FIS is down 25% since the start of August, while Square is up 5%. Since the start of 2021, Square stock is up 16%. This has brought its market cap to $116 billion.
The payments industry is said to be under pressure because of buy now, pay later (BNPL) companies. Square bought Afterpay at the start of August, for $29 billion. You can date the pressure on processors from there.
But there’s a lot more to the story than that.
The BNPL Threat
BNPL is a credit card disrupter. It replaces revolving credit with a fixed term loan, often at no interest. Credit cards are convenient but charge variable rates on retained balances, up to 25%. Those with poor credit pay the most.
In a BNPL transaction, the main transaction goes through the regular process, but the loan portion is taken by the BNPL company, along with the credit risk. The processors aren’t bypassed so much as the banks that are their customers. But the processor stocks are still suffering.
Not that the banks aren’t also being hurt. Shares in Capital One (NYSE:COF), which operates a huge credit card business, peaked on Aug. 9 and are since down 14%. Capital One is now worth barely half what Square is worth, $65 billion.
BNPL is said to be favored by younger consumers who can’t afford a life of paying minimum balances given high student loan debt. But half of consumers age 35 to 44 have used BNPL, and so have 42% of those 45 to 54. BNPL is used infrequently, for considered purchases, but with its foot in the door it could grow.
Less Technology Debt
Because it is 12 years old, Square lacks the technology debt of older processors, which grew up on mainframes. It offers merchants a standard deal, a 2.6% discount and 10 cents per swipe, and can process off a mobile phone. As Square grew processors kept their wired terminals and did individual deals with merchants, all of which must be supported.
Square then moved into the consumer space with Square Cash. This was originally a service for merchant balances. It has evolved into a complete banking and brokerage app. Cash even supports Bitcoin (CCC:BTC-USD). Cash has money transfer options like PayPal’s (NASDAQ:PYPL) Venmo, which also bypass banks.
Square’s moves into banking and brokerage have delivered enormous growth. Revenues doubled in 2020, to $9.5 billion, and equaled that for the first two quarters of 2021. Square has also remained profitable, although marginally so compared with competitors. Net income during the June quarter was just $204 million. FIS had net income of $341 million.
But it’s growth that investors are paying for today, not value. FIS had more than twice the revenue of Square in 2019. Now it has barely half as much.
The Bottom Line on SQ Stock
Fintechs are disrupting the entire financial sector, not just processors but banks and brokerages as well. People who once went “to the bank” every week now do everything on their mobile phones. Square is at the center of that revolution.
An economic downturn would increase losses for the BNPL sector. It could hammer Bitcoin. It might lead to bankruptcies among fintechs that are poorly capitalized. But investors aren’t paying attention right now.
The days of paying 20% interest to a credit card, or a 3% discount to have your transactions processed, seem over. Square has replaced “what’s in your wallet” with “what’s in your phone.”
The financial world will never be the same. Yes, buy SQ stock.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.