Crunch Time for Fintech in Developed Markets.

Weekly Market Snapshot

• SoFi’s Record Growth, PayPal’s Strong Earnings, and Regulatory Shifts

Behind the Headlines: What happened?

SoFi Technologies shares witnessed a positive start to the week after its Q3 2023 results revealed a gross increase in new memberships and product enrollment. SoFi acquired a record 717,000 new members in the previous quarter, representing a 47% year-on-year increase from its Q3 2022 figures. In addition, these new members added more than one million new financial products over the quarter, a 45% YoY increase from the same period last quarter. SoFi’s share price is up more than 60% year-to-date as of November 1, 2023, following the optimistic guidance from CEO Anthony Noto that the company was on track to post profit in Q4 2023.

SoFi Technologies Records YTD Performance of +68.44%

Source: Google Screener

PayPal (PYPL) reported third-quarter earnings that topped analyst estimates on both the top and bottom lines. The fintech company recorded earnings per share of $1.30 compared to an estimate of $1.23. Q3 2023 revenue of $7.42 billion marginally outclassed the expected $7.39 billion. PayPal’s revenue jumped by 9% to $7.4 billion on an FX-neutral basis in the third quarter ended September 30, while total payments volume increased by 13% over the same period.

In Europe, fintech firm Revolut announced former Barclays executive, Francesca Carlesi as its new U.K. CEO last week Thursday. The appointment is appropriately timed as Revolut is beefing up its local operation amid a long wait to obtain its British banking license.

This much-coveted banking license would help Revolut, one of the companies featured in CNBC and Statista’s list of the top 200 global fintech firms, to offer lending products, including mortgages, personal loans, and credit cards. It would also enable it to get a stickier user base, which would benefit from insurance on deposits of up to £85,000. Essentially, this could become a potentially lucrative line of business for the firm, letting it earn interest income — at a time when interest rates are at multi-year highs.

The Inside Scoop:

Fintech companies in the developed market were caught off-guard following a game-changing announcement by the board of the US Federal Reserve (FED) last week proposing a new cap on the maximum interchange fee a debit card issuer can receive for a transaction. The proposals seek to determine whether interchange fees for processing a transaction are “reasonable and proportional to certain issuer costs”, and this forms the most sensational update to the cap since the FED first implemented restrictions on debit card issuers with assets above $10 billion in 2011.

Since 2011, the pricing threshold has remained fixed at 21 cents, with an additional 0.05% charge based on the transaction value. Despite persistent requests from the banking and business sectors, the central bank has refrained from making any revisions to this rate. However, the FED is now under increasing scrutiny to reduce the maximum price limit due to a ten-year decline in the operational expenses incurred by banks.

Source: Federal Reserve

The latest move would lower the current interchange fee on a $50 purchase, for example, from 0.49% to 0.35%. The FED says that this would better reflect the true cost of issuer processing, as the proposal also grants new powers to the FED to revise the cap with periodic updates. While the amendments are poised to benefit both merchants and consumers with lower transaction costs, it may be safe to take with a pinch of salt, the benefit to consumers through lower prices for merchants as this may ultimately increase the cost of fintech payment processing products and services, which may spillover to customers in the form of higher prices. 

The Bottom Line: 

On Wednesday, November 1, 2023, the FED held benchmark interest rates steady amid a backdrop of a growing economy and labor market and inflation that is still well above the central bank’s target. In a widely expected move, the Fed’s rate-setting group unanimously agreed to hold the key federal funds rate in a target range between 5.25%-5.5%, where it has been since July. This was the second consecutive meeting that the Federal Open Market Committee chose to hold, following a string of 11 rate hikes, including four in 2023. Given the non-assurances from the apex bank as to when rate cutting might set in, leading firms in the fintech industry may generate additional revenue due to high-interest rates. 

The increased interest rates may enable these fintech players to invest more in product development and innovation using the revenue generated from the balances held by their customers. Furthermore, the lack of clarity from apex banks in the developed markets regarding potential rate cuts, means that Fintech firms may continue to leverage these favorable conditions. Additionally, they can strategically plan for the mid to long term without the looming uncertainty of imminent rate adjustments.

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