It was less than three months ago, though it seems like a lifetime. Mastercard CEO Ajay Banga welcomed progress in the trade dispute between the U.S. and China, but with a caveat. The good news wouldn't last if the coronavirus became a pandemic.
That's where we are now, and the worries of Mastercard's Banga, Visa CEO Al Kelly and dozens of other payment executives will soon be reflected in earnings calls in April and May.
During the current coronavirus crisis, with no set timeline for when business can get back to normal, payments companies aren't going to speculate beyond what they can control now. That's why each company has revealed downward forecasts and reasoning behind it, while also noting some growth in digital payment methods and certain retail sectors.
The growth of digital payments, e-commerce and spending on consumer staples will spare payment companies from the severe hits from other business sectors, but there will still be strong headwinds.
Different brands, different exposure
Payment companies have different exposures. Those that operate as the payment processor, in that they collect a small percentage of transactions that move through their networks, are not as exposed as networks that also serve as lenders, such as American Express or Discover.
American Express, for example, has a loan portfolio with a more affluent customer base than Discover. Amex also has a high volume of airline related payments, creating pressure for co-branded cards during what amounts to an airlines shutdown.
Amex CEO Stephen Squeri has already alerted investors on the potential outlook in noting an adjustment falling somewhere between hitting only 2% revenue growth or possibly 4%.
Visa and Mastercard also cut back on revenue outlooks, with the companies telling investors expectations for the quarter ending March 30 would be 2.5 to 3.5 percentage points (Visa) or 2 to 3 percentage points (Mastercard) off of what was initially projected to be low double digits.
The coronavirus pandemic is likely to force a great leap forward in the fight to crush paper checks, which still account for about half of B2B payments, by moving more invoice payments online.
As governments rush to provide financial lifelines to small and midsize enterprises, fintechs such as Crowdz offering automated B2B lending, credit scoring and invoicing platforms are playing a new role.
The potential for fraud fueled by the coronavirus pandemic, coupled with the anticipation of a $2 trillion stimulus, is creating such a lucrative opportunity for scammers that Visa and the Secret Service are predicting a wave of unprecedented levels of fraud.
Square, which had enjoyed gross profit increases in January and February, year over year, in part because of its Cash App, has noted a slowdown in gross processing volume from merchants using Square products that began in March. The company revised its growth expectations and revenue to be in a range of $1.30 to $1.34 billion, with revenue at $515 to $525 million. It is likely to withdraw its full 2020 guidance and update that during its earnings call in May.
If one were to keep a scorecard tallying the effects of coronavirus on the payments companies, it is clear the types of merchants Square has brought into easier card acceptance and business management — small restaurants, bars, gyms and micro merchants in marketplaces — are all closed for now.
On the other hand, PayPal has seen business trends stay strong with the growth of online shopping during stay-at-home edicts globally. The company indicated the negative impact from the virus could be about only one percentage point.
In many ways, the card brands are likely pleased they developed closer ties with PayPal over the past few years, as interaction with the online giant may increase if the pandemic drags on beyond a year.
"Growth online is going to be pretty tremendous and the companies that benefit most would feature that channel and also, in physical stores, be the ones with a mobile wallet," said Larry Berlin of Chicago-based MSI Consulting Corp. "There are stores near me asking for the use of Apple Pay or Samsung Pay, as opposed to paying for things with cash, or handing over a credit card."
Like all industries, payments have been down this road before. When air travel and business ground to a halt in the wake of the 9/11 attacks on the World Trade Center in New York City and the Pentagon in Virginia, payments companies suffered and reforecast. But the comeback was fairly fast as soon as people were comfortable traveling and spending money again.
The 2008 recession hit the U.S. and world markets hard, causing payments companies again to lower their forecasts.
"Even though card spending was still growing at that time (in 2008), the growth during that recession was going to be only in the single digits," Berlin said. "Prior to the recession, that growth was in double digits. When the economy came back, and spending came back, the move to plastic cards for spending was pretty pronounced."
Revenue markers up and down
No matter what happens in the coming months, consumers are still going to have to pay for essential products. Because of that, payments companies continue to see certain verticals remain strong such as grocery, home improvement products, takeout orders and recurring billing like video streaming services, cable/internet services, newspapers and other publications. Kroger grocery store chain, for one, was reporting a 30% year-over-year increase in March sales.
The grocery vertical's 10 largest chains, with Walmart, Kroger and Albertsons atop that list, produce nearly half of industry sales and payments, thus giving some optimism that the grocery business should hold steady during the crisis, Steve Mott, principal of BetterBuyDesign consulting firm, told representatives of major investment firms in a recent presentation.
"Differential stock impacts are emerging," Mott said. "But deeper analysis of merchant business would be important to understanding the winners and losers."
Payment companies will see a lift in contactless technologies, and mobile order/pay ahead, but chargebacks will rise, Mott noted. Acquirers, independent sales organizations and independent software vendors are doing what they can to support merchants, he added.
The restaurant and hotel sectors stand out as being hit hard from a bottomline and employee level standpoint. Restaurants started to show their sharp decline during the second week of March, while the travel and hotel industries have seen revenues drop by as much as 80%, Mott noted.
Processors are accelerating online and mobile ordering technology, and increasing ordering endpoints through mobile apps and delivery services to try to help the restaurant landscape. Virtual gift cards are coming into play and faster financing options are evolving.
Restaurant management platform Toast kicked off a grassroots effort last week called Rally for Restaurants, a directory of restaurants providing takeout and delivery services, to encourage consumers to continue using those options as a way to support restaurants. Toast said it was committing up to $250,000 in matching contributions to World Central Kitchen and the Restaurant Workers' Community Foundation.
The card networks are keeping close tabs on consumer spending at this time, and it's an area understandably causing some anxiety. It's a problem that an influx of government checks to help businesses and individuals cope with the coronavirus might not affect, at least not until businesses reopen and consumers are convinced it is safe to come out of stay-at-home isolation.
Bank of America revealed last week that consumer spending from March 7 to 24 dropped 30% compared to the prior year. The drop was even larger in certain verticals such as airlines (down 102%), lodging (down 121%) and cruise ship recreation (down 113%), due to declines in payments and increases in rebates. Not surprisingly, purchases of groceries at 19% growth year-over-year on March 24 and electronic devices at 37% remained solid.
As with most economic downturns, regardless of cause or duration, the financial arrow is not likely to point up again until consumers are confident they can drive the engine behind positive change.
In that regard, some will keep an eye on different types of metrics to get a feel for how those consumers feel about their money overall. Tools like the Money Anxiety Index can shed a different light on things.
The higher the anxiety rating, the less likely it is that consumers will part with their money over a period of time. The Money Anxiety Index went up 10.5 points to 51.6 in March, the only time it has made a leap like that since October of 2001, a short time after the World Trade Center attacks.
The index provides a monthly reading of consumers' level of financial worry and stress, as a way to predict consumers' behavior. If that is the case, then the index does provide some hope in terms of how quickly the economy and businesses can recover from the virus pandemic.
"There are two kinds of economic crises," Dan Geller, behavioral economist and the developer of the San Francisco-based Money Anxiety Index, said in a release about the new findings. "There is a systemic economic crisis, which is what we had during the financial crisis of 2008 and 2009, and there is a temporary economic crisis, which is what we experienced during Sept. 11, 2001. The economic experience of the current coronavirus crisis is likely to be similar to the Sept. 11, 2001 experience."
Payments data becomes key tool
All of these factors come into play for payments and technology companies at this time, but ultimately, payments companies do have an advantage that some other companies and industries do not — simply in how they monitor themselves.
"Payments companies are usually better than most companies in predicting their results because they have so many data points every second, unlike most other companies that are dependent on lumpier revenue," said Gil Luria, director of research for equity capital markets at D.A. Davidson & Co.
In the last economic slowdown, Visa and Mastercard did pretty well in updating their outlooks during the crisis, Luria added.
"Their main challenge had to do more with counterparty risk, as some of the banks they were dealing with had real liquidity issues," he added. "Since that does not appear to be an issue this time around, I expect them to forecast more accurately than most other companies."
A prediction of a fast recovery makes sense, especially for payments companies that already have solid financial footing.
"Most of the payments companies are in very solid positions," MSI's Berlin said. "They have both cash on their balance sheets and plenty of line of credit, if they need it. These companies should be OK, even in the long term."
However, the same can't be said for fintech or payments startups, Berlin added. "A lot of financial technology startups were burning through cash and are facing a time where revenue is not going to be what they expected for a while — and their venture funds may be a little bit tighter than they were, say, six weeks ago."
In addition, there is uncertainty about whether certain venture-backed startups would be eligible for the relief loans that the government is making available to small businesses. Lawyers continue to ponder that situation, centering mostly on how the Small Business Administration is calculating the number of employees at venture capital or private equity firms.
That sort of scenario would point to a "downward turn regarding innovation for a little while here," Berlin said.
