Fintech Headlines: April 3 - 9, 2023

Stripe’s Annual Letter confirms decelerating growth, SoFi acquires a mortgage lender Wyndham Capital, dLocal’s profit margin hit by costs related to short seller allegations and FTX bankruptcy

This Week In the Markets

U.S. payroll growth cooled in March 2023, according to the latest report released by the U.S. Labor Department on Friday. The report showed that the U.S. economy added 236,000 jobs last month, in line with expectations and well below the revised figure of 326,000 in February. However, the unemployment rate fell to 3.5% from 3.6% a month earlier due to a higher labor participation rate. The report also revealed that average hourly earnings climbed 4.2% YoY, indicating that employers are offering higher pay to attract workers.

This mixed signal from the labor market poses a challenge for the Federal Reserve, which has been trying to balance the need for keeping inflation in check while maintaining economic growth. CME FedWatch Tool now estimates a 71.5% probability of an additional 25 basis points increase in May (FOMC will meet on May 2-3) and a 100% probability of rate cuts by the end of the year. Markets were closed on Friday, but the futures activity suggests that the jobs data was perceived well.

🟢 Shares of the wealth management technology company Envestnet (NYSE: ENV 0.00%↑), climbed 5.93% during the week. The increase is most likely the result of the company appointing three new independent directors to its Board of Directors, and ending months-long tensions with the activist investor Impactive Capital.

🔴 Shares of the payments company dLocal (NASDAQ: DLO 0.00%↑) declined 16.95% during the week following the company’s Q4 2022 earnings release. The company reported a 55% YoY growth in revenue, and a 42% YoY increase in gross profit. However, the profit margin fell compared to Q4 2021 (more on that below).

✔️ Job openings tumbled below 10 million for the first time in nearly two years
✔️ Job Market Softens Only a Bit, Keeping Fed on Track for May Hike
✔️ Job growth totals 236,000 in March, near expectations as hiring pace slows
✔️ S&P 500 futures gain on Friday as March labor report shows resilient economy

Stripe Confirms Decelerating Growth

Stripe released its 2022 annual letter, disclosing that the company processed over $817 billion in payment volume in 2022, which represents a 26% increase from the previous year. In comparison, U.S. e-commerce sales grew 7.7% in 2022. Stripe’s growth rate, while still robust, marks a significant deceleration from the rapid expansion witnessed in 2020 and 2021. Stripe currently powers more than 100 companies that process over $1 billion in payments annually and onboards “more than 1,000 new companies every day”. The company noted in its letter that “while the U.S. is currently our largest market, 55% of the businesses that joined Stripe last year were based outside of the U.S.”

In March 2023, Stripe successfully raised $6.5 billion in new capital from Andreessen Horowitz, Founders Fund, Goldman Sachs, and Temasek, in order to “provide liquidity to current and former employees”. The valuation of the company was sharply reduced from its previous valuation of $95 billion to $50 billion; however, still commanded a premium. Thus, Stripe’s direct competitor Adyen (AMS: ADYEN), which processed $768 billion in payments, reported a 49% YoY growth in payment volume, as well as posted positive EBITDA of $800 million for the year (compared to Stripe’s negative EBITDA of $80 million), is trading at a market capitalization of $43.98 billion (and an enterprise value of $37.66 billion).

✔️ Stripe says in annual letter that it processed $817B in transactions in 2022
✔️ Stripe’s decelerating growth reflects harsher reality for payment firms
✔️ Stripe slashes valuation to $50 billion in new $6.5 billion funding round
✔️ Stripe Is on Track to Turn a Profit With $1 Trillion in Payment Volume

SoFi Acquires Mortgage Lender Wyndham Capital

SoFi (NASDAQ: SOFI 0.00%↑) has announced the acquisition of a mortgage lender Wyndham Capital Mortgage in an all-cash deal. The move aims to expand SoFi's mortgage lending capabilities, as well as strengthen SoFi’s technology offering with Wyndham's proprietary technology platform. In 2021, Wyndham Capital Mortgage recorded an origination volume of $6.45 billion, which has since been on a downward trend. The company's origination volume plummeted to $2 billion in 2022, dropping from an average of $300 million per month earlier in the year to below $50 million per month in the fourth quarter. Wyndham Capital Mortgage has originated over $23 billion in loans since its founding in 2001 and currently operates in 46 states.

SoFi is not new to mortgage lending; thus, the company originated $2.98 billion in mortgages in 2021 and $0.97 billion in mortgages in 2022, which is about half of Wyndham Capital’s volumes. The company’s management attributed the decline in originations to the worsening market conditions (according to the Mortgage Bankers Association, Q4 2022 mortgage originations fell 60% compared to Q4 2021), as well as challenges with its fulfillment partners. The acquisition of Wyndham Capital should resolve the company’s challenges with fulfillment; however, the market conditions are expected to remain challenging, with the Mortgage Bankers Association forecasting a further 16% decline in originations in 2023.

In case you missed my review of SoFi’s Q4 2022 results (requires paid subscription): 👉🏻 “SoFi Q4 2022 Earnings Review: the last "adjusted" year?”

✔️ SoFi Technologies, Inc. Acquires Leading Fintech Mortgage Lender
✔️ SoFi Buys Wyndham for Mortgage Loans
✔️ What is SoFi acquiring with Wyndham Capital Mortgage?

dLocal’s Profit Margin Hit by Costs Related to Short Seller Allegations and FTX Bankruptcy

dLocal (NASDAQ: DLO 0.00%↑), an Uruguayan financial technology company that helps merchants accept and distribute payments in emerging markets reported its Q4 2022 on Wednesday. For the fourth quarter of 2022, dLocal reported a Total Payment Volume of $3.3 billion, up 77.6% from $1.9 billion in Q4 2021 and up 20.6% from $2.7 billion in Q3 2022. Revenue reached $118.4 million, up 55.2% compared to Q4 2021 and up 5.7% compared to Q3 2022. Nevertheless, the gross profit margin decreased from 51.0% in Q4 2021 to 46.5% in Q4 2021. Furthermore, Profit for the period was $19.4 million, which represents a 17.5% decline compared to Q4 2021 and a 40.0% decline compared to Q3 2022. Adjusted EBITDA was $40.4 million, up 38.8% compared to Q4 2021 and down 2.9% compared to Q3 2022.

The fourth quarter of 2022 was challenging for the company. Thus, it occurred a $2.0 million expense related to an internal review of the allegations made by the short-seller Muddy Waters Research, including “fees from independent counsel, independent global expert services and forensic accounting advisory firm.” In addition, the company had to book a $5.6 million loss allowance related to the funds that were locked at FTX and were not withdrawn before the exchange filed for bankruptcy. Nevertheless, the company would still post profit margin compression even without these two one-time items. The company guided for $620 - 640 million in revenue and $200-220 million in Adjusted EBITDA for the full year 2023; however, did not guide for the profit figure or profit margin.

✔️ dLocal Reports Fourth Quarter and Full Year 2022 Financial Results
✔️ Muddy Waters' Block shorts payments firm dLocal; shares halve in value
✔️ Muddy Waters doubles down on allegations of dLocal balance sheet discrepancies

In Other News

✔️ Jamie Dimon says the banking crisis is not over
JPMorgan CEO Jamie Dimon has warned that the banking industry still faces potential risks and the crisis is not over yet, despite improvements made since the 2008 financial crisis. Dimon cited cyber attacks, geopolitical risks, and climate change as factors that need to be addressed. He emphasized the importance of technology and innovation in improving the banking sector's efficiency and customer experience.

✔️ FedNow gives banks a leg up against fintechs
The Federal Reserve's new instant payment system, FedNow, is expected to challenge traditional banks and fintech firms alike in the crowded payments industry. The system will provide a real-time payment option for consumers and businesses, potentially reducing the reliance on existing payment providers. While some banks are wary of the competition, others are viewing the new system as an opportunity to enhance their offerings and provide more seamless payment experiences.

✔️ Elon Musk Envisions Twitter as a $250 Billion PayPal Rival
Tesla and SpaceX CEO, Elon Musk, is reportedly envisioning a payments-focused version of Twitter that could be valued at $250 billion. According to sources, Musk is in talks with potential partners and investors to create a platform that would integrate cryptocurrency payments and social media. The platform would enable users to easily transact in cryptocurrency and earn rewards for engagement, with Musk allegedly considering a decentralized approach.

✔️ Robinhood to Pay Up to $10.2 Million to Settle Outage Probe
Robinhood has agreed to pay up to $10.2 million to settle charges related to technical failures that caused disruptions for its customers. The settlement was announced on Wednesday by the Financial Industry Regulatory Authority (FINRA), which had accused Robinhood of causing harm to millions of users due to outages and system failures in 2020.

✔️ Checkout.com faces exec team exodus and makes layoffs ‘by stealth’
Online payments company Checkout.com, has been hit by the departure of several senior executives and is planning to lay off some of its workforce in 2023. The departures include the company's Chief Financial Officer and Chief People Officer, while the layoffs are expected to affect less than 5% of the company's global workforce.

✔️ Dutch online bank Bunq applies for U.S. banking licence
Dutch online bank, Bunq, has applied for a banking license in the United States as it aims to expand its digital banking services internationally. If approved, the license would allow Bunq to offer its services in the US by the end of the year. The online bank, which was founded in 2012, already operates in 30 European countries and has over 1 million customers.

✔️ Investing app Acorns acquires fintech GoHenry to expand in Europe
Acorns, the popular micro-investment app, has acquired GoHenry, a fintech startup focused on children, to expand its presence in Europe. The move is part of Acorns' strategy to diversify its offerings and tap into the growing demand for family-focused financial services. With the acquisition, Acorns gains access to GoHenry's established user base in the UK and expands its reach to new markets.

Cover image: Microsoft Bing Image Creator, Powered by DALL·E, prompt “a marathon runner falls behind, looks tired, cubism”

Disclaimer: Information contained in this newsletter is intended for educational and informational purposes only and should not be considered financial advice. You should do your own research or seek professional advice before making any investment decisions.