When it comes to the Federal Reserve, all most investors care about is when the central bank plans to cut interest rates and what Fed Chairman Jerome Powell has to say about inflation. But the Fed is working on another initiative that could have a big impact on two financial stocks, and it has nothing to do with monetary policy decisions at all.
The Fed launched a real-time payments service called FedNow in July last year, which allows instant digital payments at a lower cost than bank debit cards or Automated Clearing House (ACH) transactions. More than 800 financial services companies have signed up to use FedNow, including major banks such as JPMorgan Chase.
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Wells Fargo
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and U.S. Bancorp
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Mizuho Securities analysts Dan Dorev and Ryan Coyne think this could be bad news for payments giants Visa and Mastercard.
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These two payment processing giants are the foundation for many debit card transactions, and both offer their own real-time payment transfer services called Visa Direct and Mastercard Send, but Dorev worries that FedNow could eat into that business.
“FedNow charges less per transaction than debit,” Dorev said. Barons. He added that it’s only a matter of time before more large banks join the FedNow network. Other banks agree.
“Because it was developed by the Fed, we believe it is inevitable that most financial institutions will eventually integrate with the system,” TD Cowen analysts Moshe Orenbook and Brian Bergin wrote in an April report on Visa and MasterCard. But the analysts added that “real-world use cases for FedNow remain fairly limited for now.”
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Are Visa and Mastercard investors worried about increased competition? Their shares are up about 15% over the past year, not a dismal performance, but it’s worth noting that both stocks are underperforming the market.
S&P 500
And that
Financial Select Sector SPDR
Each exchange-traded fund is up 25% over the past 12 months.
Of course, concerns about increasing competition for the Visa-MasterCard duopoly have been building for some time. The two companies already compete with the big banks in payments, some of which, including Bank of America, have been vying for power.
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Capital One (which plans to buy Visa and Mastercard rival Discover Financial Services for more than $35 billion) and JPMorgan Chase are part of the network that owns digital money-transfer service Zelle.
Visa and Mastercard are also facing increased competition from fintechs such as Venmo owner PayPal Holdings.
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and Block, which owns both CashApp and Square, and pay later leader Affirm.
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But there are other ways to tap into the growth potential of the FedNow service, Dolev said.
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is a “conduit between consumers and banks” and stands to benefit from the growth of FedNow and other digital payment services.
TD Cowen analysts also believe investors shouldn’t count out Visa and Mastercard, as the two companies “have inherent advantages over other instant payments infrastructures,” they wrote in a report, adding that they are “focused on payments.”
“This has allowed them to invest heavily in their network over time, in areas such as technology and fraud detection,” the analysts wrote.
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FedNow is still in the early stages of adoption, so it’s a threat worth keeping an eye on, but increased competition from fintech companies is nothing new for Visa and Mastercard, even if their latest rivals aren’t Silicon Valley startups or Wall Street giants, but major players in the Washington, D.C., regulatory landscape.
Write to Paul R. La Monica at paul.lamonica@barrons.com
