Fintech stocks, many of which previously had high valuation multiples, have gotten crushed during 2022's brooad market decline. Digital payments leader Block (SQ 0.37%) hasn't been spared: Its stock price has dropped by 55% so far this year. That might have some investors thinking that this would be a great time to scoop up its shares at a discount. 

But before buying stock in Block, investors will want to assess how the company could perform in an adverse economic scenario. Many experts see just such a situation looming as the Federal Reserve continues to hike benchmark interest rates in its effort to curb soaring inflation. 

How would Block fare in a recession?

Inflation is at a 40-year high, and people are feeling it keenly in their daily lives as elevated expenses for rent, food, gas, and more have forced many to tighten their budgets. Persistent supply chain bottlenecks, supply and demand imbalances in the energy sector, geopolitical turmoil, and strong consumer demand have combined to drive inflation higher in economies around the world. Now, the Fed is attempting to implement a fiscal tightening policy that both brings U.S. inflation back to normal levels and avoids putting the brakes on the economy so hard that it triggers a recession.  

If the central bank successfully executes that "soft landing," that should generally be a positive result for corporations. Nonetheless, the end of the country's extended period of loose monetary policy is quite likely to be a headwind for Block. 

Its business could be affected in two primary ways. First, because 55.4% of Block's revenue is generated when Square sellers accept payments from customers and Cash App users withdraw or spend funds from their accounts, a weaker economic environment will definitely slow the company's growth. That's because in a recession, the small businesses that Square focuses on are apt to be particularly hard hit. And when it comes to Cash App, individuals might cut down on discretionary purchases, reducing the amount of money that needs to be exchanged among friends. 

In the first quarter, Square's gross profit jumped 41% year over year, while Cash App's gross profit increased 26%. These two impressive growth rates would surely come down in a recession. 

Higher interest rates will also be problematic for Block. Because it extends credit to its customers, increased borrowing costs could lead to lower demand for loans, as well as greater loan-loss rates across the business. This will be especially important for Block in the wake of its acquisition of buy now, pay later specialist Afterpay. 

Block Chief Financial Officer Amrita Ahuja addressed investor concerns on the first-quarter earnings call in May, saying that "we have seen loss rates consistent with historical ranges" when discussing Afterpay's receivables, but this will be something to keep an eye on. According to a study conducted by The Motley Fool, 45% of buy now, pay later customers use the payment tool to buy things that wouldn't normally fit in their budgets. If times get tougher, losses in this segment are almost guaranteed to rise meaningfully.

Investors who are comfortable with Block's ability to handle the risk of a recession should seriously consider buying the stock after its steep declines. However, those who think the company has its work cut out for it in the near term are probably best advised to stay away.