Plagued by economic challenges such as inflation, rising interest rates and a strong dollar, payments executives soon reporting quarterly earnings results are likely preparing for a darker economic outlook.
Although consumer spending has been fairly resilient, the Federal Reserve has repeatedly raised interest rates this year in an attempt to tamp down inflation. Companies in the payments space are focused on “what happens if and when the Fed breaks the back of the consumer to help stop inflation,” said Wolfe Research analyst Darrin Peller. That’s leading companies to gird themselves for an economic slowdown.
As they report quarterly results over the coming weeks, payments companies are likely to say, “‘Numbers are going to have to come down a little bit, because we’re preparing for worse, both on interest expense, FX and maybe cost management,’” Peller said.
Here’s what major card companies Visa and Mastercard, payment processors like Fiserv and Fidelity National Information Services (FIS), PayPal and others in the payments arena are expected to confront this earnings season.
Consumer spending was generally healthy during the quarter, and the card networks also get a boost from things like the return of cross-border travel. Inflation tends to benefit the card companies because it pumps up their volume, Peller noted.
Still, currency volatility pressures are likely to affect quarterly results, Bank of America equity research analyst Jason Kupferberg wrote in a Tuesday note to investors. San Francisco-based Visa reports fiscal fourth quarter results on Oct. 25, and Purchase, New York-based Mastercard reports 3Q results Oct. 27.
About half of Visa’s payment volumes come from outside the U.S., leading Bank of America analysts to lower their global payment volume growth expectations in light of slower growth in the U.K. and Europe.
That firm’s analysts did the same for Mastercard, given currency volatility. Behind Mastercard’s 2022 outlook “is the assumption that domestic and cross-border volumes will continue to see steady recovery,” Kupferberg noted.
In a Tuesday note to investors on Mastercard, Baird Equity Research analyst David Koning said potential slowing of spending and cross-border travel could create headwinds for the company, although inflation contributes to its volume growth and the company might have flexibility in managing expenses amid a possible downturn.
Investors will be eager for mid-quarter updates from the card companies, Kupferberg said. Regulation also may come up during the company’s conference calls, he added, given the pending credit card routing legislation that seeks to increase competition and online debit routing related to the Federal Reserve’s recent rule finalizing.
American Express, Discover
Amid concern over how consumers are shouldering inflation and higher interest rates, American Express and Discover Financial Services have said unemployment is the metric they watch closely, because there’s often a correlation between it and consumers’ ability to pay their bills.
Recent actions by the Federal Reserve “have served to confirm the view that unemployment is headed higher, which will pressure credit losses for the card issuers,” Bank of America equity research analyst Mihir Bhatia wrote in an Oct. 6 note to investor clients on Amex, Discover, Synchrony Financial, Bread Financial and Capital One. Consequently, that’s leading to lower earnings expectations.
With rising unemployment predicted for 2023, analysts are “increasing our credit loss forecast for all issuers and we now expect losses to exceed 2019 levels,” Bhatia wrote. “We think it will take some time for losses to reach 2019 levels but the normalization has begun.”
New York-based Amex is contending with higher operating expenses, “mostly due to higher salaries and employee benefits as it leans into tech hiring and retention,” Bhatia wrote.
Riverwoods, Illinois-based Discover “appears to have the most to gain if it can deliver some clarity around the student loan servicing issue and resume capital returns,” Bhatia wrote. Discover in July announced it was pausing share buybacks in light of an internal investigation into its student loan servicing practices and related compliance.
Peller said there’s a lot of attention on digital payments company PayPal at the moment, due to its cost take-out plan and management changes. PayPal, which will report quarterly earnings Nov. 3, has reduced revenue targets twice this year, and activist investor Elliott Investment Management has taken a $2 billion stake in the San Jose-based company.
Analysts “continue to see upside potential” to profit margins due to the company’s “increased focus on cost controls, and involvement of activist Elliott Management,” Kupferberg wrote in an Oct. 12 note. On Sept. 12, CEO Dan Schulman said the company was having a “good, solid” 3Q with revenues on pace to meet guidance, Kupferberg added.
Still, PayPal faces risk from exposure to shifts in consumer spending and macroeconomic uncertainty, especially since it has a “meaningful amount” of exposure to the U.K. and Europe, Kupferberg said. Total payment volume growth is likely to “remain muted” in 3Q.
Consumer health will be a focus area when San Francisco-based buy now-pay later provider Affirm reports quarterly results on Nov. 8, RBC Capital Markets analyst Daniel Perlin noted in an Oct. 14 report to investors. Perlin said Affirm has benefited from BNPL offerings being used to mitigate the effects of inflation, and he will be looking for updates on the company’s debit product rollout and strategy.
Fiserv, FIS, Global Payments
Bank of America analysts expect earnings results for Fiserv, FIS and Global Payments will reflect the impact of currency volatility and the strong dollar. The merchant acquiring businesses of each company “have more economic sensitivity than other segments, which is increasingly relevant given macro stresses in the UK and Continental Europe, impacting consumer spending and FX rates,” Kupferberg wrote in a Oct. 10 note to investors.
Analysts have said they’ll pay close attention to severance expense during payment processor Fiserv’s earnings call Oct. 27. The Brookfield, Wisconsin-based company reported increased costs in this area in the first half of the year, and the company has been making more cuts to its workforce in recent weeks.
When reporting 2Q earnings, Fiserv executives cut the profit margin expansion projection for the year, and even that “could prove modestly challenging to achieve,” given inflation and worsening foreign exchange, Kupferberg wrote.
Peller expects Fiserv’s profit margin expansion will be even lower than the company’s adjusted expectation. Wage inflation and the stronger dollar have “made it harder to make profitability,” he said.
Regarding FIS, analysts noted foreign exchange pressure has increased since 2Q, putting guidance for 3Q and 2022 revenues and profit margins at risk.
Jacksonville, Florida-based FIS, which reports 3Q earnings Nov. 3, recently announced Stephanie Ferris would become the company’s CEO; Erik Hoag took over as chief financial officer. Atlanta-based Global Payments reports third quarter earnings on Oct. 31.