Which Financial Stock Would Hold Up Better in a Recession: PayPal or American Express?

American Express (NYSE: AXP) and PayPal (NASDAQ: PYPL) both changed how people spend money. American Express is one of the world's largest credit card companies, and PayPal is one of the top digital payment platforms. American Express is often considered a slower-growth blue chip stock, while PayPal usually attracts growth-oriented investors.

But over the past five years, American Express' stock has more than doubled, while PayPal's has plummeted nearly 80%. Let's see why that divergence occurred -- and if American Express will continue to outperform PayPal when the next recession hits.

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The differences between American Express and PayPal

American Express issues its own credit cards and runs its own banking accounts. That sets it apart from Visa (NYSE: V) and Mastercard (NYSE: MA), which don't issue their own cards and rely on partner banks to handle the actual accounts.

To protect its balance sheet from bad debt, American Express issues its cards to more affluent customers with higher credit scores. Those higher standards give it a smaller market than Visa or Mastercard, but also provide it with more downside protection during a recession.

It's also resistant to interest rate swings, as higher rates usually boost the net interest income from its revolving card balances and cash holdings. That growth can offset the macro pressure of inflation and higher rates on its consumer-driven credit card business. It serves more than 140 million cardholders worldwide.

PayPal generates most of its revenue by charging transaction fees on its checkout services and money transfers. However, its take rate (the percentage of each transaction it retains as revenue) has been declining as it faces more competition and relies heavily on its lower-margin unbranded payment services and Venmo peer-to-peer payments. Its growth in active accounts, which reached 439 million in its latest quarter, has also slowed to a crawl.

Unlike American Express, PayPal's business model isn't naturally insulated from economic downturns. A macro-induced slowdown in retail spending will inevitably throttle its growth and crush its margins. It's trying to widen its moat through deeper partnerships with credit card companies, Venmo's expansion, new services for brick-and-mortar stores, crypto trading tools, high-yield savings accounts, and stablecoin-powered cross-border transfers.

Unfortunately, all of those businesses will struggle during a prolonged recession. All of those existential challenges are preventing PayPal from keeping up with American Express.

What will happen over the next few years?

From 2025 to 2028, analysts expect American Express' revenue and EPS to grow at CAGRs of 9% and 14%, respectively. Assuming a recession doesn't occur, that growth should be fueled by its focus on younger Millennial and Gen Z consumers, its international expansion, and its rollout of more Platinum and Gold card benefits in exchange for higher annual fees.

From 2025 to 2028, analysts expect PayPal's revenue and EPS to grow at CAGRs of 5% and 4%, respectively. It plans to drive that growth by streamlining its business, monetizing Venmo more aggressively, expanding its crypto capabilities, and scaling its higher-margin integrated advertising business. It also plans to buy back more shares to boost its EPS.

American Express and PayPal trade at 19 times and 11 times this year's earnings, respectively. PayPal seems like the cheaper stock, but it arguably deserves that discount because it faces formidable near-term and long-term challenges. PayPal recently rejected a joint takeover bid from Stripe and Advent International at $60.50 per share, claiming the bid undervalued its business. However, it still needs to prove it deserves a higher valuation.

The choice between American Express and PayPal is a simple one. American Express operates a balanced business with a wide moat, while PayPal's moat is shrinking in a fragmented market filled with similar fintech companies. So while a recession would only be a temporary setback for American Express, it could irreparably damage PayPal's fragile turnaround efforts.

American Express is an advertising partner of Motley Fool Money. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends American Express, Mastercard, PayPal, and Visa. The Motley Fool recommends the following options: short September 2026 $47.50 calls on PayPal. The Motley Fool has a disclosure policy.