After PayPal layoffs, is there still an appetite for fintech?

The fintech sector has struggled amid the wider economic downturn, with PayPal recently taking the decision to cut 2,000 jobs in an effort to cut costs. But there are still opportunities for growth in an expanded field, as NatWest’s acquisition of workplace savings fintech Cushon shows.

– NatWest’s purchase of Cushon gives the British bank further intervention in fintech.

– PayPal cuts 2,000 jobs as inflation bites, even as stock rises 5% after 2022’s epic drop.

– The Global X FinTech ETF offers exposure to PayPal stock and is up 12% year to date.

Fintech firms have faced significant headwinds over the past year.

PayPal [PYPL]for example, was identified as the world’s most valuable fintech firm at the start of 2022. But its stock fell 62.2% over the year, and in January it announced it would cut 7% of its workforce, or about 2,000 employees, amid the it called a “challenging macroeconomic environment”.

But last week NatWest Group [NWG] agreed to buy 85% of Cushon, a workplace savings and pensions fintech firm, for £144m – suggesting that fintech still has potential for growth.

NatWest says the move will improve its range of “financial wellbeing” offers.

Current management will retain the remaining 15% of the ownership in the company.

Fintech opens up NatWest’s options

So far this year, NatWest’s share price has risen 6.9%, following a 22.1% gain in 2022.

On 17 February, NatWest announced fourth quarter (Q4) 2022 revenue of £3.7bn, up 42% year-on-year, while annual profit of £13.2bn was up 26.9%.

The growth was linked to higher interest rates, which produced better results than funds used for bad loans. The UK bank reported net interest of 2.85% for 2022, and estimates 3.2% for 2023. A buyback of up to £800m is also planned for the first half of 2023: the bank is partly supported by the UK government.

Despite positive news, NatWest’s share price fell as much as 9% after earnings as guidance missed investors’ hopes and it warned of rising costs, forecasting the 2023 total to be £300m higher than previously forecast. Analysts at Credit Suisse [0I4P.L] saw the results as “a miss”.

PayPal, meanwhile, announced fourth-quarter and 2022 results on February 9.

It said net income was up 7% year-on-year for the fourth quarter and 8% for 2022, but expected 2023 earnings to slow to 7.5% growth. Full-year forecasts of $4.87 a share missed analysts’ outlook of $4.75, compiled by Refinitiv.

Fintech will grow

Investors will hope that NatWest’s move further into fintech via the Cushon deal provides new revenue opportunities.

Currently, Cushon manages approximately £1.8 billion of savings for its 500,000 clients. Founder and chief executive Ben Pollard said last year that the company aimed to strengthen a “boring” pensions arena. NatWest plans to roll out Cushon as an option for commercial customers this year, with offers including a master trust pension and workplace ISA.

In terms of its own earnings, PayPal said pressure on discretionary spending would dampen its outlook, thanks to the macroeconomic slowdown and shoppers tightening their wallets.

Speaking to analysts, acting chief financial officer Gabrielle Rabinovitch said: “E-commerce growth in our core markets has slowed. Inflationary pressures have affected discretionary consumer spending, and post-Covid-19 spending patterns are still evolving.”

Wedbush analyst Moshe Katri observed that, like other technology companies, “PayPal is seeking to position itself financially and strategically, preparing for an economic downturn”.

However, there is reason to believe that fintech, which includes mobile banking, trading platforms, crypto and business-to-business operations, still has room to grow. According to Expert Market Research, the global fintech sector was worth $194.1 billion last year and will grow at a CAGR of 16.8% to $492.8 billion by 2028.

Fund in focus: Global X FinTech ETF

Global X FinTech ETF [FINX] offers exposure to stocks in fintech companies including PayPal, which currently has a weight of 6.10% in the portfolio and is the fifth largest holding as of February 17.

Other fintech names in the fund include Block [SQ]which is the second largest holding with 7.38% of assets under management, as well as Fiserv [FISV], which is currently the largest holding with 7.71% of assets under management (AUM); Fiserv’s technology supports a number of US banks.

FINX is up 12.2% year-to-date, despite a 30.2% decline over the past 12 months.

Funds that hold NatWest shares include the First Trust United Kingdom AlphaDEX® Fund [FKU]. As of 17 February, NatWest is the 11th largest holding, with 2.14% of AUM. FKU has risen by 10.5% so far this year, but is down 11.9% in the last 12 months.