Fintech industry has grown astonishingly
The U.S. Consumer Financial Protection Bureau (CFPB) stated on November 7, 2023) that the digital payment and e-wallet services of technology giants have now developed to be comparable to the traditional banking industry in terms of business scale and scope. Comparable to each other. Representatives of these companies include Alphabet, Apple, PayPal and Block. They provide powerful payment platforms such as GooglePay, ApplePay, PayPal and CashApp respectively. The standard is companies that process more than 5 million transactions per year, and there are about 17 companies of this size that handle more than $13 billion in payments annually.
Fintech and payments are too tempting
Buffett himself also invests in financial technology. He once made a very vernacular comment on the financial technology industry: everyone wants to control the payment field. Payment is the core of financial technology, which shows how attractive this financial technology field is.
Note: Buffett has long held shares of Visa (US stock code: V) and Mastercard(US stock code: MA), and has also invested in Brazilian financial technology listed companies StoneCo (ticker: STNE) and Nu (ticker: NU) , and India’s PayTm are three recently listed financial technology unicorns.
Fintech is severely affected
Fintech is no longer a super new blue ocean in the technology and financial circles ten years ago. It is not an exaggeration to describe it as a red ocean; this is also reflected in various well-known fintech players, such as PayPal (ticker: PYPL) and Block (ticker: SQ), represented by the market valuation of listed or unlisted financial technology companies, payment companies, and online loans, these three typical financial technologies, all companies have no Fortunately, the valuation has fallen from its peak valuation three years ago to its current level.
The market valuation level of listed financial technology companies not only has no advantage, but is even lower than that of most technology sub-industries. In the technology industry, the current valuation of financial technology is considered to be a very low group.
Unlisted financial technology companies are even worse. Many valuations are only 1/4 or even less than 1/10 of their peak. Many are unlisted. The famous financial technology unicorns three years ago not only started to conduct multiple rounds of After layoffs, many of those who couldn’t hold on would declare the company bankrupt – because none of these companies had positive cash flow, and without new investors willing to inject capital, they could only declare the closure of business.
Among them, the unlisted payment industry unicorn Stripe, which was once the world’s top three largest valuation company, fell by 47%, and the enjoy now and pay later company Klarna, which fell by 85%, can be regarded as unlisted financial technology companies. Two major representatives of industry value impairment.
Pandemic catalyst is no longer
During the COVID-19 pandemic, various places implemented lockdowns, which made it difficult for consumers to use cash and turned to digital payments. However, after the epidemic, investors became increasingly optimistic about the growth prospects of the digital payment industry, and the high valuations of financial technology companies are also facing correction pressure.
In the two to three years before 2021, the stock prices of financial technology companies, like most technology stocks, have repeatedly hit new highs. After most financial technology companies went public, they coincided with the 13-year bull market that was rare in the US stock market. In addition, consumers during the COVID-19 epidemic preferred to use electronic transfers and e-commerce shopping to avoid exposure to infection.
These two points can be said to be the key to financial technology. Catalysts for the stock prices of listed companies in the industry. After 2021, when interest rates rise and the bear market hits, the stock price has been falling. The stock price decline is not only much greater than the U.S. stock market, but also much lower than most technology stocks, with no sign of bottoming out. And this phenomenon affects all financial technology companies, and no one is an exception.
For these financial technology platforms, the sudden change in valuation is also related to the drastic changes in the macro environment in the past few years. Low interest rates and online consumption habits during the COVID-19 epidemic have caused the valuations of this group of financial technology stocks to skyrocket. However, as interest rates rise rapidly and inflation further compresses consumption capacity, the situation of these growth stocks in the capital market has also taken a turn for the worse.
Interest Rates Raised
Rising interest rates will cause market bond interest rates to rise, which will reduce the value of bond assets purchased by financial technology companies during the bull market. This is because bond interest rates are low during the bull market, but the number of bonds held by financial technology companies is very large, which will have an impact on the company’s financial turnover. This is the main reason why Silicon Valley Bank will collapse in early 2023.
Regarding the ins and outs of the collapse of Silicon Valley Bank, please refer to my other post for details: “How did Silicon Valley Bank collapse? What is the impact?“.
Inflation, bear market, economic downturn
Macroeconomic slowdown. Affected by this, consumers allocate more funds to non-discretionary categories. Consumers are increasingly reducing non-essential expenditures such as luxury goods and entertainment, and tend to spend money on necessary expenses such as housing and food. Rather than dispensable consumer goods (such as luxury goods, cars, high-priced electronics), profits also affected the company’s growth.
Inflation, a bear market, and an economic downturn combine to force consumers to cut back on spending, and of course daily transactions will be significantly reduced. This is the main reason why the business of financial technology companies, which mainly rely on collecting transaction commissions, has shrunk and is not as good as before. Because the payments, online loans, transfers, and cryptocurrencies operated by financial technology companies are all consumer financial services for ordinary retail investors.
When the consumer financial business is in a bull market, money can be borrowed everywhere, everyone has a job income, consumers dare to spend money boldly, and the business of financial technology companies is booming. However, when the economic situation in a bear market is not good, jobs may not be guaranteed, and money may not be borrowed. Consumers are afraid to spend, and spending will obviously shrink significantly.
Most of the corporate financial services that traditional banks can operate are beyond the reach of financial technology players. Corporate financial business, on the other hand, is mostly long-term and stable loans with collateral issued by the company. In comparison, it will not be hit, and the interests of the industry can be protected.
However, all financial technology companies are involved in lending to ordinary retail investors, and these are all loans without collateral. When the economy is bad, a large proportion of consumers will not pay, and the bad debt rate will soar sharply. A high bad debt rate will erode profits and even cause substantial losses. The most typical representatives are the new artificial intelligence online lending company Upstart (ticker: UPST), and the enjoy now, pay later (BYPL) operator Affirm (ticker: AFRM).
Cryptocurrencies plunge
The bankruptcy of FTX is the most typical case. Bitcoin, the most popular cryptocurrency, has fallen 36.4% from its highs, which has caused a lot of harm to the business of fintech players, especially those whose main business is payments. Because almost all financial industry players whose main business is payment provide cryptocurrency trading and take commissions from it.
There was no problem when the market was good, but now the transaction volume has shrunk significantly, which has caused a huge blow to the income of financial technology companies–Block is one of the representatives of the companies that have been hardest hit. Taking the fourth quarter of 2020 during the bull market as an example, because Bitcoin revenue accounted for 55.7% of the company’s total revenue, only 43.22% remained in the second quarter of 2023.
The plunge in cryptocurrency prices will also affect the assets of investors holding cryptocurrency, and most financial technology companies will hold large amounts of cryptocurrency assets to increase financing or meet business needs. The plummeting price of cryptocurrency will reduce the assets of financial technology companies, severely hit the company’s finances, and affect the company’s daily operations. The most typical representatives are Block Company and Coinbase (ticker: COIN), which is mainly engaged in cryptocurrency trading.
For Coinbase, please see my post: “How do Coinbase and Binance make money? Advantages comparison“.
Competition is too fierce
In addition to all the large e-commerce companies in the world having their own payment networks, the old financial industry giants and banks also don’t want to miss this piece of the pie.
Almost all large technology companies have entered this field, and it is difficult for investors to think of a large technology company that has not joined the competition in financial technology. These large technology companies all have certain moats. Each of them is a monopoly platform and has more resources than ordinary financial technology companies. General financial technology companies are not their long-term opponents at all.
This trend also shows that there are no high barriers to entry in the field of financial technology. Unless financial technology companies continue to carry out research and development or make breakthroughs, or even develop new operating models, the prospects are not too optimistic in the face of the current difficulties.
Can’t shake the old payment network
One of the main factors that has caused the current situation of emerging financial technology players is that after more than a decade of development, the original expectations were too high, and the financial technology industry was simply unable to shake the moats of the old payment networks──these old payments. Internet giants take the two major credit card payment networks Visa and Mastercard as the most typical representatives.
What should be emphasized here is that the payment market is too huge. Emerging financial technology players have indeed seized some new markets, but they have not successfully taken away the market that originally belonged to the payment network giants. This is an indisputable fact. The problem is that the market owned by the old payment network giants was formed in the past half century or so. The payment markets that have been added in the past decade or so, such as e-commerce, are much larger and even disproportionate.
No exception
You might think this is only true in the United States, but no, this is a global phenomenon and no fintech industry is immune. On October 25, 2023, Worldline (ticker: WRDLY) stock price fell 59.24% in one day. Not only did the company’s third quarter results fall short of expectations, it also lowered its full-year revenue growth guidance from 8%-10% to 6%- 7%.
Previously on October 24, 2023, Cab Payments (ticker: CABPF), which had just landed on the London Stock Exchange in July this year, also caused an astonishing 71.92% drop due to a significant reduction in performance guidance. Also on the 25th, Cab Payments fell again by more than 10%, while Italian payment platform Nexi (ticker: NEXPF) fell close to 20%. Previously, the Dutch payment platform Adyen (ticker:ADYYF) had a single-day drop of 38% in August, it also fell nearly 10% on Wednesday. Affected by this, the stock prices of Block and PayPal, the two major digital payment giants in the United States, fell 8% and 5% respectively that day.
Several institutions, including CVC Capital, are initially considering acquiring Nexi. In June this year, Brockfield Asset Management announced that it had purchased Network International for 2.2 billion pounds. GTCR then purchased a majority stake in Fidelity National Information Services (ticker: FIS), valuing the transaction at $18.5 billion.
Related company stock price performance
| ticker | 11/14/2023 share price | Deviation to all-time high | P/E | P/S | Forward P/E |
| PYPL | 56.68 | -81.63% | 16.87 | 2.18 | 9.98 |
| SQ | 55.1 | -80.00% | N/A | 1.6 | 20.2 |
| UPST | 25.43 | -93.48% | N/A | 4.08 | 52.91 |
| AFRM | 25.56 | -84.44% | N/A | 4.43 | N/A |
| COIN | 92.01 | -73.15% | N/A | 7.69 | N/A |
| HOOD | 8.5 | -85.04% | N/A | 4.3 | N/A |
| WRDLY | 7.43 | -86.33% | 16.51 | 0.91 | 4.32 |
| CABPF | 0.64 | -79.68% | 3.75 | 0.91 | 3.82 |
| NEXPF | 7.09 | -68.54% | 118.17 | 1.6 | 9.79 |
| ADYYF | 1132 | -65.04% | 58.14 | 5.63 | 40.65 |
| V | 246.94 | -0.84% | 29.86 | 15.77 | 24.94 |
| MA | 397.65 | -5.10% | 34.73 | 15.54 | 27.86 |
| AAPL | 187.44 | -4.28% | 30.58 | 7.73 | 28.49 |
| GOOGL | 133.62 | -10.28% | 25.6 | 5.76 | 20.04 |
| AMZN | 146.37 | -20.38% | 76.34 | 2.74 | 43.48 |
| META | 336.31 | -11.19% | 29.68 | 6.97 | 20 |
| JPM | 148.44 | -13.59% | 8.86 | 2.91 | 9.75 |
| BAC | 29.22 | -40.59% | 8.18 | 2.36 | 8.8 |
| 標普500指數 | 4,495.70 | -5.67% | 24.59 | 2.36 | 18.62 |
I am the author of the original text, the essence of this article was originally published in Smart Magzine
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