5 Financial Transaction Stocks in Focus Despite High Tech Expenses

The Financial Transaction Services industry is poised to benefit from a booming digital economy, supported by greater Internet access and smartphone adoption. Expected interest rate cuts in 2025 could stimulate merger and acquisition (M&A) activity across the sector. While technological investments are meant to stay competitive with the booming digital era, they frequently result in higher costs for industry participants. Growth in cross-border transactions acts as a tailwind. However, inflationary pressures could limit consumer purchasing power, thereby putting a strain on consumer spending. Despite these obstacles, companies like Visa Inc. V, Mastercard Incorporated MA, Fiserv, Inc. FI, Fidelity National Information Services, Inc. FIS and The Western Union Company WU appear well-placed to counter industry headwinds.

About the Industry

The Zacks Financial Transaction Services industry is part of the Financial Technology or FinTech space, including companies with diverse natures of businesses. The industry comprises card and payment processing and other solutions providers, ATM services and money remittance service providers as well as 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 that Remain Underway in the Financial Transaction Services Space

High Technology Expenses: The global shift toward contactless payment solutions continues to accelerate. In response, industry leaders are introducing cutting-edge payment innovations. These advancements have broadened customer access and diversified revenue streams, enhancing convenience. To remain competitive and sustain market leadership, significant investments in technology have become the need of the hour, thereby elevating the technology expenses of companies. Further, the widespread adoption of digital payments has heightened the risk of sophisticated cyber threats, posing significant challenges for both consumers and businesses. As a result, firms are prioritizing the development of secure payment systems, which further require technology investments. Though these measures are expected to fetch benefits in the long term, costs related to such investments dampen the margin growth of the industry participants.

Strain on Consumer Spending: Steady consumer spending implies increased utilization of financial transaction services, leading to higher transaction volumes and revenue growth for the industry participants. A flourishing e-commerce sector, driven by greater Internet accessibility and widespread smartphone adoption, is expected to sustain favorable consumer spending levels. However, Fitch Ratings anticipates U.S. consumer spending growth of 2.6% in 2025, slightly down from 2.8% in 2024, with new tariffs posing potential risks that could fuel inflation. While strong household balance sheets and a resilient labor market may continue to provide some respite to consumer spending, inflationary pressures could pose a challenge by potentially constraining consumers’ purchasing power.

Expansion in Cross-Border Transactions: Financial transaction service providers are well-positioned to benefit from the rise in international trade, increased global travel and a growing demand for efficient remittance solutions. Companies offering advanced cross-border payment platforms are particularly attractive as they enable seamless international transactions and efficient currency exchange management. These solutions play a crucial role in helping businesses receive payments from global customers and make timely payments to suppliers, ensuring smooth operations. Additionally, the expanding global workforce continues to drive demand for reliable cross-border remittance services.

Strategic Growth via Mergers and Acquisitions: To establish comprehensive digital ecosystems, companies in the financial transaction services sector frequently pursue M&As alongside investments in technology. These strategies are vital for enhancing service capabilities, diversifying operations, expanding customer bases and strengthening global market presence. In 2024, the Fed cut the interest rate three times. The Fed also hinted at probable two or three more cuts in 2025. Lower interest rates are expected to encourage companies to secure loans for M&A activities, allowing them to preserve cash reserves while fostering expansion.

Zacks Industry Rank Indicates Bearish Outlook

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, indicates tepid 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 #133, which places it in the bottom 46% of 248 Zacks industries.

Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one. The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate.

Despite the dismal scenario, we will present a few stocks that one can retain, given their solid growth endeavors. But before that, it is worth looking at the industry’s recent stock-market performance and the valuation picture.

Industry Outperforms Sector and S&P 500

The Zacks Financial Transaction Services industry outperformed its sector and the Zacks S&P 500 composite in the past year.

In the said time frame, the industry has grown 15.5% compared with the Business Services sector’s gain of 9.7%. The S&P 500 has rallied 9.5% in the same time frame.

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