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How the Fintech Rally Could Fizzle in 2024

The Wall Street Journal

Financial-technology companies have rallied in 2023 even as rates rose. Some could now face risks from falling rates, as well as stepped-up competition.

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 COIN 5.08%increase; green up pointing triangle net revenue in the third quarter was from interest income and via revenue from stablecoin reserves. More than half of Robinhood Markets’ HOOD 1.01%increase; green up pointing triangle 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 AFRM 2.86%increase; green up pointing triangle, 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 SOFI 1.66%increase; green up pointing triangle have roughly doubled.

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