It’s safe to say there’s a “new normal” emerging in financial services. With banking, investing, and payment apps gaining critical mass, “old school” banks and brokerages could wind up left in the dust. In order words, these “disruptors” and their fintech stocks pose a serious competitive threat. But, as the saying goes, “if you can’t beat them, join them.”
Or in this case, buy them! Mergers and acquisitions (M&A) could help established companies maintain their economic moat. This may move the needle for many major fintech stocks.
Recently, we asked Derek Horstmeyer, Associate Professor of Finance at George Mason University, about the impact of payment solutions like Square (NYSE:SQ) and PayPal (NASDAQ:PYPL) on the financial services landscape.
In a response emailed to InvestorPlace, Horstmeyer said, “I think the impact will be consolidation in the industry.” He continued, citing Visa’s (NYSE:V) recent acquisition of Plaid. Horstmeyer also pointed out how while many of these new apps are “free”, strategic buyers could easily monetize them.
Fintech “disruption” may be a rude awakening for some established institutions. But via M&A, many of these financial services and fintech stocks see further upside. Among large-cap names in this space, these five stand out as clear beneficiaries.
Let’s dive in and see why these five fintech stocks could benefit from M&A.
Fintech Stocks That Could Benefit From M&A: Fiserv (FISV)
As a major payments processor, Fiserv stock offers investors high margins and a deep economic moat. The company is no stranger to M&A. In the past decade, they have acquired many fintech companies to bolster their existing business.
But are they interested in buying something like Square? Last year, the company merged with payments giant First Data in a $22 billion transaction. This could mean they take a breather while absorbing their latest buy. Also, the company already has its own version of Square: Clover.
Yet it may be easier to move the needle for FISV stock by acquiring similar payment apps in tandem with growing Clover. In short, this payments giant may not be a household name. But with their strong balance sheet and smart eye for M&A, this “old school” company should gain from fintech consolidation.
You may know of Visa’s game-changing acquisition of Plaid. But what’s Mastercard up to? The credit card processor may operate in a de-facto oligopoly with its ubiquitous rival. But are they keeping up in the game of fintech M&A?
As this Fortune article recently discussed, the company’s CEO has his eyes on turning Mastercard into a fintech giant. Past acquisitions of Vocalink and Nets helped drive towards this goal. They clearly aren’t slowing down deal-wise. Could the company counter Visa’s recent headline-making deal with a buyout of say, Square?
Only time will tell. But with strong cash flow and a solid balance sheet, MA stock could continue its strong long-term performance via its shrewd fintech M&A strategy.
Simply put, PayPal is the perfect way to bet on the future of payments. The company has moved far beyond its roots as eBay’s (NASDAQ:EBAY) payments processor. With apps like Venmo driving growth, the company could do to financial services what Amazon (NASDAQ:AMZN) did for retail.
But we could be putting the card before the horse. PayPal may have a commanding market share. With other well-capitalized players in the game, however, it’s no slam dunk. Outside of organic growth, M&A could help the company further expand its already-long runway.
A buyout of Square likely would not get approval from regulators. The company could easily change the game by acquiring brokerage Robinhood, morphing into a fintech supermarket overnight.
Square may be thought of as a takeover target, but despite being smaller than rivals, they aren’t exactly a minor company. With a market capitalization of $23.2 billion, they could buy some major fintech assets via all-stock deals. With its high forward price-to-earnings (P/E) multiple of 78, they could find deals that are accretive to earnings.
SQ stock already offers investors significant fintech exposure. Beyond their merchant payments business, the company includes the CashApp peer-to-peer platform, as well as services including brokerage and bitcoin purchasing. Buying up smaller upstarts in this space could help the company keep up with the likes of PayPal.
Visa may have their work cut out for them with the recent buy of Plaid. But this recent deal, while headline-making, didn’t break the bank for the credit card giant. Like Mastercard, the company’s strong cash flow and healthy balance sheet could support more big acquisitions.
A high purchase price and regulatory hurdles could keep them away from Square. But similar Plaid-sized deals could be in the cards in the next few years. Far from being a financial services dinosaur, as our own Matt McCall recently discussed, Visa also benefits from the “future of payments” megatrend.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.