With inflation at a 40-year high, consumer confidence on the decline, the stock market in a slump and interest rates on the rise, these are challenging times for business, including the payments sector. All of that is happening when the economy is still recovering from the impact of the COVID-19 pandemic.
In response, restructuring in the payments world is already underway. Activist investor Elliott Investment Management is reportedly pressuring PayPal to speed up its cost-cutting after the digital payments pioneer already cut jobs earlier this year. Swedish buy now-pay later operator Klarna also dismissed 700 employees earlier this year. Checkout start-up Bolt reportedly eliminated 250 jobs, about one-third of its workforce, and its rival Fast shut down.
In this fourth edition of our CEOs Sound Off series, we talked with three CEOs in the industry to get their perspective on how the macroeconomic upheaval is affecting their businesses and what they’re doing to see their companies through the turmoil. Each has a unique vantage point on the economy.
As CEO of Deluxe Corp., Barry McCarthy interacts with both large and small business customers of his check-printing and payment processing business. He’s currently leading a strategy shift in which the Minneapolis-based company is expanding its digital payments business as check-writing decreases. He’s also integrating the $960 million acquisition last year of First American Payments.
Jay Klauminzer runs Raise.com, a Chicago-based business that offers consumers a platform for buying and selling gift cards, luring consumers with the promise of saving money on popular brands. They are mostly consumers who seek “to make their money go further,” he said. The company has raised about $150 million in venture capital since its inception in 2010.
Neal Desai is the CEO and a cofounder of Kafene, a company that provides merchants with the ability to offer their customers lease-to-own financing in the payments process. The financing is mainly for big-ticket items like furniture, electronics and appliances. Many of the New York company’s customers have difficulty accessing credit because they are unbanked and they have little discretionary income, he said. “Money is always tight for our customer base,” Desai said.
Editor’s note: The interview responses have been edited for brevity and clarity.
Inflation is at a four-decade high. How is that affecting your business?
JAY KLAUMINZER: We had a couple of categories pop during COVID, especially things like home entertainment, like streaming services [and] food delivery. They've taken a notable dip over the last couple of months. Consumers are cutting back on luxury things. When they had the extra money, it was OK to get DoorDash delivered or maybe take that trip, and that's not happening as much anymore.
NEAL DESAI: We see that consumers are broadly shifting their purchasing behavior from discretionary goods to more necessary goods. We do see that consumer balance sheets are quite strong. So it's not as if all spending has suddenly stopped. But we do see a shift in consumer behavior. Given that our product is focused on necessary goods, we're not seeing much demand contraction compared with other sectors.
How are the rising interest rates affecting your business?
BARRY MCCARTHY: Our customers that borrow money to start a business or expand a business have a significant issue of an increasing expense line. If someone's interest rate is going to double...that's just money that's not going to be available to be invested in the business. That may put additional pressure on companies everywhere.
KLAUMINZER: Due to rising interest rates, Americans are looking for discounts and deals more than ever, so we are finding that the money savings that our businesses offer are even more in demand.
DESAI: I think rising interest rates affect most businesses that require capital. Our business is no exception. That being said, it is a factor that we can work around pretty efficiently. And we can do that because, as a business, the lease-to-own model has very strong unit economics. So, what I think is pretty clear is that all lending and all financing businesses are not created equal. The lease-to-own model is almost as resilient as it gets with respect to rising rates.
How has the drop in stock market values, and possibly your company's valuation, affected your business?
MCCARTHY: The entire market is significantly off from its peak and Deluxe is no different. It puts extra investor focus on us, keeps our focus on delivering profitable revenue growth for shareholders, and puts pressure on [us] to continue taking price increases and managing the expenses even more diligently than ever. And that is a challenge, but we don't let what's specifically happening in the market, in a particular chapter, over-rotate or change our company's strategy. Our company is very focused, transforming from a legacy check-printing company to a payments and data company.
DESAI: We are lucky that we are still a private company [because] our valuations are not marked to market every day like some public companies out there. We see that the investor base is nervous given what they see with the public company valuations contraction. We have not had any adjustments for that, nor has it impacted our business directly.
KLAUMINZER: There's a close-knit community of fintech CEOs where we are talking about what we've been seeing over the last three months. We had seen a significant softening in the capital markets for startups, especially when there was a time when valuation multiples were at an all-time high.