We see some major changes taking place in the finance sector these days. A few weeks ago, Square, one of the biggest fintech payments companies in US, exceeded the market value of one of America’s oldest banks, Goldman Sachs. It was only two months ago when Paypal was able to do the same with Bank of America, the second largest lender in the United States. Since then, Paypal is worth more than any other US bank, just behind JPMorgan Chase. In this post, we want to look at why these transitions are taking place in the finance market.
The meteoric growth of these two payment companies strengthens the emergence of the new guard: businesses that started to expand significantly together with the emergence of e-commerce and digital transactions as niche players in neglected parts of finance. Square’s shares have risen over 140% this year already, while PayPal has risen 90%. The KBW Bank Index, however, has dropped by 32 percent.
In a phone interview, Devin Ryan, an analyst at JMP Securities, stated, “It’s quite amazing to look at all these fintech firms and the credit they receive today.” “The consumer differentiates between the potential growth of businesses and what they are prepared to pay for now, and finance is seen as a more developed, heavily regulated sector.”
The Covid-19 pandemic has increased digital payment growth throughout entire markets, leading in double-digit sales increases in the second quarter at PayPal and Square. And the emergency measures by central banks’ to help markets starting in March, combined with federal stimulus grants for households, led to more dollars seeking growth, benefiting from fintech and technology stocks.
In the meantime, banks such as Bank of America and JPMorgan have jointly set aside tens of billions of dollars for anticipated losses on credit cards, mortgages and business loans as a result of the pandemic. And for years, the profitability of the sector will potentially be squeezed when the Federal Reserve retains its target interest rate at zero.
The success divergence can be looked at in many ways: New vs. Old, Finance vs. Tech, Growth vs. Value, West Coast vs. East Coast. But maybe the biggest difference is that the new generation utilizes digital channels that benefit more from scale than banks, which are already in the business of running physical storefronts and implementing large lender-making balance sheets.
“Conor Witt, a senior analyst at CB Insights, says,” PayPal is really all about the payments business, and they can profit from operational flexibility in a manner that banks really can’t.
To be certain, on Thursday, the valuations of famous technology firms were extended ahead of a dramatic pullback, and the best value could appear to be the banks. For months, there’s been indications of froth in the market as brands like Apple and Tesla rose every day, and since March, the tech industry saw the greatest downturn on Thursday.
On Monday, Square’s market value hit $70.7 billion, exceeding Goldman’s at $70.5 billion. The Thursday pullback indicated that Square was beaten out later in the week by Goldman. As of Thursday, PayPal’s market value was $247.5 billion, compared to $225.4 million of Bank of America’s.
Ryan stated that some banks were not getting enough recognition for their high-growth digital projects, especially Goldman Sachs. But the direction for the long run is clear, he added.
“In modern finance, there’s this arms race, because traditional businesses have outdated technology they’re trying to refurbish, and legacy profit margins,” he added. Companies that emerge with a digital infrastructure do not have such challenges, because the cost of providing services is lower. I assume there will be few incumbents left in the past.