While there has been plenty of innovation in fintech -- financial technology -- over the past decade or so, and while many fintech stocks have consequently performed extremely well, fintech businesses aren't always immune to recessions and turbulent economies. Nevertheless, fintech stocks have certainly been a hot segment of the stock market in recent years.

Fintech-enabled e-commerce has steadily grown over the past decade, comprising about 4% of all retail sales in 2010 and about 13.5% just a decade later. The trend toward cashless and contactless payments is clear and durable throughout the world, and fintech is a big beneficiary of this trend and the need for secure ways to access money and sensitive financial information.

Here's what investors should know about the cyclicality of fintech stocks, as well as a list of four cyclical fintech stocks that have massive long-term growth potential.

Person using a mobile phone to make a payment in a store.

Image source: Getty Images.

Are fintech stocks cyclical?

Generally speaking, the answer is yes. Fintech stocks are cyclical businesses for the most part. They largely perform in correlation with consumer spending and business investment.

That said, not all fintech stocks are equally cyclical. For example, companies that develop technology for insurance companies aren't inherently cyclical since insurance is a rather recession-resistant business. On the other hand, companies that develop payment technologies, which are more vulnerable to the effects of market forces, are more likely to experience significant slowdowns during recessions.

It's important to address the recession caused by the COVID-19 pandemic, during which many fintech companies saw their revenues or stock prices soar. Investors should remember that, while all recessions are unique in one way or another, the 2020 recession was especially so in the sense that many high-tech stocks actually benefited from it.

For example, a payment processing company such as Square (NYSE:SQ) would typically be considered a cyclical business. The company primarily makes money by collecting a small percentage of each transaction processed with its hardware. But, in recessions, consumers typically spend less, which translates to less fee income for Square. However, with fintech-enabled e-commerce businesses growing during the pandemic, the company's stock price hit an all-time high during the peak of the crisis. The investor optimism was based on the growth rate of cashless payments accelerating, more people using the Square payment platform Cash App, and other pandemic-related catalysts that could further boost the payment processor's business.

Four cyclical fintech stocks to consider

Since some fintech stocks can be quite cyclical, they are less likely to perform well during recessions and other turbulent economic times compared to when the economy is strong and growing. But just because many fintech stocks are cyclical doesn't mean that some fintech companies won't do extremely well over the long term.

With that in mind, here are four cyclical fintech stocks that have tremendous long-term growth potential.

Visa and Mastercard

Visa (NYSE:V) and Mastercard (NYSE:MA) are very similar businesses, so it makes sense to discuss them together. These are two huge payment processing networks that together have in circulation more than six billion credit and debit cards around the world. 

Visa and Mastercard operate payment processing networks that are "open." They don't actually lend any money themselves; rather, they facilitate the movement of money from one place to another. In exchange for this service, Visa and Mastercard each collect a percentage (often referred to as the "swipe fee") on every transaction. There are other ways these companies make money, too, but the bottom line is they primarily generate fee income based on the volumes of money flowing through their networks. So, in recessions, when consumer and business spending both drop, Visa and Mastercard's revenues are likely to decrease as well.

However, both companies still have vast growth opportunities ahead of them. The amount of money that flows through Visa and Mastercard's payment networks is currently $15 trillion annually, just a fraction of the $185 trillion global payment opportunity that Visa estimates to exist worldwide.

Square

Even though the pandemic has been good for Square, we haven't yet seen how Square's business would perform in a normal recession. The company is just over a decade old, and other than the COVID-19 recession, the company hasn't been through any economic contractions.

A more typical recession would likely cause a decline in revenue in most of Square's business segments. Payment processing revenue would likely take a hit in the same way that Visa and Mastercard would process fewer transactions. Square Capital, the company's small business lending platform, would likely see loan volume decline as businesses suffered. With decreased consumer willingness to spend, Cash App would likely be used less.

Square nonetheless has an immense opportunity to not only build out its core payment hardware business to several times its current size, but also to create a complete financial ecosystem for businesses and consumers. Square's recently launched Online Store platform enables retailers to develop true omnichannel capabilities, and, with a pending application for a banking charter, Square's business lending platform could grow much larger. On the personal-use side, its Cash App -- which is still in the early stages of monetization -- could not only dramatically increase Square's user base but also offer an increasing range of consumer financial products. In the future, Square could offer personal loans, checking accounts, insurance products, mortgages, auto loans, and more.

Bill.com

Bill.com (NYSE:BILL) is by far the smallest company on this list, and it is the newest to the public markets, having made its debut in December 2019. The company provides billing solutions for businesses, with a particular focus on small- and medium-size companies. Services include customer invoicing and accounts payable processing, among several others.

The services Bill.com provides could obviously be expected to slow down in a recession. Although its business is cyclical in nature, Bill.com is tapping into a substantial market opportunity. The trend toward cashless payments is clear in the U.S.; however, Bill.com says that 90% of small- and medium-size businesses still use paper checks to pay either employees or vendors. Using paper checks is time-consuming and costs significantly more than electronic methods, so this represents an important market opportunity for Bill.com. The company estimates the size of its addressable market to be about $30 billion worldwide and $9 billion in the U.S. alone. With annualized revenue of just over $200 million, it's fair to say it's still early days in Bill.com's growth story.