Fintech & Payments: Disruption AND Value In Them Hills
The TD Cowen Insights
Fintech and payments have attractive secular growth trends despite disruption and digitization of financial services in recent decades. Ongoing innovation fuels growth. Our work is focused on major merchant acquirers/payfacs and is informed by ~40 proprietary industry interviews, colleagues across TD, and consumer data.
Initiating Coverage on Fintech And Payments
We initiate coverage on the fintech and payments sector, which refers to companies enabling digital payments. We favor secular growth tailwinds. While acknowledging near-term consumer/macro uncertainty, we think too much pessimism is reflected.
If Cash is King, Digital is the Emperor
The pandemic materially accelerated payment digitization trends. However, global opportunities in consumer and B2B payments remain given the long term trend of converting from cash to digital payments. Changes in purchasing behavior have caused more complexity. Embedded finance, integrated payments, and ever-growing alternate payment methods, including digital wallets are being used more and more. This requires facilitation from trusted, scaled payments partners. Rising software penetration via verticalized solutions, next-gen point of sale (POS) devices, and value-added services drives attractive high-margin recurring revenue potential. When paired with scaled global footprints, it drives even greater profitability.
Value Found at Innovative Payments Companies
Meanwhile, payments companies (excluding the networks) have experienced notable valuation pressure with some at multi-year and record lows. Investor perception suggests limited growth and commoditization, but we think this inappropriately discounts the value of select players demonstrating innovation and the value of incumbency. This is particularly true in a high interest rate environment that hinders ‘growth at all costs’ investments. Indeed, in a ‘revenge of the incumbents’ backdrop, the disruptors may become the acquired, and we think investors will better appreciate relative insulation as 2024 progresses.
Deep Dive on Fintech and Payments
Our deep dive across major secular themes leverages ~40 proprietary interviews across public and private vendors in fintech and payments. Our analysis is also informed by interviews with colleague experts across the TD payments and consumer/commercial banking organizations. Our work leverages research collaboration with TD Cowen’s proprietary consumer sentiment survey and regulatory perspective from TD Cowen Washington Research Group. Our analysis also includes a proprietary TD Cowen industry pricing database and M&A analysis.
Who is Posed To Win in The Face of Uncertain Macroeconomic Trends
Near-term macroeconomic factors are a key determinant of industry growth potential through 2024. With on-again, off-again recessionary views conveyed in daily news flow, conservative postures in public companies’ growth outlooks are apt to continue. This is offset by most employing greater opex rigor to at least maintain attractive margin levels. Healthy free cash flow generation is supportive of balanced capital allocation programs. We expect active share repurchase programs for several providers to persist while opportunistic M&A is assessed. The consensus view is cautious on the group. Ultimately, we think relative insulation in a potential slowdown with sufficient avenues for future growth and margin will lead to earnings expansion in select incumbents & disruptors.