Please ensure Javascript is enabled for purposes of website accessibility

Here's Why PayPal, Visa, Discover, American Express, and Mastercard Are Plunging on Monday

By Matthew Frankel, CFP® - Updated Mar 16, 2020 at 12:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The payment processors are having a pretty rough start to the week.

What happened

To say that Monday is a volatile day in the stock market would be a massive understatement. After plunging by about 10% at the open and triggering a market circuit breaker, the major market indices have rebounded a bit. As of 11:15 a.m. EDT, the Dow Jones Industrial Average and S&P 500 benchmark indices are down by roughly 7% and 6%, respectively.

Unlike during last week's sell-off, the financial sector isn't doing too much worse than the overall stock market, with the Financial Select Sector SPDR ETF (XLF 3.69%) down less than 8%.

Payment processors are a mixed bag. Visa (V 4.51%), Mastercard (MA 4.34%), and PayPal (PYPL 5.24%) are all down by about 7%. American Express (AXP 3.18%) is getting hit a bit worse, down 9% for the day. And Discover Financial Services (DFS 5.39%) is by far the worst-performing stock in the group, with shares down by 18% so far this morning.

Customer paying for a purchase with a credit card.

Image source: Getty Images.

So what

In a nutshell, as the COVID-19 (commonly referred to as the novel coronavirus) pandemic unfolds, it's looking more like the U.S. response to the outbreak is going to lead to a recession. Even if it doesn't, the near-shutdown of the economy in most areas of the country is likely to lead to a greater-than-anticipated drop in consumer spending.

While each of the five companies mentioned generates revenue in a somewhat unique way, all five earn a significant amount of their revenue from payment processing -- that is, acting as a middleman in financial transactions. For example, when you use your Visa card to pay for a purchase, Visa moves money from your financial institution into the merchant's account, taking a small percentage of the transaction as its service fee. If a prolonged economic slowdown occurs, it's virtually certain that transaction volume will drop significantly.

American Express and Discover also act as the lenders in financial transactions. For example, when you use your American Express-issued card to make a purchase, Amex facilitates the transaction but also is the financial institution that lends you the money (this is referred to as a "closed loop" payment system). In tougher times, consumer loan defaults tend to rise, so these two companies could get hit extra hard. Discover also has large student loan and home equity loan businesses that could see a wave of defaults.

Visa, Mastercard, and PayPal are third-party facilitators of financial transactions and don't lend any money themselves. This provides a bit of relative safety during tough times and likely has a lot to do with these stocks holding up better than Amex and Discover today.

Now what

It's likely to be a bumpy road for stocks in general, at least until we start seeing serious signs that containment efforts are helping to stop the spread of the novel coronavirus in the U.S. Having said that, all five of these companies are financially solid, and the stocks are now well off their highs, which could be interesting from a long-term investor's perspective.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

American Express Company Stock Quote
American Express Company
$146.15 (3.18%) $4.50
Mastercard Incorporated Stock Quote
Mastercard Incorporated
$330.50 (4.34%) $13.74
Visa Inc. Stock Quote
Visa Inc.
$205.51 (4.51%) $8.87
Discover Financial Services Stock Quote
Discover Financial Services
$99.17 (5.39%) $5.07
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$77.68 (5.24%) $3.87
The Select Sector SPDR Trust - The Financial Select Sector SPDR Fund Stock Quote
The Select Sector SPDR Trust - The Financial Select Sector SPDR Fund
$32.34 (3.69%) $1.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.