The US stocks barometer S&P 500 Index raced past the 5,600 mark this past week as Wall Street’s bull run gathered momentum. On July 10, the Index was up 18.8% year-to-date and just over 60%, including dividends, since it bottomed in late October 2022.
Tech-heavy Nasdaq Composite Index has had an even better run. Powered by Nvidia, Microsoft, Amazon and Google’s owner Alphabet, the tech barometer is up 27%, including dividends, this year and over 81% since its bottom just 18 months ago. Market gains like that are spectacular by any yardstick and have left many a naysayer completely flummoxed.
While most tech segments have rallied strongly on the momentum of hot AI players, fintech stocks have lagged. Among them are payment firms, “Buy Now Pay Later” (BNPL) companies, challenger digital banks and wannabe credit card disruptors.
Fintech and e-commerce were the only two segments that showed the most carnage. Venture funds dried up, job cuts burgeoned, stocks were hit hard and for unlisted players, IPO and other exit routes remained shuttered. Many fintech stocks were hammered down 80% to 95% in 2022 and early 2023 as the US Federal Reserve dramatically jacked up interest rates from near zero to 5.25% — the fastest pace in history.
aIndeed, two leading digital payment “disruptors” — PayPal Holdings and Block (formerly Square) — are now just a shadow of their former selves. PayPal stock plunged over 84% from its July 2021 peak of US$308.54 ($415.85) late last year and is still down nearly 83%.
Despite changing its name from Square, Block has fared only a little better. Though its shares fell over 86% from its peak of US$281.81 in August 2021, they are now hovering around US$65 or down 77% from its all-time high. PayPal’s stock, which traded close to 90 times earnings at its peak, now trades at just 14.2 times 12 months’ forward earnings and investors are still not interested in it.
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Fintech unicorns didn’t fare any better. Klarna, a Swedish BNPL firm, slashed its valuation by 85% from a peak of US$45.6 billion to just US$6.7 billion as its investors reevaluated the impact of high interest rates on online lending platforms.
Klarna provides BNPL services to e-commerce customers. With e-commerce and fintech both in the doldrums, Klarna was considered among the more vulnerable. IoT is reportedly seeking an IPO later this year, hoping for at least a valuation of at least US$20 billion on its listing day.
Payment infrastructure player Stripe, valued at US$95 billion after a US$600 million funding round in 2021, slashed its valuation to US$50 billion. In a recent share sale to provide current and former employees some liquidity, Stripe shares were valued at US$65 billion, still way down from US$95 billion over three years ago.
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Fintech’s disruption
One of my earliest Tech columns for The Edge Singapore appeared eight years ago in late June 2016. Titled “Fintech and Banking’s Uber Moment”, it was about how financial technology start-ups were disrupting traditional finance in general and banks in particular.
Throughout history, challengers in financial services have largely failed because they try to take on incumbents on too many fronts. In his seminal work The Art of War, Sun Tzu posited that “every battle is won or lost before it is even fought.”
Battling entrenched players who have built decades-long relationships with customers has been the bane of fintech challengers. Banks are unlike media firms or retailers which are easily disrupted by the Internet and e-commerce.
The fintech ecosystem burgeoned in the aftermath of the Covid-19 pandemic. Consumers, particularly the younger demographic, increasingly demand seamless, secure, personalised payment experiences. Companies delivering on those expectations are getting rewarded, but those who can’t meet expectations are getting pummelled and younger users who have no loyalty to the platforms just move on to the next thing.
There are three main groups of players in fintech — Big Tech companies, including Apple, Google and Amazon; traditional financial services players, including incumbent banks; credit card issuers like Visa and Mastercard; and finally, fintech companies like Block, Stripe, Klarna and PayPal. At stake is who dominates the future of payments and financial services.
The thing is, shiny new, innovative players don’t necessarily have an advantage in financial services. For one thing, there is inertia. Customers loathe to abandon a bank or credit card firm they have dealt with since they were teenagers or one their parents or even grandparents trusted.
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The biggest banks in America and Europe have a history of a century or more. JP Morgan Chase, the world’s largest financial institution, was founded in 1871, just months after Deutsche Bank, Germany’s largest, was founded in 1870 and Britain’s Barclays Bank first opened for business in 1690.
In financial services, trust matters and it is difficult for fintech to break through. The route many innovative fintech start-ups have taken is to focus on a tiny neglected niche segment of the market and then expand into other services.
Having lost a lot of ground to fintechs a few years ago, large incumbent banks are spending billions incubating fintechs in-house and spending billions more on technology. JP Morgan Chase, for example, spent US$17 billion on technology last year.
Mike Mayo, the top-rated banking analyst for Wells Fargo Securities, has even called the New York-based financial giant the “Nvidia of banking”. JPMorgan’s CEO Jamie Dimon has long warned peers to take the threat from Big Tech and fintech players seriously.
What went wrong at PayPal?
That brings me to what’s ailing once hot fintech giant PayPal. ApplePay and GooglePay, the checkout payment solutions of iPhone maker and the giant search engine operator, have outdone their fintech rival. The duo has become the Kings of contactless payments through their iOS and Android apps, which were once PayPal’s core business and main revenue driver.
I can’t remember the last time I had to take out my physical credit card to pay for anything. Most people don’t even know why they carry physical plastic cards when contactless payments are the preferred way to pay for merchants and customers. At the cashier or a self-service counter, I usually open the ApplePay app on my iPhone and point it towards the terminal.
PayPal and Block have tried to differentiate themselves by pivoting to niche peer-to-peer (P2P) payments, but ApplePay is making inroads. The iPhone maker recently unveiled updates to Apple Pay, including “Tap to Cash”, a new P2P feature that allows users to transfer money by holding two iPhones together without sharing personal info.
That’s a natural evolution of ApplePay’s existing “Tap to Pay” feature for merchants to accept contactless payments. Revenues from ApplePay set an all-time record in the March quarter.
Ironically, PayPal and Block were expected to dominate digital payments with their Venmo and Cash App offerings. However, they are now struggling to defend what was once their forte. Until recently, Apple Pay and Google Pay were popular with people 35 and older, while younger users favoured PayPal’s Venmo and Block’s Cash App.
For some years, PayPal has been grappling with slowing growth and declining active accounts. Active accounts declined 1% over the past 12 months. A decline in active accounts indicates problems attracting new users and maintaining engagement.
You might think a 1% decline is nothing to worry about, but in the fintech world, where user growth is everything, an actual decline sends the wrong signals to investors. While PayPal’s other metrics show some growth, they are not enough to mollify detractors.
PayPal’s Total Payment Volume (TPV) grew by 14% in constant currency from January to March, while revenues grew by just 9%, annualised at US$7.7 billion. That growth is the norm for utilities and telecom companies, not high-flying fintechs.
Aware that it has a serious growth problem, PayPal is leaving few stones unturned to show investors that it can actually grow. It is investing in new initiatives like an AI-powered personalised advertising platform and focusing on strengthening relationships with small business customers.
PayPal has also begun focusing on strategic partnerships to expand its user base. It recently even sealed a deal with its key competitor, Apple, to enable ApplePay users to link their PayPal and Venmo accounts for online purchases.
Last September, it hired a new CEO, Alex Chriss, from Intuit, another fintech player. At Intuit, Chriss has focused on M&A transactions. Whether he will use mergers to grow the user base and revenues at PayPal remains to be seen.
For its part, Block has done slightly better. It is a far more diversified player. It’s big in the BNPL space. It owns Tidal, a music streaming service. It even has a trading platform to buy stocks and digital assets. Its Cash App is much more popular among young gear demographics than rival Venmo.
Gross profit from its Cash App grew by 25% in the last quarter, driven by increased adoption of P2P payments, Bitcoin trading and other financial services like Cash App Borrow and Cash App Card.
Another reason Block’s stock outperformed PayPal was Block’s investment in Bitcoin. Block owns 8,038 Bitcoins, currently valued at US$463 million. Block raised its current fiscal year guidance for gross profit, projecting at least US$8.9 billion, or a 17% year-over-year growth. Block has vowed to invest 10% of its gross profits from Bitcoin back into the cryptocurrency.
One large fintech player has fared better than PayPal and Block: Netherlands-based Adyen, a payment processor, has quietly carved a niche by serving large enterprise clients with its unified commerce platform, competing with PayPal’s Braintree.
Although its stock fell 80% from its August 2021 peak, it has since rebounded 72% from the lows. The stock is now 62% from its all-time high. Adyen’s net revenues grew 21% y-o-y to EUR887 million ($1.2 billion) last quarter.
Right now, AI is taking all the oxygen in the room, leaving little leeway for fintech players. Over the next few years, the key will be how incumbent financial institutions leverage generative AI to keep their competitive edge against innovative fintech challengers.
Much will also depend on how Big Tech firms like Apple, Google’s owner Alphabet, Amazon and the new fintech player that Tesla CEO Elon Musk is incubating within X, formerly Twitter, expand in financial services.
Under President Joe Biden, US regulators have tried to prevent Big Tech from buying competitors or using their financial muscle to grow bigger in areas like fintech.
That is likely to change after the November Presidential elections. Former President Donald Trump wants Big Tech and incumbent banks to have a freer rein and is now the odds-on favourite to win. Relaxed rules will help the likes of cash-rich Apple, Amazon and Google take more market share from cash-starved fintech players and emerge stronger challengers to incumbent banking giants.
Assif Shameen is a technology and business writer based in North America.
