In this Sunday Spotlight, we take the pulse of banking and financial services technology trends by analyzing commentary from this week’s bank earnings calls. Today, banks face mounting pressure from new entrants in the market, particularly from big tech and neobanks, which is only expected to increase. In the payments space, 25% of all transactions now go through non-bank financial institutions, per ISG. To combat this, technology has become increasingly important to overall banking strategy, as evidenced by a 96% increase in mentions of “technology” on earnings calls in FY19 vs. FY18 among the U.S. money center banks.
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Over the last few days, FIS announced two sizable wins for its core banking business: 1) First Republic (~$110bn in banking assets and ~$140bn of wealth management assets) announced that it has selected the FIS IBS platform as part of its core banking modernization program, and 2) Union Bank (~$135bn in assets) announced FIS will deliver a “next generation core banking platform to power the bank through its next iteration of digital offerings.” Checks suggest that these were competitive take-aways. We suspect that FIS’s recent investments into its core banking business offerings, and reputation for serving larger asset sized banks well, may have contributed to the wins.
Heading into Visa and Mastercard’s earnings, we note that issuing bank card trends look mostly in-line with expectations. 4Q trends at Wells Fargo decelerated sequentially while JPM consumer credit spend posted a slight acceleration and Citi growth was flat in 4Q vs. 3Q on a Y/Y basis. We note that Citi and JPMorgan are the largest issuers for Mastercard and Visa respectively and act as decent read-throughs with regards to network payment volume and transaction trends. We highlight our current V/MA models call for stable trends vs C3Q, reflecting data provided QTD (both Visa and Mastercard through October 21st) and holiday sales data which looked solid vs. expectations as well. For reference, Visa’s U.S. payment volume growth was up 8% Y/Y through October 21st, vs 8% in C3Q. At Mastercard, U.S. switched volume was up 11% Y/Y through October 21st vs. 12% Y/Y in 3Q.
Earlier today, Visa announced that it has signed an agreement to acquire Plaid for $5.3bn ($4.9bn cash and $400mn retention and deferred equity) via a combination of cash on hand and debt. Plaid, founded in 2013, provides a network that enables people to connect their financial accounts to applications like Venmo, Transferwise, Acorns, Chime and others. V pointed out that 1/4 people with a U.S. bank account have used Plaid to connect to more than 2.6k fintech developers across 11k+ financial institutions. Closing is expected within 3-6 months.
In this week’s Sunday Spotlight, we provide highlights and investor feedback from our recently published 2020 Outlook, Ratings and Price Target Changes; Evolution of FinTech is Far from Over. 2019 was another transformational year for FinTech, highlighted by the 3 largest mergers in its history (FIS, GPN, FISV) and a series of tuck-in acquisitions made by MA (Nets), V (Earthport), PYPL (Honey) among others. These investments underscore a recurring theme in FinTech in which traditional offerings are no longer enough to remain differentiated in the space and key capabilities in eCommerce, cross-border, dual-sided capabilities (connecting merchants, consumers and issuers), convergence of POS and vertical software, and other emerging technologies are of the highest demand.
Earlier today (01/07/20), SQ announced that it was increasing the fee on its Seller Instant Deposit volumes from 1. 0% to 1.5%. Beginning February 7, the rate on both instant and same-day bank transfers for existing sellers will increase, whereas the pricing change is immediate for new sellers. This is a similar strategy to when Square increased its consumer pricing at the end of 1Q18—with the goal being to keep more funds in its ecosystem and encourage engagement via Cash Card and P2P. While we recognize this may create tough comps in 2021 (similar to what we saw in 2019 after the Consumer price increase), we believe this move is strategically sound and underscores the company’s pricing power, among other levers. We see this indexing well to micro sellers and for long weekends/holidays, which in some instances drives cash flow issues for sellers.
Wolfe Research Senior Payments, Processors, & IT Services Analyst, Darrin Peller, hosted a 2020 outlook webcast for the Payments, Processors, and IT Services industry.
Several years ago, the FASB proposed changes to reserving methodology to account for lifetime credit losses on financial assets, going into effect on Jan. 1, 2020 for many. This will require lenders to reserve for expected loses over the lifetime of the loan (vs. currently where lenders reserved capital for anticipated losses over the next 12-months). While many of our names will not be impacted, there are several that may, including: 1) ADS and 2) PYPL and to a lesser extent 3) SQ, 4) WEX, and 5) FLT.
From YE 2017 to YE 2019, the median P/E across our coverage increased by nearly 2 turns to 23.3x NTM, while the S&P’s forward multiple expanded by less than one turn over the same period to 18.3x NTM. While the spread to the market multiple may be 1-2 turns higher than FinTech has historically traded, we suspect these valuation levels will hold or even continue to expand given we see key drivers persisting through 2020 and beyond. In particular, the majority of FinTech companies in our coverage have recognized that legacy offerings may no longer cut it, and instead, almost all have been evolving to two sided networks and/or software/omnichannel centric technology companies. Notably, most software/tech names with similar growth trade at NTM P/Es from 30x to 40x, leaving valuation room for our coverage as the FinTech universe further evolves.
In this weeks’ Sunday Spotlight, we provide investors an updated look at U. S. holiday sales by category and channel comparing growth in 2019 to 2018 performance and more. According to Mastercard SpendingPulse data, U.S. holiday retail sales increased 3.4% Y/Y (ex. auto and vs. 5.1% Y/Y in 2018 and 4.9% Y/Y in 2017) with online sales increasing 18.8% Y/Y (vs. 19.1% Y/Y growth in 2018 and 18.1% Y/Y in 2017) and comprising 14.6% of total retail sales. The data captures retail spending including cash and check from the period of November 1 through December 24. By category, total apparel grew 1% Y/Y overall and 17% Y/Y online, jewelry grew 1.8% Y/Y in total retail sales with 8.8% Y/Y online growth, department stores saw a 1.8% Y/Y decline in growth with online sales growing 6.9% Y/Y, electronics and appliances sales grew 4.6% Y/Y and home furniture and furnishings grew 1.3% Y/Y.
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