Here’s my take on the current global economic turmoil and its implications for the payments industry. (Related: Jon Stewart to Sen. Durbin: “Is This the Worst It’s Been?”)
First, what’s happened and why?
(a) The sovereign debt of a bunch of European countries has started to look like junk bonds. Greece, Ireland and Portugal were bad enough. But then Italy and Spain got added to the mix. If these countries were banks, they’d have long lines of people stretching around the corner at their branches trying to take out their cash. As it turns out, the banks are the ones holding a lot of the debt. The fear of sovereign debt defaults leading to banks once again falling like dominos has spooked the market. This is all taking place in a political entity—the European Union—that doesn’t really have the right institutions in place for solving these problems (they are a monetary union but not a fiscal union), and they are struggling to do so.
(b) The United States is slowing down. The country looks like it could head into a second recession in the worst of worlds or just remain sluggish in what may be the best we can hope for. Unemployment remains over 9 percent, lots of people have left the labor force because they’ve decided getting a job is hopeless and there isn’t robust hiring since companies have figured out how to do more with less until their confident demand is back. Consumer confidence and spending is down, and there’s not a lot out there that looks like it could lift the economy up.
(c) China and the rest of the world no longer look like we can count on them to keep the global economy motoring along. Maybe China won’t go into a recession, but it also isn’t clear that it can be counted on to grow as quickly as it has been.
(d) The U.S. debt downgrade to my mind puts an exclamation mark on points (a) and (b) but isn’t such a big deal. There may be disagreement on this, but I don’t see the downgrade, per se as changing much. The markets knew that the U.S. fiscal situation and policymaking was a mess before the S&P downgrade, and prices have already largely reflected that, at least that in my view. There’s virtually no chance—and there never was—that the U.S. government is going to default on its debt.
Second, what does this mean for the payments industry? The answer to that depends on how all this plays out—whether there’s a serious downturn or just no upturn. (Related: 7 Ways to Innovate Through A Recession)
(a) We know that if the unemployment rate edges up and more people lose their jobs or experience big reductions in income, charge-offs will go up for anyone extending credit. The big question is whether we are in for more firings, or whether we’re just going to get stuck at around 9 percent unemployment for the foreseeable future. This is a tough one to call. Firms became pretty lean during 2009 and didn’t fatten up much and still aren’t. It’s not clear they have much more room to lay people off, unless of course, there is a serious nosedive in the economy.
(b) We also know that when the economy falls, people engage in fewer transactions. The mix of transactions will shift toward non-discretionary ones, and average ticket sizes will go down. That’s going to affect pretty much every player in the payments industry directly or indirectly. What happens again depends on how big a nosedive we take, and whether we just stay sluggish. Again this is a tough one to call. If we stay at the current anemic level of economic activity in the United States and Europe, not much changes.
(c) What has changed in my view in the last several weeks are expectations about the future. Here’s the way to think about it from the standpoint of an investor in payments. A few months ago, there were reasons to be somewhat optimistic that the U.S. economy was going to recover and that European Union would contain the sovereign debt crisis within its various member states. I think forecasts about future consumer spending, business spending, investment and employment all need to be ratcheted down if they haven’t already been in the last few weeks. That necessarily means the present discounted value of payments companies (and many other companies) is lower. The question again is just how much lower? So, we’re again back to whether we stay sluggish or have a significant collapse.
Third, what should you do if you are running a payments company?
(a) Go home tonight and have a stiff drink or run off that anxiety or watch a stupid show. Whatever you do to relieve stress.
(b) I’m sorry to say this, but I think it would be prudent for payments folks (not necessarily bankers) to put their September 2008 hats back on. There’s a decent probability that we’ll have a significant downturn. We may know for sure pretty quickly, or it may take some time. Yesterday’s tanking of the markets can’t tell us for sure. It might have been an overreaction or the beginning of something worse.
(c) For issuers, the prospect of a significant downturn means paying very close attention to the extension of consumer credit, including overdrafts for checking accounts. For everyone else, that means paying close attention to employment and investment levels if there’s a reduction in transaction volume and price resistance by business partners in payments.
Fourth, I hear someone saying, “Can’t you say something to cheer us up?” Well, if I must.
(a) We’ve had financial crises for millennia. They are horrible. Things always get better. The United States especially will have a vibrant economy for sure. There’s no reason to think otherwise. If you are looking at the long-run, investment in building great payment companies is still well worth doing and will eventually be rewarded.
(b) It may be a great time to buy! And many large players have cash sitting around. Hey, maybe you could even buy Groupon for a song.
(c) The long-term prospects for payments are still very solid. There’s a huge opportunity to displace non-electronic, and the innovation possibilities are incredible. You just may need to be patient
If that doesn’t cheer you up see 3(a).
David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework®, a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass. David is the Founder of Market Platform Dynamics. Read More