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1 Fintech Stock to Own if Inflation Stays High

By Matthew Frankel, CFP® and Jason Hall – Jan 5, 2022 at 7:43AM

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Here's a company that should do just fine if high inflation lasts longer than expected.

There are some financial sector stocks, especially in the financial technology, or fintech, space that could suffer if elevated inflation persists throughout 2022 and beyond. But payment network operator Mastercard (MA -1.00%) isn't one of them. In this Fool Live video clip, recorded on Dec. 16, 2021, contributors Jason Hall and Marc Rapport discuss why Mastercard could be a good stock to own in an inflationary environment. 

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Jason Hall: Sometimes, I think the best opportunities for companies that can benefit from things like inflation are the ones that are just so easy to overlook. Because we literally experience them every day and you think about payments companies as a great example.

One of the largest in Mastercard. I'm going to just share a couple of quick slides from a fairly recent presentation that they did. Because this highlights a lot of where their focus is. This is on things like open banking and this more broadly, ties into things like cryptocurrencies, where they have some initiatives going on digital identity so making it easier and simpler to utilize other payment products. This other new network, right again, it's actually talking about cryptocurrency and blockchain networks. But here's the thing, just consumer purchases alone, this is a $37 trillion market opportunity.

Then you look beyond that, and you get to business-to-business payments, you get to government-to-government payments. All of the various government-to-business -- all of these various things. All of a sudden that market gets five times bigger. It's absolutely enormous. The plain reality is that this is a tollbooth business, by and large. It gets a cut of every dollar that goes across its payment network, every payment that it processes. Guess what happens when those payments go up, when inflation goes up by 2%, they collect 2% more. Guess what happens with inflation of 6.8%? They get 6.8% more. They get the same percentage, but you get the point.

The key thing about it that makes it so attractive is at the end of the day, the underlying technologies that They use, this is such an asset-light business. It doesn't cost them really anything more. There's no incremental increase in their expenses. That's tied to the majority of the things that inflation is driving up. Their labor costs may go up a little bit when you have labor inflation. But that's a net positive because labor inflation means people have more disposable income. It's good for the economy. They're happy to pay labor inflation.

But I just think it's so easy to overlook a business like Mastercard that wins from inflation. Here's the caveat real quickly. It's the good inflation that's good for them. It's when inflation becomes rampant and then you see things like interest rates getting lifted quickly to slow that inflation, to cool off the economy. A cooling off economy and economic recession when inflation is too high and it leads to downturns or stagnant economic growth is not good. Because it reduces the total amount of payment volume. There is definitely sensitivity to the ups and downs of the economy and the economic cycles so keep that in mind. But again, just such a resilient, strong business and inflation is good for these guys.

Marc Rapport: How do they deal with disruptions in the payment rails?

Hall: The reality is, you think about disruption and a lot of that disruption over the past few years has been things like people think about like mobile transaction, that kind of thing. You know, where those mobile transactions are happening? On Mastercard's network.

At the end of the day, largely, people keep their money in a bank. They need to get the money out of the bank into the merchant they want to do business with. The merchant wants to do business with consumers. There's really powerful network effect. At the same time, the company is doing some really great things as more people become less banked. Processing and accepting cryptocurrency as payment. For example, they're starting to build that out. They're really focusing heavily, again on that much much larger opportunity. That's not even consumer transactions. It's the business side is cross-border transactions in so many other things.

This is a business that's far from being disruptive and they're going to be right in the middle of so many things. Whether people are dealing with money out of banks or cryptocurrency. They're building on blockchain already. They're right in the middle of all of that. Yeah. I'm not concerned about it. They're going to be a stalwart and an innovator.

Jason Hall owns Mastercard. Marc Rapport has no position in any of the stocks mentioned. Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool owns and recommends Mastercard. The Motley Fool has a disclosure policy.

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