Visa vs Mastercard vs PayPal

The political and technological landscapes around us have seen seismic shifts in just the past couple of years. This shaky ground has left the economy in a state of ongoing high inflation and elevated interest rates.

The recent decline in consumer spending on the back of persistently high inflation directly impacts companies’ revenues and profit margins, especially in industries geared mainly towards consumer goods and services, leaving many with rising input costs and lower profit margins.

The Central Bank tightened the supply of money by increasing interest rates several times between 2021 and 2024, and fiscal stimulus programs sparked rising prices.

It seems little relief for consumers sits over the horizon, though, because, in its June 2024 meeting, the Federal Reserve announced that it would keep the overnight federal funds rate between the current range of 5.25% to 5.5%—the highest range in 23 years.

Prices for May FY2024 were 2.6% higher than May FY2023. However, this is down from 2.7% in April 2024. Overall, core inflation eased from 2.8% to 2.6%, which is a range that closes in on the Federal Reserve’s annual target rate of 2% and signals the possibility of interest rate cuts.

So how will this all affect Visa, Mastercard and PayPal?

What This Means for the Payments Industry

Elevated inflation and interest rates spell difficulties for financial firms because of the knock-on effect among consumers and businesses, translating to less cash in circulation and additional operating costs.

At the same time, financial companies have a level of protection against crises due to diversified service portfolios and an increased reliance on the digital payments economy.

Consumers and businesses are shifting their spending and business activities in step with the economic environment, which in turn is causing companies like Visa Inc. (NYSE:V), Mastercard Incorporated (NYSE:MA), and PayPal Holdings, Inc. (NASDAQ:PYPL) to re-evaluate growth initiatives.

As spending improves, consumer resiliency stands out, particularly in the face of inflation and recession woes. The US Census Bureau report showed continued retail sales growth in May 2024 up 0.2% from April 2024.

It’s noteworthy that while increased spending is simply a result of increased prices, it also may be a positive for the payments industry.

So, how might these factors shape the future of digital payments companies?

Visa

As one of the world’s largest payment networks, Visa handles billions of transactions every year. It continues to stand out as the leader in the industry, and earned the confidence of Warren Buffett as a result.

In spite of its position in the payments business, Visa hasn’t rested on its laurels but rather has collaborated with several fintech companies to expand its scope and reach, as well as to widen its moat.

So too, the development of Visa Direct has fortified its position in the market and diversified its revenue streams.

Not willing to let the grass grow under its feet, Visa continues to expand into new geographical markets where cash is the dominating form of payment. These new regions hold long-term promise, especially if customers and merchants welcome the transition to electronic transactions.

Recent acquisitions have added to Visa’s service variety too and enhanced its appeal in the marketplace. It’s clear that management has a collaborative leaning and is eager to continue embracing payments industry trends via partnerships with digital wallets as well as through fintech acquisitions.

Consequently, these vital alignments enable the company to compete in an evolving payments industry. In January 2024, Visa finalized its acquisition of Pismo, a cloud-native core banking and issuer processing platform seeking to expand globally.

An added benefit of increased global expansion is that revenues from these new geographical regions lead to diverse payment sources that lessen the risk of economic difficulties typically connected with certain geographic regions.

Visa is now in more than 200 countries and territories, used by more than 14,500 financial institutions, and accessible in more than 130 million merchant locations, which speaks to its 4.3 billion payment credentials.

In FY2023, the Visa network processed total volume of $15 trillion in more than 276 billion transactions. This vast volume indicates how firmly established Visa is in different regions and markets and ensures a durable competitive advantage.

Visa’s stock price has returned over 15% in the past year. It currently trades at a lofty valuation compared to its industry peers, sitting at 26.76 times forward non-GAAP earnings, but it’s trading at a discount if you look at its five-year average.

Analysts expect Visa stock to surge more than 15% in the coming year. Favorable analysts’ sentiments are undeniable, with 20 out of 28 rating Visa as a Buy.

Mastercard

Mastercard’s revenue has increased at a CAGR of more than 18% over the past three years.

The success is largely attributable to a keen focus on business priorities, such as expanding its core payments network, extending its service offerings, and embarking on new network opportunities.

New payment flows and other digital innovations have led to high customer payment volumes and been a tailwind to the financials, especially revenues that now sit at $25.6 billion.

But first a noteworthy aspect of the firm’s financial strength is its dividends, which have been raised for 12 years straight and no doubt attract income investors.

Analysts see the stock rising all the way to $513 per share before hitting fair value, suggesting meaningful upside still lies on the horizon for the firm.

With strong cash flows and profitability, there is lots to like about Mastercard but one thing that does grab attention is the 34.7x price-to-earnings ratio that seems lofty.

Still, revenues are forecast to rise at a pace of 11.7% annually over the next 5 years and net income is predicted to eclipse that with a 13.7% gain annually over the same period.

PayPal

To date, 426 million active consumer and merchant accounts call PayPal home and have processed $1.53 trillion in total payment volume.

This company remains a clear market share leader in spite of an onslaught of copycats over the years. And when a powerful up-and-comer does threaten PayPal it has the deep pockets to acquire it. Take Venmo as a prime example.

PayPal’s Venmo acquisition is immensely beneficial and has improved the service’s peer-to-peer payments and sparked popularity among a wider audience.

Venmo’s convenient debit cards and investment tools enhance PayPal’s customer value proposition in the fintech industry.

New and upcoming innovations from PayPal and Venmo are likely to help advance e-commerce experiences by creating more personalized transactions.

Globally, PayPal aims to deepen its presence in markets based on the shift toward electronic and mobile commerce, which in turn should spread the base of customers far and wide, and further support revenue diversification.

While PayPal stock has weakened, experiencing a 12% fall in share price in Q3 2024 compared to Q3 2023, analysts are positive and expect the stock to surge by as much as 33% in the near term. 15 PayPal stock analysts rate it a ‘Buy’, while 25 of the 40 analysts are a little more cautious, rating it a ‘Hold.’