What happened
The stock market was having a terrible day on Thursday, with the Dow Jones Industrial Average plunging by more than 1,100 points at 12:30 p.m. ET and the tech-heavy Nasdaq Composite on pace for its worst day of the year so far, down by about 5%.
However, payment processing stocks were some of the market's worst performers. Fintech giant Block (SQ -2.28%) had fallen by more than 10%, online payments giant PayPal Holdings (PYPL 0.34%) had declined by 7.5%, and Brazilian payments company StoneCo (STNE 0.26%) was down by nearly 10% as of the same time.
Image source: Getty Images.
So what
There isn't much in the way of company-specific news for any of these names today -- not yet, at least. Block (better known as Square) reports its earnings after the market closes, but that's really it.
The real culprit is rising interest rates, which affect fintech companies like these in a few different ways. From a stock price perspective, rising rates tend to put pressure on the valuations of high-growth stocks, which could explain why Block and StoneCo are getting hit the hardest.
In addition, rising rates can slow down economic activity, which all three of these companies rely on. Think of it this way -- if consumers start spending less, it would translate to lower payment volumes for these companies, and therefore less fee income. And there's also the fear that rising rates and high inflation could send us into a full-blown recession, which could be a negative catalyst for credit quality and could cause many of the businesses that use these companies for payment processing to go out of business.
On a similar note, Mastercard SpendingPulse said in a report that e-commerce sales have actually declined by 1.8% from a year ago, while in-store sales are up 10%. All three of these rely on e-commerce to one degree or another, but this could be particularly bad news for PayPal, which is highly dependent on e-commerce strength.
Now what
The bottom line is that all three of these are seen as somewhat risky stocks by the market. PayPal has been grappling with slowing user growth and is struggling to find its direction. Block's acquisition of Afterpay remains a big question mark for investors, and its seller ecosystem could be particularly recession prone. And StoneCo has many of the same worries, but in a significantly less stable Brazilian economy.
Investors seem to be pumping the brakes on risk as bond yields spike, and that's especially being reflected in these three companies.
