How the Fintech Rally Could Fizzle in 2024

Higher rates did hit “fintech” stocks in many ways. Not only do growth stocks in general often trade at lower multiples during periods of rising rates, but fintechs in particular had benefited from near-zero rates for funding loans and encouraging risk-taking by trading customers.

Yet some upstart financial companies found other ways to turn higher rates to their advantage, helping drive a sharp rebound in their shares this year after a rough 2022. Several started earning a lot more on their own cash and customers’ cash. For instance, about a third of Coinbase Global’s net revenue in the third quarter was from interest income and via revenue from stablecoin reserves. More than half of Robinhood Markets’ net revenue in the quarter was from net interest revenues.

Credit investors seeking out investments with higher yields have also been a help to fintech lenders. Nonbank firms have to pay higher market funding costs to fund their loans—but they can also charge more for lending. Buy now-pay later provider Affirm, for example, has been able to charge enough to borrowers and merchants to help blunt the impact of higher transaction costs, which includes funding. It has stayed within its long-term target range for revenue less transaction costs as a percentage of gross merchandise volume.

Coinbase shares have more than quadrupled this year, and Robinhood is up over 40%. Affirm shares have also gone up more than fourfold. Lender Upstart shares have more than tripled, and shares of digital bank and lender SoFi Technologies have roughly doubled.

So can fintech stocks gain even more in a falling rate environment? The most straightforward path would be through multiple expansion, which could help boost many other growth stocks, too, including payments providers that have lagged behind the S&P 500 this year, such as Adyen, Block and PayPal.

Across several big fintech names, only Coinbase is trading at a premium price-to-forward sales multiple today compared with what it was at the end of 2021. Adyen, Affirm, Block, PayPal, Robinhood, SoFi and Upstart are all still trading at forward sales multiples lower than back then.

Still, Autonomous Research analyst Ken Suchoski cautions that investors could be “more selective on placing their chips” than in the past. That is because fintech companies enter 2024 with some very different market dynamics than a few years ago. At that time, they were still arguably mostly competing with aging, traditional providers of financial services.

These days, they are competing either with each other more intensely, or often with deep-pocketed tech companies. Adyen, for example, this year noted a shift toward lower-cost payments providers. The likes of Apple, Alphabet’s Google and Shopify are now playing across the fintech space in payments and lending. A risk to trading fees could be if there is finally approval of more exchange-traded funds for bitcoin, potentially making it cheaper to invest in.

Plus, many firms now have their substantial interest income at risk from lower rates. This might be more than offset with higher core revenues, like from more trading or borrowing. Consumers have also been spending and using credit at a pretty strong pace, even as rates rose. But it is unclear how long this will last if the economy cools.

Investors in 2024 are also unlikely to totally set aside credit risk, even if a “soft landing” is the envisioned outcome. That might be especially true if consumers’ savings cushions shrink. “There will still be questions about whether business models are proven out in a higher-delinquency environment,” says Mizuho analyst Dan Dolev, referring to late loan payments.

Fintechs bearing scar tissue from surviving a surge in interest rates will in many ways emerge as stronger companies. But making the case for hypergrowth may still be harder now than before.