Volatile FinTech Stocks Highlight Promise, Perils of Financial Services’ Digital Makeover

On Wall Street, what goes up must go down, and vice versa.

A momentous week with a seesaw of volatility in the markets could be rightly chalked up to the seismic shifts from elections Tuesday (Nov. 5). So-called “Trump trades,” assets tied to President-elect Donald Trump and those likely to benefit from his administration, surged after his win.

Headed into November, the FinTech IPO Index was up nearly 15% year to date. That overall return was outpaced by individual names that were up by high-double-digit and even triple-digit percentage points.

It would be simple to state that the retracement of gains is a matter of investors cashing in on a rally in the wake of Wednesday and Thursday rocket fuel (along with a Federal Reserve rate cut) that saw stocks roar to new records.

However, a deeper dive into some of the earnings reports of these largely digital upstarts reveals that in business, particularly with the digital transformation of financial services, nothing travels in a straight line. Growth can be, and often is, bumpy.

In early trading Friday (Nov. 8), shares in Affirm were down 7%. Shares in Upstart were soaring 34%. BILL Holdings was building on its own post earnings rally, adding 15%. Marqeta was down 2%, extending a drop that has erased more than a third of that company’s market cap in a week. Flywire was 10% higher. Square slipped 7%.

Wall Street Parses the Numbers as Ecosystems Take Shape

Part of the volatility can be traced to the fact that earnings season is a game much like football, won by inches. A slight revenue miss or beat versus consensus can send stocks skyward or plummeting.

Block, which reported earnings Thursday (Nov. 7) after the close, had total net revenue of 5.98 billion in the third quarter, which was below consensus of $6.2 billion. Marqeta shares slid after the firm’s $128 million in consolidated revenues were below the consensus $128.1 million. Conversely, Upstart’s rally came after the firm’s $162 million in total revenue trounced Wall Street’s forecast for $150 million in sales.

Beyond the hit or miss versus consensus, a few common themes are emerging. Several companies are in the midst of building out ecosystems that span everything from cards to cryptocurrency to loans, as evidenced by the likes of Block, MoneyLion and Affirm. In the case of firms like BILL.com and Marqeta, the drive has been to help digitally transform businesses’ access to capital and payments, or to modernize card issuance and the back-office operations of companies themselves.

Cross-selling and retention of customer bases have been keys, as repeat business drives recurring revenues.

Block, for example, noted a 15% improvement in retention of sellers who adopted a full suite of banking products (three or more) compared with sellers that did not. The firm has also been offering capital to sellers, and merchants who have taken out a loan use 3.7 Square products on average compared to 1.5 products used by sellers who haven’t taken out a loan.

Elsewhere, Cash App Card monthly active users increased 11%.

Affirm saw double-digit growth in transactions per active user in an age when buy now, pay later (BNPL) has been seeing increased adoption in the United States and as the United Kingdom has attracted the firm’s interest and investment, having just launched there.

MoneyLion’s earnings results detailed cross-selling success across the platform’s various products that include, for example, cards, cash advances and tax prep.

BILL’s investor deck noted “expanding network effects” across its targeted base of small- to medium-sized businesses (SMBs), buyers and suppliers, where 89% of its revenues come from existing customers.

There Are Also Challenges

Beyond the vagaries of matching, meeting or beating consensus, there are still some challenges for the digital transformation of financial services.

Marqeta’s results are a harbinger here. The company guided to forward, fourth-quarter revenue growth of 10% to 12%; consensus had been around 17%. Growth is still growth, but deceleration has spooked at least some investors. As Marqeta CEO Simon Khalaf said on an earnings call, the slowdown comes as “last year, the regulatory environment changed among the smaller banks that support many of our customers’ programs.”

Later during the call, Chief Financial Officer Mike Milotich said: “We were less efficient in working with our bank partners to launch new programs, which we attribute to the increased regulatory scrutiny over the last few quarters on the banking industry, particularly the smaller banks supporting FinTech and embedded finance.”

Regulators have been issuing consent orders and ramping up their scrutiny of third-party relationships, management said on the call. There’s a healthy backlog in place, but it will take time to work through that backlog.

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