As we navigate an increasingly challenging environment, fintech stocks are already pricing in a combination of recession and/or long-term growth impairment, in our view. However, even in a recession, we believe many of these stocks are quite cheap versus both their own history and in absolute terms. Though every company will be impacted if a recession happens, we expect several areas of fintech (the payments industry, in particular) will be affected less than what is implied by current valuations.
In this piece, we explore the current environment for fintech and highlight a few factors that show why the outlook for payments and other related subindustries may be less challenging than many may anticipate.
A recession impacts real consumption, which is the base layer of payments industry growth. We think about a decline in real personal consumption expenditure (PCE) as a relatively linear decline in growth across consumer payments companies. For example, a 400-basis point (bps) decline in real PCE should have a similar 400-bps growth impact on a payments company growing 20% and a payments company growing 8%. All else equal, growth would shift down to 16% and 4%, respectively.
Notably, however, historical consumption data going back more than 60 years helps to show why we expect payments industry growth to be relatively resilient even as consumer spending likely weakens over the next several quarters. On a rolling 12-month basis since 1960, the only period that saw declining nominal consumer spending was the global financial crisis (GFC). Nominal spending grew through every other recession/macro crisis since 1960.1 That fact holds true on a monthly basis as well.
Large-cap/mature growth payments stocks have outperformed the broad market year to date, but we do not think the market is engaging with the idea that these businesses will have durable (albeit slower) growth even in a consumer recession. All-time-low valuations coupled with these businesses growing at reasonably attractive rates even in a recession represents good value in our opinion.
Importantly, today’s inflation environment could be a positive for the payments industry as revenue is generally tied to the price consumers pay — nominal transaction volumes. Therefore, high nominal inflation likely improves the industry’s outlook as inflation could offset real PCE declines for most payments companies. For instance, a 6% inflation, 0% real PCE growth world is better for a payments company’s top-line growth than 2% inflation, 2% real PCE growth.
Goods versus services
The goods/services spending dynamic is another significant factor in a potential recession as the composition of spending is almost as important as headline nominal PCE growth. The payments industry is more levered to services than goods spending, which we expect should hold up better than aggregate consumer spending in a slowdown. In addition, the ratio of services to goods is still recovering to its normal 55/45 split, which should be a continued, moderating tailwind aiding payments industry growth.
The growth differential between services and goods generally favors services, which is a trend that could be exacerbated by the amount of spending that took place on goods over the past two years. Moreover, some buckets of “discretionary” spend behave in a less discretionary way than one may think. For instance, the worst restaurant spending environment from 1992 to 2019 over any rolling TTM period was -1% growth.2 Going out to eat seems like the ultimate discretionary item, but that is not how consumers have treated it historically. If nominal PCE is 2% next year, it is possible we will have normal services spending and a goods spending depression, which on balance would be better for the payments industry.