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The week in fintech: Analysts expect solid Q3 after macro-driven sell-off

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The week in fintech: Analysts expect solid Q3 after macro-driven sell-off

This recap features updates on bank technology, payments, online lending and other news in the U.S. financial technology space. Send tips, ideas and chatter to rachel.stone@spglobal.com. For other recent fintech news, click here.

Analysts are largely bullish on fintech stocks ahead of reported third-quarter earnings, even amid a broader tech sell-off.

Although fintech has largely outperformed the broader market in 2018, shares of most companies dropped during the market rout on Oct. 10 and Oct. 11. Still, analysts remain positive heading into reported earnings, with several recommending investors buy on the dip.

Macroeconomic concerns — trade war tensions combined with a slowing U.S. housing market and rising interest rates — are largely driving the recent pullback in fintech shares, Guggenheim analyst Jeff Cantwell wrote in an Oct. 12 note. He described the slide as an "incremental buying opportunity, particularly for high-quality names" such as Visa Inc. and Mastercard Inc.

Keefe Bruyette & Woods analyst Sanjay Sakhrani said he has not yet seen any material impact on the payments sector from trade tensions. The analyst expects payments companies to post "very strong fundamentals" in the quarter's results, he said in an interview.

The payments sector started on the right foot with PayPal Holdings Inc. posting an earnings beat and raising its full-year 2018 guidance. The monetization of Venmo, PayPal's mobile-based peer-to-peer payments service, is nearing a "tipping point," management said on a call to discuss the quarter's earnings.

Following the results, Credit Suisse analyst Paul Condra said he is "more confident" in a PayPal growth story. Venmo presents "wide-ranging e-commerce opportunities to create a customer acquisition channel" for the company's millions of small business customers, he wrote in an Oct. 19 note.

In consumer finance, Sakhrani expects "decent quarters" but cautioned that some investors are concerned about the credit cycle.

"It's more about whether or not investors are willing to believe those results because there has been a very strong focus on the fact that some of the macro indicators, like interest rates, may be suggesting weaker times on the horizon," he said. But the analyst added that he has seen nothing to suggest an imminent slowdown.

Even so, the sector's stocks are not picking up ahead of earnings releases, Sakhrani said. He called American Express Co. a top pick for third-quarter results, and the card issuer kicked off earnings with a year-over-year increase in net income and total revenues.

Card networks also face increased competition in the private-label segment. In July, a long-established partnership between Synchrony Financial and Walmart Inc. was broken up as the retail giant announced it was moving its co-branded card program to Capital One Financial Corp.

"That created another bout of concerns that there's a lot more competition in that space," Sakhrani said.

But on a call to discuss earnings, Synchrony President and CEO Margaret Keane called the Walmart decision "an outlier." The company extended its partnerships with J. C. Penney Co. Inc. and Lowe's Cos. Inc. during the third quarter, while also adding new partnerships with Fred Meyer Jewelers Inc. and Jewelry Television.

Synchrony reported higher year-over-year earnings and beat analysts' consensus estimate.

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Elsewhere in fintech, 15 of 78 payments companies in India have yet to comply with the Reserve Bank of India's Oct. 15 deadline for data localization requirements. Among them are Visa, Mastercard, American Express and PayPal. The central bank is expected to impose a penalty on the companies that missed the deadline but are not expected to prohibit them from providing services.

Puerto Rico's top banking regulator is cautiously inviting fintech innovation. In a recent interview with S&P Global Market Intelligence, George Joyner, commissioner of financial institutions, said his office is working with fintech innovators to issue permits to organize and operate on the island. But the office is carefully vetting the companies that hope to launch there, he added.

"We want to be on the leading edge of this industry," Joyner said. "We don't want to be on the bleeding edge."

In cryptocurrency news, the SEC launched the Strategic Hub for Innovation and Financial Technology, called FinHub, as a resource for public engagement on fintech issues, including distributed ledger technology, digital marketplace financing and machine learning, among others. The FinHub, led by Valerie Szczepanik, will replace and build on the work of several internal working groups at the agency. Szczepanik currently serves as senior adviser for digital assets and innovation and associate director in the SEC's division of corporate finance.

From Oct. 12 to Oct. 19, the SNL U.S. Financial Technology index rose 0.83%.

A recent report from S&P Global Market Intelligence explores how banks and insurers are embracing fintech innovation. The report looks at recent trends and provides outlooks for the insurtech, digital lending, digital investment management, digital banking, payments and distributed ledger technology sectors. Click here to read the report.