Securities.io is not an investment adviser, and this does not constitute investment advice, financial advice, or trading advice. Securities.io does not recommend that any security should be bought, sold, or held by you. Conduct your own due diligence and consult a financial adviser before making any investment decisions.
One sector of the economy that has been slow to change is the financial sector. Banking, insurance, and other financial firms have been sticking to rather ancient technology and methods. This gave an opportunity for more tech-savvy and innovative companies to reinvent these businesses and grab market share, especially with the younger generations, creating the so-called fintech (financial tech) sector. A large ecosystem of startups has bloomed to embrace digitalization and innovation of financial offers.
Another segment where fintech succeeded is with part of the population that was neglected or poorly cared for by traditional financial companies. Freelancers, entrepreneurs, digital nomads, and many new work and lifestyles could not fit into the narrow definition of old finance and struggled to access financing or get efficient purely digital services. E-commerce and crypto were other sectors that traditional banks did not want or could not properly service.
The large unbanked population in developing countries in Asia, Africa, and Latin America is another interesting target for ambitious fintech companies.
Fiserv provides “financial technologies” to the financial sector. In practice, this means payment systems, electronic billing, mobile banking, debit and credit card processing, digital payments, debt collection, etc.
The company serves 6 million merchant locations, has 1.4 billion accounts on file, and processes 12,000 financial transactions per second from nearly 10,000 financial institutions.
This makes Fiserv one of the original “fintech” before the word even existed. It also makes it a central part of the financial infrastructure, which gives the company a solid economic moat.
Growth might be slowing down, which may not be a surprise for such a large company. Still, the merchant segment grew revenues by 16% year-to-date, and the payment and network segment grew by 11% year-to-date, showing that the company might still be able to keep expanding out of financial technology.
The company does not distribute a dividend but rewards its shareholders through a solid share repurchase program, with already $2.5B in the first two quarters of 2023.
Fiserv might not be the most trendy or newest fintech, but it is a safer bet than more ambitious and smaller competitors. So it is likely more fit for rather conservative investors looking for exposure to the sector without taking too much risk.
When the Internet was still young, payment processing was a real issue. People lacked trust in online payments or sellers to put their credit card data online. To solve these issues and make payment seamless, both Elon Musk and Peter Thiel worked tirelessly to build payment processing companies. They would put aside their differences and merge their respective companies to form the so-called PayPal mafia. PayPal employees would later find LinkedIn and YouTube.
PayPal today has lost a little of its early days’ luster, being seen as a “boring” payment company. This is rather misleading, with PayPal still to this day a central keystone of e-commerce. The company also owns Venmo and Braintree, both acquired in 2013.
Apart from being out of fashion, PayPal has 400 active customer accounts, and 35 million active merchant accounts in 200 countries in 150 currencies.
In Q2 2023, it processed $377B and generated $7.3B of revenues. The company is growing aggressively today, with yearly growth regularly above 10%.
PayPal is also quite shareholder-friendly, with $19B in share repurchases since 2015. Contracting margin, rising rate, and inflation have created anxiety among investors about PayPal’s future, leading to a severe decline in share price back to 2018 levels. The long search for a new CEO ended in August 2023 and also contributed to worries about PayPal’s future strategy.
This lower price can be an opportunity for investors looking for fintech stocks at a discount. Considering the steady growth and dominant position in the e-commerce ecosystem, risks might be lower than perceived.
On a side note, PayPal is also still innovating, notably launching a dollar stablecoin in August 2023, aiming to “Build the bridge between fiat and Web3 for consumers, merchants and developers”.
MercadoLibre is an e-commerce company that is also very active in the fintech sector. It is the dominant e-commerce company in Latin America, with more monthly visitors than all other e-commerce platforms in the region combined. It had 108 million unique active users in Q2 2023. The region has a rather young demography, strong economic growth, and far from mature adoption of the Internet and e-commerce.
The Fintech segment of MercadoLibre, Mercado Pago, has just surpassed 45 million users in Q2 2023. The company is thriving from the inefficiency of banks in its main markets.
In fact, it is on the strength of its payment system, usable directly from phones, that MercadoLibre managed to build an e-commerce company in a region of the world where payments and transfers are notoriously inefficient. This simplicity of usage also gave it access to the massive 122 million people unbanked in Latin America.
Unlike Robinhood in the US, Mercado Pago also offers loans and an investing platform. The fintech activities have been growing strongly, only slowed down a little by a decline in credit growth.
One strength of MercadoLibre is its ecosystem. People might start using it for e-commerce or the online wallet and then progressively use it more and more for all online purchases and money transfers.
Combined with its dominant position, its ecosystem is well positioned to grow both in market share and with the overall Latin America fintech + e-commerce sector, both at a much earlier stage than in Western countries. So this could be akin to buying a company merging together PayPal and Amazon, somewhere between 2000 and 2010, even if Latin America is also known for being a much more unstable economy than the US.
Block, formerly known as Square, was founded by Jack Dorsey, co-founder of Twitter. Its first product, Square, is focused on helping small and medium businesses to accept credit card payments, using tablets as payment registers.
It also has a Cash App for directly transferring money from person to person; Afterpay, a buy-now, pay-later service; Weebly, a web hosting service; and Tidal, a music streaming service.
The company’s expanding list of services has somewhat helped it grow its revenues and gross profit, with most of the profit coming from Cash App and Square. The company has been recording a positive net income since 2019.
The company’s largest opportunity is with mid-sized companies, with less than 0.5% market penetration today. By comparison, market penetration was 13% for micro and 4% for small companies.
Cash App is used only by 20% of Gen Z and 17% of millennials, leaving much room for growth to Block. Nevertheless, it was the number 1 finance app in the App Store for the last 5 years and 8th most downloaded app in 2021.
Block has also been known as a Bitcoin enthusiast company, notably putting 1% of its assets in Bitcoin in 2020. With TBD, it is building an open developer platform to facilitate access to Bitcoin and blockchain in general while bypassing financial institutions.
The potential of Block is to turn into “the future of finance,” connecting its square payments system to Cash App and TBD, as it has proven a remarkable ability to reach a younger audience.
With much of the company’s future rests on future market penetration, investors will want to monitor the company’s margins and growth rate closely to check if the growth thesis is still alive and well.
Nu Holdings and its subsidiary NuBank are the other large and growing fintech in Latin America, with 85 million customers in Mexico, Brazil, and Colombia.
The company is an online bank and provides 5 million people with their first credit card or bank account. The company market penetration is especially impressive in Brazil, where 49% of the adult population is a client of NuBank.
This makes NuBank the world’s largest digital banking platform, with explosive growth since 2019 (10x in customer numbers).
The company is also active in the commercial banking sector, with 3.1 million business customers. It is expanding in the investing sector, with 10 million customers and 1.3 million NuBank crypto customers. More recently, NuBank launched a home insurance offer, which led it to pass the bar of 1 million active insurance policies.
The company has now reached the scale it needed to turn profitable, with 53% growth of net income quarter-to-quarter. A strong growth driver for the company is that customers increasingly make NuBank their primary bank account, adopt multiple services from the company, and do so very quickly, on average, after just 6-12 months.
Overall, NuBank’s extreme growth level is the best case that can be made for the stock. Investors will nevertheless need to be cautious, as inflation and globally rising rates might cause some economic hardship and put at risk the loan books of banks.
NuBank does not seem to be an exception, with 90+ days of nonperforming loans rising since 2021, even if, according to the company’s management, “delinquency ratios are tracking expectations.”
Robinhood is the creator of a very popular investing app with the stated mission to “democratize finance for all.”
It was one of the first to offer a commission-free trading service to retail investors, leading to very quick adoption, especially among younger audiences. It also offered fractional share investing (allowing one to buy only a fraction of a full share of a company).
The company has 10.8 million monthly active users and $89B in assets in custody. The user base has declined severely since the highs of 2021 when investing and trading (and honestly, for some people, gambling) rose dramatically due to the pandemic and lockdowns.
This decline in monthly users did not translate into an equivalent decline in assets under custody, with volume mostly fluctuating from changes in the stock market valuation. This seems to indicate that the larger accounts have stayed, with smaller or more speculative accounts making most of the monthly user losses.
While options and crypto often made headlines in connection with Robinhood, equity & cash still represent the bulk of the assets in custody.
Because of the relative decline in trading activity, Robinhood stock has performed rather poorly since its July 2021 IPO. At the same time, the company metrics are not as bad as people seem to think. The company is still the custodian of a massive asset base and has also achieved GAAP profitability for the first time in Q2 2023.
Overall, it seems Robinhood has rationalized its expenses while increasing its revenues. So, while the investing mania of 2021 might be over, what is left behind is a solid company with a strong user base, improving technology, and a more efficient cost structure.
So, investors in Robinhood will have to bet that the market will reconsider their opinion on the company now that it is turning profitable and has not lost assets in custody despite poor expectations.
SoFi is a fintech with a strong focus on loans, offering a diverse selection of student loans, personal loans, mortgages, and auto loans. It also offers investing accounts, credit cards, banking, insurance, and cryptos.
The company looks to win the loyalty of its client base through the Member program, providing discounts, unique offers, hotlines, coaching, etc.
SoFi’s customer base is still expanding quickly, with a growth of 43% year-to-year in Q2 2023. Net revenues grew by 37% and quarterly EBITDA by 385%.
A key point of interest for SoFi, and any lender for that matter, is how it will deal with rising interest rates. On one part, it could benefit from rising rates, which in turn provides more profits to the company. On the other hand, it can cause a rise in delinquency and bad loans, which could endanger the company, as we recently saw with a few regional banks in the US.
Another layer of complexity is added for SoFi as many student loan repayments have been on hold since the pandemic and are scheduled to restart in October 2023. With student loans of $5.4B of a total $18.2B loan book, this could affect the company.
Home prices and commercial real estate are not a concern for SoFi, with home loans only being $78M.
Investors in SoFi will want to carefully evaluate the loan book risks while also considering that a quickly growing customer base creates a very different situation than a more mature and stagnant regional bank.
Wise (formerly TransferWise) is an Estonian startup initially founded to facilitate cross-border money transfer while dramatically reducing the often outrageous fees banks charged for this service. This represents a total market of £2T for individuals and £9T for SMEs.
The company claims to be able to do international and multi-currency money transfers in less than 20 seconds for 8-10x cheaper fees than banks.
Since 2019, the company has multiplied its customer base by 3x, reaching 10 million people, and its income and EBITDA grew even more.
This still leaves much room to grow for Wise, with only a 5% share of the personal market and 1% of the SME market.
A very impressive statistic from Wise is that 66% of its customers came from word-of-mouth, which Wise calls “evangelical customers,” an almost unheard-of performance in finance, where customer acquisition can be expensive. This is most likely due to the exceptional performance in both speed and fees. The volume of transfers from existing customers also tends to grow over time.
Wise is now profitable and listed on the London Stock Exchange. Wise’s business is somewhat niche, not trying to compete on trading fees, loans, and other larger financial industry sectors. It is also responding to a very real need that has been neglected (abused?) by banks, with an infrastructure for money transfer that had not evolved for decades.
So investors in the company will aim for Wise to have developed a strong economic moat and brand and the ability to expand it globally beyond the US+EU region.
Upstart is a lending marketplace powered by AI, launched much before AI became a center of tech conversation in 2023. It currently has 2.3 million customers and originated $34B in loans with 100 banks. Upstart’s process is mostly automated, with 87% of granted loans fully decided through automation.
The idea behind Upstart is that the existing credit score system is inefficient and outdated. With a lot more data available, it is possible to identify loan risks better and, as a result, provide cheaper loans to a large portion of the population.
This means Upstart’s method can identify people with high FICO scores but, in practice, have a high risk of defaulting on their loans. And reversely, people with low FICO scores are not that likely to default.
The Total Addressable Market is large, with a yearly $4T originating from personal, auto, home, and small business loans.
Due to rising interest rates and reduced demand for loans, Upstart has experienced a decline in revenues, with $135M in Q2 2023, compared to $228M a year before.
This temporary loan volume setback has not slowed Upstart’s expansion of its lending partner network, with 100 banks, up from 71 a year before and only 10 at the IPO in 2020, and 61 dealerships, from 39 in Q1 2023.
The company has a cash stash of $422M and will need to use it to pass this period, while the growing network will have to help it restart growing revenues.
Investors in Upstart will need to hope that the growing network is a clear sign of the value of Upstart technology and of its potential to become a large originator for loans in the US market.
LendingTree is an online lending marketplace, which is helping people find the best loan offer available among 500 loan providers. Over 26 years of activity, it has contributed to $260B of loans for 111 million people.
Like other companies in the lending space, LendingTree has suffered from rising rates and a decline in overall activity. Still, its Q2 2023 AEBTIDA was only down by 7% year-to-year, even with revenues down 23%-50% depending on the sector, with the largest decline seen in housing loans.
LendingTree might suffer from declining loan volumes, but this does not change its long-term prospect once the economy has absorbed higher rates.
The main question for LendingTree moving forward is whether the model of a lending marketplace is still valid. Will customers still look to compare loan offers, how they are doing routinely for hotels, travel, etc.… ? Or will they accept the offers from their trading app, digital bank, and other fintech they are already using?
While in the short term, many fintech are looking to expand their own loan offer, the more they multiply, the more a reliable and neutral comparison tool will be needed, the same way it is with traditional banks. So, there is a good case to be made that a leading marketplace like LendingTree will still have a space in the ecosystem, even if it becomes dominated by fintech instead of traditional banking.
Major French Banks Raided in $108B Money-Laundering and Tax Fraud Investigation
Jonathan is a former biochemist researcher who worked in genetic analysis and clinical trials. He is now a stock analyst and finance writer with a focus on innovation, market cycles and geopolitics in his publication ‘The Eurasian Century”.
Consolidation of Financial Services Among Vertical Software Platforms to Redefine Industry Roles
Advertiser Disclosure: Securities.io is committed to rigorous editorial standards to provide our readers with accurate reviews and ratings. We may receive compensation when you click on links to products we reviewed.
ESMA: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Investment advice disclaimer: The information contained on this website is provided for educational purposes, and does not constitute investment advice.
Trading Risk Disclaimer: There is a very high degree of risk involved in trading securities. Trading in any type of financial product including forex, CFDs, stocks, and cryptocurrencies.
This risk is higher with Cryptocurrencies due to markets being decentralized and non-regulated. You should be aware that you may lose a significant portion of your portfolio.
Securities.io is not a registered broker, analyst, or investment advisor.