforce sustains the solid demand for efficient cross-border remittance services.
Pursuit of the M&A Strategy: For building a digital solutions suite, the Financial Transaction Services industry players resort to a M&A strategy in addition to undertaking technology investments. These initiatives are essential means to expand capabilities, bring diversification benefits, boost customer base and solidify global presence. As the Fed points to possible interest rate cuts in 2024, borrowing costs are expected to witness a decline, thereby making it easier for industry participants to opt for loans to enter M&A deals and avoid complete exhaustion of cash reserves. After facing a roadblock in 2023, M&A activities are expected to rebound in 2024, per Morgan Stanley Investment Banking.
Zacks Industry Rank Instills Optimism
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates bright near-term prospects. The Zacks Financial Transaction Services industry is housed within the broader Zacks Business Services sector. It currently carries a Zacks Industry Rank #73, which places it in the top 29% of more than 250 Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry's positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate.
Before we present a few stocks that you may want to buy or retain in your portfolio, let's take a look at the industry's recent stock-market performance and valuation picture.
Industry Outperforms Sector But Lags S&P 500
The Zacks Financial Transaction Services industry has outperformed its sector but underperformed the Zacks S&P 500 composite year to date.
In the said time frame, the industry has gained 6.2% compared with the Business Services sector's rally of 5.2%. The S&P 500 has gained 7.7% in the same time frame.Year-To-Date Price Performance
Industry's Current Valuation
On the basis of the forward 12-month Price/Earnings ratio, commonly used for valuing financial transaction services stocks, the industry is currently trading at 23.04X compared with the S&P 500's 20.88X and the sector's 25.44X.
Over the last five years, the industry traded as high as 32.49X, as low as 17.61X and at the median of 25.04X.Forward 12-Month Price/Earnings (P/E) Ratio
5 Stocks to Keep a Close Eye on
We are presenting five stocks from the Financial Transaction Services industry that currently carry a Zacks Rank #3 (Hold). Considering the current industry scenario, it might be prudent for investors to retain these stocks in their portfolio, as these are well-placed to generate growth in the long haul.
Visa: Visa, headquartered in San Francisco, is one of the world's leaders in digital payments. Numerous acquisitions, alliances and expanding payments volume continue to drive revenues of the company. Several digital solutions such as Visa Token Service, Visa Checkout and Visa In-App Provisioning have been developed by V in recent years to upgrade its digital platform. Investments worth $10 billion have been made by the leader in digital payments over the past five years in technology and innovation.
The Zacks Consensus Estimate for Visa's fiscal 2024 earnings is pegged at $9.89 per share, indicating a 12.8% rise from the year-ago reported figure. V's earnings beat estimates in each of the last four quarters, the average being 4.09%.Price and Consensus: V
Mastercard: The Purchase, NY-based company frequently resorts to tie-ups with financial institutions or undertakes significant investments to occupy a significant share in the global payments market. The Mastercard Cross-Border Services platform imparts customers the capability of safely conducting cross-border money transfers across 30 countries. Its strategic acuisitions bolster its operational capabilities.
The Zacks Consensus Estimate for Mastercard's 2024 earnings is pegged at $14.35 per share, indicating a 17.1% rise from the year-ago reported figure. MA's earnings beat estimates in each of the last four quarters, the average being 3.49%.Price and Consensus: MA
Fiserv: Based in Brookfield, WI, Fiserv provides a varied array of products and services. The diverse product and service portfolio enables the company to serve various segments of the financial services industry. Its acquisitions of Skytef and Sled in 2023 are expected to facilitate the augmentation of the company's distribution network.
The Zacks Consensus Estimate for Fiserv's 2024 earnings is pegged at $8.62 per share, indicating a 14.6% rise from the year-ago reported figure. FI's earnings beat estimates in three of the last four quarters and matched the mark once, the average being 1.04%.Price and Consensus: FI
Fidelity National: The Florida-based FIS benefit from the sound performances of its Banking Solutions and Capital Market Solutions segments. The company pursues organic growth strategies and acquisitions, which, in turn, continue to fetch multi-year recurring contracts. Fidelity National comes up with advanced solutions in a bid to boost its client base and expand across addressable markets.
The Zacks Consensus Estimate for Fidelity National's 2024 earnings is pegged at $4.66 per share, which indicates an improvement of 38.3% from the year-ago reported figure. The consensus mark for 2024 earnings has moved 3.1% north over the past 60 days.Price and Consensus: FIS
Global Payments: Headquartered in Atlanta, GA, Global Payments is aided by strong contributions from the Merchant Solutions and Issuer Solutions segments. Merchant Solutions' performance benefits on the back of higher transaction volumes. It resorts to acquisitions, partnerships and joint ventures for enhancing capabilities and boosting business scale. Buyouts remain one of the management's priorities to allocate capital.
The Zacks Consensus Estimate for Global Payments' 2024 earnings is pegged at $11.62 per share, indicating an 11.5% rise from the year-ago figure. GPN's earnings beat estimates in each of the last four quarters, the average being 2.04%.Price and Consensus: GPN
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