Investors and analysts said that because everyone is playing the same game, the competition will be fierce. This, however, will not be a winner-take-all situation.
Most fintechs begin with a niche in order to attract users and then diversify their products. PayPal focused on merchant-to-consumer payments, while Square focused on devices that allow credit card payments when inserted into tablets. SoFi made its name in the student loan industry, while Robinhood pioneered free stock trading.
When fintechs’ core business experiences diminishing returns on new users, they attempt to crack the same code in a new area. It remains to be seen whether many of these fintechs are versatile enough to expand beyond what they became famous for in the first place.
“You have to expand laterally to satisfy the rapacious desire of shareholders for new revenue streams and future growth”. “They can’t all win at the same time. So, for the most part, it will be determined by your entry point and the permission you receive from customers to play a more active role in their lives, as well as how you take risks and innovate ahead of the curve.”
Wall Street appears to be unanimously in love with SoFi, which has buy ratings from all three analysts who cover the stock. They expect the stock to rise by 86 percent over the next year.
Wall Street likes PayPal as well, with 87 percent of analysts covering the company rating the payments giant as a buy. Based on consensus price targets, PayPal is expected to rise 16% in the next 12 months.
Brokerage firm that has recently gone public Robinhood is expected to gain nearly 25% in the next year, but only half of the analysts who cover the stock trading app rate it as a buy. Square has a buy rating of 64%, and analysts predict a 13.3 percent.
Is PayPal stepping on the toes of Robinhood?
The pandemic drove an increase in online activity, with a record number of consumers interacting with financial technology companies. Consumers became more comfortable using online applications during lockdown periods, bringing new clients into an already crowded space.
“The industry-leading fintech platforms have achieved tremendous scale, so adding other products and services for engaged customers is a natural extension, and I think the end goal is to help those customers better optimize their financial life,” JMP Securities analyst Devin Ryan said.
Analysts are unsurprised by PayPal’s decision, which has weighed on Robinhood’s stock.
“With 371 [million] global active customer accounts (ex-merchants) as of 2Q21, we see stock trading as a material engagement driver for PYPL as the company looks to gain a larger share of the customer wallet and drive more funds into its ecosystem,” Wolfe Research analyst Darrin Peller told clients.
Tallents believes PayPal should acquire a stock trading company for its eventual service because of the speed with which the brokerage industry is changing. Tallents noted that Hagen “has previously built and sold things, and I wonder whether he will look at the need to buy or potentially partner and then leave it separate.”
Analysts also discussed the psychological barrier that PayPal — which also owns Venmo — will have to overcome in order to establish itself as a vehicle through which customers can trade stocks.
Tallents added, “I honestly believe the transition from peer-to-peer and merchant payments to investing is a significant one.”
The challenge for Robinhood, which plans to diversify its services, will be convincing customers that it is more than just a millennial-favored stock trading app that helps to facilitate so-called meme stock volatility.
According to Ryan, the companies that are succeeding in this area are creating products based solely on what their customers tell them they want. More than 20% of Robinhood’s customers now use the company’s Cash Management service. The service was launched only two years ago.
“You must build trust with customers in whatever initial area of service or product you offer them. “Then, as you expand into other areas, you have to build those products in conjunction with customer feedback,” Ryan of JMP explained.
According to Bloomberg News, Robinhood is working on a new feature that will allow users to access their paychecks via direct deposit up to two days early. This feature is also available from PayPal and the private fintech Chime.
What are the risks associated with Robinhood?
From a financial standpoint, analysts said that owning more pieces of the economic chain will become increasingly important.
“As parts of the industry become more commoditized… having the ability to monetize a broad spectrum of the revenues that exist in the business model is very important,” Ryan said.
For example, Robinhood’s decision in 2018 to establish an in-house clearing house means the brokerage earns more money from trades than brokerages that use a third-party clearing house and share revenue. Essentially, Robinhood has better unit economics for trading and can invest that extra money in a better, or different, user experience.
To be sure, Robinhood’s business model is fraught with dangers, including the regulatory uncertainty surrounding payment for order flow.
According to its first earnings report as a public company, Robinhood’s trading revenue is also heavily reliant on cryptocurrency trading. A regulatory stumbling block for cryptocurrency or a drop in the value of the digital asset could jeopardize the brokerage’s competitive advantage.
Of course, the threat of legacy brokers catching up is always present.
“The story was, ‘What has Robinhood done to the legacy brokers?’” That was probably true until about seven or eight months ago. The story should now be about “what are the legacy brokers doing to Robinhood?” And what they’ve done is taken all of Robinhood’s innovations and copied them. Tallents stated, “They are becoming the graduation point for Robinhood customers who do well.”
According to several analysts, SoFi has one of the most compelling stories among the fintechs. SoFi, which stands for Social Finance, went public in June after merging with Social Capital Hedosophia Corp V, a blank-check company run by venture capitalist Chamath Palihapitiya.
SoFi was founded in 2011 with the goal of refinancing student loans for millennials. It now provides trading in stocks and cryptocurrencies, as well as personal and mortgage loans and wealth management services. Anthony Noto, a former Goldman Sachs managing director and Twitter’s former chief operating officer, leads the company.
Tallents said that he likes SoFi because student loan debt is inherently a long-term customer relationship. As a result, SoFi can justify investing more money in its clients, knowing that they will be there for decades. Because SoFi is already integrated into their monthly expenses and experiences, it is a natural place to integrate more of a consumer’s wallet.
Square’s most recent move
Square is the second-largest fintech by market capitalization.The company led by Jack Dorsey has a market value of $123 billion, trailing PayPal, which has a market value of $338 billion. (Robinhood and SoFi have respective market capitalizations of $38 billion and $11.5 billion.)
Cash App, the company’s Venmo competitor, had 40 million monthly transacting active customers in the second quarter. Square’s stock-brokerage product is also performing well, with over 4.5 million customers holding a stock or ETF in the second quarter.
In its most recent diversification move, Square paid $29 billion for the “buy now, pay later” company Afterpay. Square’s first foray into installment loans.
Square reported that consumers, particularly younger buyers, are avoiding traditional credit. Square already provides installment loans, which the company describes as a “powerful growth tool” for the company’s core seller business. It intends to incorporate Afterpay into its seller and Cash App ecosystems.
“While much of the emphasis at SQ is on integrating the two ecosystems, we believe the addition of Afterpay may be most notable for its potential to broaden SQ’s presence on the merchant side of the equation,” Ryan said.
According to Ryan, having scale, as Square does, allows companies to more easily vertically integrate.
“You may lack scale, but you have a better consumer offering.” Or you have the scale, which results in a more compelling economic model,” he explained. “Having a combination of both scales where you can leverage the economic chai is the holy grail.”But you also have the non-commoditization of your platform, which creates a user experience that customers want to engage with and pay for.”
To be sure, as these fintech firms gain market share, they become more competitive with the legacy banks.