Every High-Growth Investor Must Keep This Huge Threat in Mind

Wall Street suffered its toughest day in a long time on Tuesday, as major market indexes moved sharply lower. Losses for the Dow Jones Industrial Average (^DJI 0.69%) and S&P 500 (^GSPC 1.20%) amounted to roughly 1.5% to 2%, but the Nasdaq Composite (^IXIC 1.59%) saw even deeper drops that reflected investors' skittishness about some of the high-flying stocks that have led the market's rally over the past 18 months.

Data source: Yahoo! Finance.

Many disruptive small-cap companies in high-growth areas like technology, biotech, and fintech have posted huge gains over the past year and a half, led higher by the prospects for their businesses to usurp existing players in their respective industries. Yet it's too much to believe that industry leaders won't fight back.

That's a lesson that investors in stocks in the popular buy now, pay later (BNPL) niche learned on Tuesday, and those who've invested in other stocks taking advantage of disruptive innovation need to reassess whether the companies they're seeking to displace won't have similar opportunities to try to counter their strategic moves.

Image source: Getty Images.

A big move lower for buy now, pay later

Stocks that have benefited the most from the rise of interest in BNPL services took some big hits on Tuesday. Affirm Holdings (AFRM 2.49%) was lower by 11% by the close. Shares of Australian BNPL specialist Afterpay (AFTP.Y) fell almost 6%, moving almost in lockstep with U.S. rising financial star Square (SQ 5.04%), which is set to buy Afterpay in an all-stock acquisition initially valued at $29 billion.

The news that hit these stocks came from credit card industry giant Mastercard (MA 1.33%). The company announced its new Mastercard Installment program, which will be available in the U.K., the U.S., and Australia. The BNPL program will have many of the same features consumers have come to expect from Afterpay and Affirm, including interest-free installment payments. Yet Mastercard argues that its program's integration into its existing electronic payments network is a competitive advantage that will make BNPL eventually available across the card giant's entire global network.

Mastercard intends to count on its vast network of lenders and merchants to help make its program a success. To the extent that consumers agree, the company will be able to make transaction histories known to lenders as part of their decision-making process for underwriting installment arrangements. This could lead to more-extensive credit availability for shoppers. Moreover, Mastercard believes that BNPL could help merchants by boosting sales and reducing abandoned online carts.

At the same time, Mastercard touted its zero-liability fraud protection as a feature. That's something its rivals aren't typically offering.

Interestingly, the company has put together a large set of partners for its rollout. Some are mainstays in the financial community, including Barclays, Fifth Third Bancorp, and Synchrony Financial. Others are newer, including neobank SoFi Technologies and card-issuing platform provider Marqeta.

A broadside for disruptors

Mastercard's entry into BNPL is just one example of the many ways that current leaders in many industries will fight back against high-growth small caps trying to take away their business. The move won't be fatal to Affirm or Square, but it serves as a valuable reminder that disruptors won't have the field to themselves -- and need to be prepared to fight for supremacy in the areas in which they've become pioneers.