Signals: it's been a good year for public fintech companies

Hello, Fintech Friends!

September was a quiet month. It's one of those "off-season" months when companies have completed reporting their previous quarter and are focused on delivering great results for the upcoming earnings season. So the most notable event of the month was the Federal Reserve (finally) cutting the fed funds rate by 50 basis points. Investors now expect an additional 50 basis points cut by year-end.

There were winners from high interest rates. Think of Rohinhood earning interest on uninvested customer balances or Coinbase earnings interest on USDC reserves. There were also losers from high interest rates. Think of fintech lenders that faced frozen securitization markets and higher cost of funding. This earnings season, which was kicked off by JPMorgan last Friday, we will start hearing more about how all these fintech companies plan to grow when the rates normalize.

In the meantime, the TWIF Index is up 40% YTD, compared to roughly +22% for both, the S&P 500 and Nasdaq Composite. It's been a good year for fintech companies, and perhaps, the market, which is always forward-looking, tells us that their future looks bright too.

Jevgenijsp.s. Have feedback? Ping me on X/Twitter.Happy to hear what we can improve in this column!

Sezzle (NASDAQ: SEZL), Dave (NASDAQ: DAVE), and ZIP (ASX: ZIP) continued their run in September. Sezzle is now up 775% YTD, Dave is up 422% YTD and Zip is up 359% YTD. These numbers are getting ridiculous, so let's see for how long this run continues.

Robinhood (NASDAQ: HOOD) is also back in the Top 10, along with its more mature competitor, Interactive Brokers (NASDAQ: IBKR). Robinhood stock is up 106% YTD, Interactive Brokers is up 82% YTD. Does it mean that investors expect increased retail trading activity for the remainder of the year?

PayPal is so much fun to follow under the new leadership! The company is launching new products and signing new partnership agreements pretty much every other week. Thus, in September, PayPal extended its partnership with Shopify to "become an additional online credit and debit card processor for Shopify Payments in the U.S." Payment processing will be powered by PayPal Complete Payments, the company's solution for marketplaces and platforms.

Shopify has been actively signing up merchants for Shopify Payments. Thus, 60% of Gross Merchandise Volume on the Shopify platform is now processed via Shopify Payments (see the chart below). It is hard to say if one day all payments on the platform will be processed via Shopify Payments, but Shopify has a strong motivation to continue increasing penetration of this service. In Q2 2024, approximately 60% of Shopify's revenue came from payment fees.

What's noteworthy about the announcement is that PayPal became an alternative processor to Shopify's long-standing partner Stripe (you can now see both companies mentioned in Shopify Payments Terms of Service). Shopify Payments' volume is still much smaller than PayPal's (in Q2 2024 Shopify's GPV was $42.1 billion, while PayPal's GPV, branded and non-branded, was $266 billion). However, it is still a testament that PayPal can compete with the new generation of payment processors like Stripe.

PayPal also announced that it is "enabling its U.S. merchants to buy, hold and sell cryptocurrency directly from their PayPal business account." Moreover, PayPal merchants will also be able to send and receive crypto "to and from external blockchain addresses." Crypto adoption in commerce is one of the next big frontiers for the crypto industry, and having the backing of PayPal is a strong vote of confidence. "Crypto to me is a really important future element of commerce," commented Alex Chriss, the company's chief, about the announcement.

Read more: PayPal Enables Business Accounts to Buy, Hold and Sell Cryptocurrency & PayPal Partners with Shopify to Power a Portion of Shopify Payments in the U.S.

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PayPal stock performance: +31% YTD, +38% 1Y

Adyen introduced a new payment terminal called SFO1 and incorporated Klarna's Buy Now Pay Later service into its in-person checkout system. In 2023, Adyen and Stripe processed over $1 trillion in merchant payments, representing around 17% market share in global e-commerce sales for each company. Thus, diversifying into in-person commerce is critical for both companies to maintain growth.

Earlier in the year, Amazon chose Stripe to power its "Just Walk Out" technology in Australia and Canada. "Just Walk Out" technology enables customers to shop in physical stores without needing to go through a traditional checkout process. Amazon will use Stripe's payment terminals and payment processing to enable the solution. In general, Stripe doesn't shy away from building its own terminals.

In the first half of 2024, in-person commerce (reported as "POS volume"), represented 15.4% of Adyen's total processed volume. However, in-person payment volume has been consistently growing faster than online volume (see the chart above). Integration with Klarna and the new, feature-rich, terminal further enhances Adyen's in-personal commerce proposition for merchants. It will take some time, but at some point, we might stop associating Adyen and Stripe with online payments. After all, in-person commerce is still much bigger than online.

Read more: Adyen continues to pioneer the in-person payment space with host of new industry-defining products

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Adyen stock performance: +16% YTD, +82% 1Y

The Wall Street Journal reported that JPMorgan Chase is "in talks with Apple to take over its credit card program from Goldman Sachs." Goldman has been trying to unwind its consumer business, and the Apple card, with 12 million cardholders and $17 billion in credit card balances, is one of the remaining pieces. The pending merger of Capital One and Discover would dethrone JPMorgan from the position of the largest credit card lender in the U.S., and it seems that the company is looking for ways to keep its leadership position.

Moreover, JPMorgan is piloting credit cards in the UK. The company launched its retail banking operations, Chase UK, in 2021, and according to its Chief Operating Officer, Daniel Pinto, has 2.3 million customers, of which "1.5 million are highly engaged, and has collected around $28 billion in deposits. To put this into perspective, Monzo, the UK's most successful neobank has 9.7 million customers and $14.7 billion (£11.2 billion) in deposits.

In 2021, JPMorgan acquired a digital wealth management platform, Nutmeg, and is now in the process of integrating it into the Chase UK mobile app. Nutmeg has around $10 billion in assets under management, up from less than $5 billion at the time of the acquisition. What's noteworthy is that Chase doesn't plan to stop with the UK. Thus, according to Daniel Pinto: "We are not going to have branches or anything like that. It's all digital. And at some point, we will expand into the rest of Europe."

Read more: Apple is in talks with JPMorgan for bank to take over card from Goldman Sachs

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JPMorgan stock performance: +33% YTD, +52% 1Y

European merchant acquirer Worldline fired its CEO, who had been leading the company for the past 11 years. Worldlines's stock lost 75% of its value over the past 12 months, as its management has been revising the guidance down. During its 2021 Investor Day, Worldline guided for €5 billion in revenue and €750 million in free cash flow in 2024. The current guidance for the full year 2024 is €230 million in Free Cash Flow, less than 1/3 of what was promised in 2021.

Worldline's rival, Nexi, isn't fairing better. The company is, so far, delivering on its 2024 guidance, but this guidance is just a fraction of what was promised during the company's 2022 Investor Day. The company's stock is down 21% YTD and is trading below the IPO price. In 2021, Nexi completed the merger with its Nordics rival, Nets, creating one of the largest merchant acquirers in Europe. This marked the peak for the company's stock.

The recent performance of Worldline and Nexi raises the question of whether they are facing only temporary setbacks or if they are being outcompeted by next-generation competitors like Adyen and Stripe. Let's also not forget, that Toast and Shift4 are actively expanding into Europe, so the competition will only become fiercer. As of this writing, Worldline trades at a forward Price-to-Earnings multiple of 3.0x, which suggests that investors don't believe the company will be around for long.

Read more: Worldline CEO exits, shares plunge as payments firm issues another profit warning

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Worldline stock performance: -58% YTD, -72% 1Y

Mercado Pago, the fintech arm of Mercado Libre, has finally applied for a banking license in Mexico. The company aims to "become the largest digital bank in Mexico” and announced its intent to apply for a banking license already in May. So far, Mercado Pago has been operating in Mexico under the Electronic Payment Funds Institution license and offers debit cards and credit cards, personal loans, financing for SMEs, as well as incident insurance.

Mercado Pago is following the steps of Nubank, which applied for a banking license in Mexico already in October 2023. As of Q2 2024, Mercado Pago had 52 million monthly "active Fintech users" across the LatAm region, which compares to Nubank's 87.2 million "active customers". The company also finished Q2 2024 with a credit portfolio of $4.9 billion, which compares to $18.9 billion for Nubank. Mercado Pago also has a strong footprint in merchant acquiring with acquiring TPV reaching $33.7 billion in the quarter.

Mercado Pago is not a typical fintech company. Despite contributing 42% of Mercado Libre's total revenue, you can rarely find it on the lists of "fintech companies." Yet, anyone investing in LatAm fintech companies cannot ignore Mercado Pago, as it directly competes with many "pure" fintech companies such as Nubank, Inter, Stone, PagBank, and even XP. Nubank's valuation suggests that the market expects Nubank to succeed in Mexico. But, perhaps, its success is subject to figuring out how to outcompete Mercado Pago.

Read more: MercadoLibre's fintech arm applies for banking license in Mexico

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Mercado Libre stock performance: +33% YTD, +68% 1Y

There weren't many changes to the lists of fintech companies ranked by their EV/EBITDA and P/E multiples since our previous issue: Shopify, Toast, and FICO are still some of the priciest fintech companies out there whichever way you look at them.