Signals: the calm before the storm in public fintech companies?

Hello, Fintech Friends!

The Synapse bankruptcy and the cyber attack on Evolve Trust & Bank, a banking partner for numerous fintech companies like Stripe, Affirm, and Wise, sent waves through the broader financial services industry. However, for publicly traded fintech companies, June was a quiet month.

The Federal Reserve left rates unchanged sparking the debate about "overdoing it", meaning keeping the rates too high for too long and driving the U.S. economy into recession. Nevertheless, the decision (or the debate about a recession) has not had a meaningful impact on public fintech companies.

July is expected to be a busier month with the big banks kicking off the Q2 2024 earnings season on July 12, and Visa, Mastercard, PayPal, and Block reporting their results later in the month. So perhaps, June was just the calm before the storm?

Dave (NASDAQ: DAVE) had a couple of rough months with its stock declining 43% from the peak on May 9. The stock is still up 261% YTD, but at least it fits on the chart now. Read more about the amazing runs by Funding Circle (LON: FCH) and Robinhood (NASDAQ: HOOD) below.

This month's story was certainly Affirm striking a partnership with Apple to offer its BNPL products in Apple Pay. Thus, later in 2024, "eligible U.S customers checking out online or in-app with Apple Pay" will be able to pay for their purchase over time with an Affirm loan. Affirm has shown the world again that they are the masters of partnerships.

An important caveat is that this partnership, at least for now, covers only online and in-app purchases. Apple will be partnering with other lenders (such as Citi and Synchrony in the U.S., and HSBC and Monzo in the U.K.); however, Affirm will be the only partner, that will be directly integrated into Apple Pay, while others will provide installment loans via connected debit and credit cards.

What's even more interesting is that Apple announced the discontinuation of its own BNPL offering. A little over a year ago, the company launched Apple Pay Later, which allowed users to "split purchases into four payments, spread over six weeks with no interest and no fees." It looks that just a year into the BNPL journey, Apple decided that partnering with Affirm might be a better strategy.

In its filing with the SEC, Affirm noted that it "does not expect this partnership to have a material impact on revenue or gross merchandise volume in the fiscal year 2025" (Affirm's fiscal year 2025 starts on July 1, 2024), which, perhaps, explains why the stock hasn't moved much on the announcement. Evolve's hack also didn't help Affirm's stock (Evolve is Affirm's issuing partner for Affirm cards).

Read more: Affirm buy now, pay later loans will be embedded into Apple Pay later this year

📈

Affirm stock performance: -41% YTD, +80% 1Y

Robinhood announced the acquisition of Bitstamp, one of the oldest crypto exchanges in the world. Bitstamp holds "over 50 active licenses and registrations globally" and serves customers in the EU, U.K., U.S., and Asia. Robinhood will be paying $200 million in cash and expects to close the transaction in "the first half of 2025."

The acquisition will help Robinhood ramp up its global expansion with Bitstamp providing the necessary licenses and operational infrastructure to onboard users. Thus, at the end of 2023, the company launched crypto trading in the European Union and is considering launching trading of crypto futures in the EU and the United States.

However, what probably is fueling the company's stock performance this year (+78% YTD) is the growth in customer deposits. Thus, Robinhood's customers have been consistently adding over $3.5 billion in deposits per month since the beginning of the year (see the chart above). At the end of May 2024, Robinhood customers had $20.3 billion in cash sweep with Robinhood earning 80-90bps in annualized interest on these funds.

As a reminder, Robinhood earned more in interest income than in trading fees in 2023. Thus, a growing cash sweep and the interest rates that are expected to remain higher for longer, are a strong tailwind for the company's earnings.

Read more: Robinhood to Acquire Bitstamp

📈

Robinhood stock performance: 78% YTD, +129% 1Y

Wise published the fiscal year 2024 results (the company's fiscal year ends in March). The number of active customers increased 29% YoY to 12.8 million, revenue increased 24% YoY to £1.05 billion (approx. $1.34 billion), and reported profit for the year increased 212% to £354.6 million (approx. $452 million).

However, the company's stock is down almost 20% since reporting the results, as Wise's management announced the plans to "invest relentlessly to serve as much of this huge, under-served market as possible" and investors didn't like that. The company leadership argued that investing in price (meaning cutting fees for customers), marketing, product development, and customer support functions worked before, and they plan to continue using this playbook.

Thus, since going public in 2021, Wise's customer base has grown at a CAGR of 29%, volume has grown at a CAGR of 30%, and underlying income has grown at a CAGR of 41%. The company also managed to deliver this growth while maintaining profitability, with the underlying profit before tax increasing at a CAGR of 83%.

Wise's management also reiterated their ambition to deliver a 15-20% annual income growth over the medium term and a 13-16% underlying profit before tax margin, which is the equivalent of the 20-23% adjusted EBITDA margin (a metric that the company used previously). Could the market have overreacted to the announcement?

Read more: Preliminary results for the financial year ended 31 March 2024

📈

Wise stock performance: -17% YTD, +10% 1Y

Coinbase made two announcements in June, which might not have had an immediate impact on the stock price, but are contributing to the company's mission "to bring more than 1 billion users onchain." First, Coinbase announced a partnership with Stripe. Thus, Stripe will add support for USDC stablecoin on Coinbase's L2 chain Base to its crypto product suite. And Coinbase will add Stripe’s fiat-to-crypto onramp into Coinbase Wallet.

Second, Coinbase announced the launch of Smart Wallet. Smart wallets are self-custodial wallets that use passkeys instead of seed phrases, which greatly simplifies user onboarding. In addition, smart wallets allow app developers to "sponsor" transaction fees. For example, Coinbase allows topping up smart wallets from Coinbase accounts for free (typically users would have to pay a "gas fee" to transfer funds to a self-custodial wallet).

So how are these two announcements related? Stripe is bringing USDC to millions of its merchants and app developers, while Coinbase is simplifying the onboarding and usage of crypto wallets for consumers. As Garry Tan, President and CEO at Y Combinator put it: "Coinbase's biggest opportunity is to be the browser wallet and fiat to crypto rail."

Read more: A New Era in Crypto Wallets: Smart Wallet is Here

📈

Coinbase stock performance: +28% YTD, +210% 1Y

Sometimes less is more. Thus, in March this year, British small business lender Funding Circle announced the intention to sell its loss-making U.S. business to focus on the U.K. market and simply the company... and the company's stock soared on the news, as investors welcomed the change.

In June, the company finalized the sale of its U.S. operations to iBusiness Funding, a subsidiary of Ready Capital, netting £33 million in proceeds. In the meantime, the company's market cap more than tripled from less than £100 million before the announcement in March to £345 million as of this writing.

Founded in 2010, Funding Circle expanded to the United States in 2018. Initially, the company operated under a peer-to-peer model, offering individual and institutional investors access to high-yielding small business loans. However, in 2022, similar to the likes of LendingClub and Zopa, Funding Circle discontinued its peer lending service.

Read more: Funding Circle sells US business for £33m amid cost-cutting drive

📈

Funding Circle stock performance: +140% YTD, +70% 1Y

There weren't many changes since our last issue (as mentioned above, June was a quiet month). We've added FICO (NYSE: FICO) and the largest U.S. credit bureaus (Experian, Equifax, and TransUnion) to the list. Despite many attempts to disrupt FICO, the company is still doing fine and is trading at some of the highest multiples in the industry.