Payments tech could be the bright spot in a broader downturn

As many technology companies cut back, there are signs that at least portions of the payments market will perform relatively well in the year ahead.

A recent Keefe, Bruyette & Woods report classified payments as "overweight," saying there are no notable signs of deterioration in fundamentals and estimating an earnings downside risk of 2% to 7% depending on the severity of an economic downturn. 

In other sectors, KBW estimates mortgage originations will decline another 9% in 2023, following a 43% decline in 2022, with home prices projected to drop by 13% in 2023, which would be the first annual decline in 13 years. KBW also projects diversified financials and overall fintech will decline 13% in 2023. 

It's not necessarily a direct comparison, but KBW says the payments sector is better positioned than some adjacent sectors to ride out a downturn. Part of the strength is in the migration toward digital payments and related technology.  

"There's still a strong secular tailwind of people moving toward electronic payments," said Sanjay Sakhrani, an analyst at KBW. "And inflation helps dollar volume for payment companies." 

Total technology venture funding in 2022 was about $451 billion, down from about $638 billion in 2021 but still well ahead of pre-pandemic levels, which hovered around $300 billion per year for several years, according to CB Insights. Fintech funding dropped from $139 billion to $75 billion in 2022, which is still above pre-pandemic levels of about $50 billion.

While the fintech numbers do not carve out payments and do not consider mature publicly traded payment companies, the segment may fare better than other industries that rely on technology investment. 

"Payment volumes are going to hold up," said Trevor Rich, a partner at Lovell Minnick, adding the move toward digital transactions is still strong.

Most companies that provide technology that supports digital transactions should experience growth in the next year, according to Precedence Research. That includes payment gateways, cloud computing, data management and companies that support technology for mobile wallets. There's also likely upside in mobile payments, considering about 6% of U.S. iPhone owners use Apple Pay, for example, according to 9to5Mac. 

That's not to say there's a runaway boom underway for payment technology companies. 

Payment-related fintechs saw drops in their valuations and stock prices in 2022. But these firms also have mostly held to their aggressive payment technology development strategies. The companies are leaning into a challenging economic environment by making purchases simpler for consumers, cutting overhead for businesses and allowing clients to use payment technology to access other financial and nonfinancial services. 

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 Mature payment companies, such as the major card networks, and firms that offer embedded payments will face pressure  — but they also should be able to withstand a slowdown relatively well, according to Sakhrani. 

"The markets for the card companies are broader and more global," Sakhrani said. "They have their hands in a lot of verticals." 

Visa and Mastercard, which report earnings later this month, have had several quarters of strong financial results in a row. American Express and Discover have also recently reported strong earnings. In recent years, the card networks have focused on their service businesses, which allows the companies to draw revenue from sources beyond processing fees. That includes security, risk, compliance and financial inclusion, which are all high-growth areas. 

"Regardless of hikes or the market conditions, we are still seeing an upward rise in digitization of commerce and increased usage of these platforms. COVID pushed a lot of brands to embrace commerce and usage of payments tech," said Adrian Mendoza, founder and general manager of Mendoza Ventures, adding that there will be attractive investment options in payment technology over the next few months outside of cryptocurrency plays. "This trend is here to stay."

Mendoza Ventures recently closed on a $100 million investment led by Bank of America. Mendoza plans to use the funds to expand its mission of investing in fintechs with underrepresented founders. 

"Newer noncrypto payment tech players will be giving the Stripes of this world a run for their money as there will be a price war among on payment technology competitors," Mendoza said.

Firms that provide embedded payments, or make use of payment credentials to support other services, will find demand because the technology allows clients to use payments to support new products without adding new technology relationships, Rich said. 

"If a firm can embed a payment platform directly into a merchant's software system, it can do well," said Rich, whose recent investors in payments technology include Fortis, a payment facilitator that allows firms to plug into multiple payment types through a single relationship. 

Another fintech VC, Real Ventures, is also looking for opportunities in payment technology. Its recent investments include Dream Payments, a fintech that offers embedded payments. 

"Embedded payments allows firms to monetize their payment flows without having to build a system themselves," said Brent Ho-Young, president and co-founder of Dream Payments, adding Dream plans to enter new industries in the coming year, such as supporting digital payments for property managers. Its other business lines include insurance carriers, which use Dream to reduce paper check payouts. "This saves money in a time of cost-cutting," Ho-Young said.