When it comes to investing in the banks of the future, it only makes sense to also keep your eye on tech stocks.
Banks have been making a big push into digital payments, and the results have been promising. JPMorgan Chase & Co. (NYSE:JPM) leads the banks with 51 million total active accounts.
However, that lead seems rather tenuous after Paypal Holdings Inc (NASDAQ:PYPL) released its first quarter earnings, divulging that its Venmo active accounts exceeded 40 million at the end of the quarter. This puts PYPL in the same league as the banks and among the most frequently used financial apps domestically.
That should have big banks feeling uneasy. Given their substantial investments in technology, it’s unlikely they realized just how tenuous their footing is. Their app usage especially in the longer term is not guaranteed. The fact is that switching costs between payment apps are negligible.
Banking Tech Stocks Look to the Future
What’s more disconcerting for the banks is the total payments volume growth that Venmo alone showed; 73 percent growth for the quarter, bringing the total payments volume to $21 billion. These are big growth numbers. Not only are millions of users being added each quarter, the total volume is materially increasing. Volume is a main determinant of how much intermediaries make, so this is important.
Since Venmo already has a debit card—Venmo card—that can be used anywhere that accepts Mastercard, it’s looking ahead at opportunities to further enhance profitability. The logical next step is its own credit card.
Branded credit cards are a popular strategy to drive customer engagement, brand awareness, and of course, profits. Retailers may be the first industry to come to mind that has leveraged this, typically with points or cash back enticements. Clearly, though, many banking tech stocks are not far behind.
So far, Venmo is primarily digital and having presence in credit cards will help Venmo contribute even more to Paypal’s top line. Even though the trend is toward all things digital, there are still many offline retailers, and a credit card would allow Paypal to tap that market.
SQ Stock Rises as Cash App Strengthens
And its not just tech stocks like PYPL nipping on their heels. Square (NYSE:SQ), the San Francisco-based tech startup founded by Jack Dorsey, has reflected its success in attracting payment volume and growing its capital lending business. The stock is up 34 percent to date.
With their Cash App, SQ has built a slew of financial tools for users to send, spend, and store money. They also have a Cash Card that allows customers to make purchases with a prepaid Visa card that is linked to the balance stored in Cash App. It’s also bitcoin compatible.
Cash App volume grew nearly 2.5x year over year, reflecting the growing network effects and reach of the app. According to Nomura Instinet’s data:
“Cash App monthly downloads remained elevated at [2 million] new downloads a month, up from an average of [1.9 million] in 2018.” Overall, the Cash App has 45.3 million cumulative downloads, compared with 41.2 million for Venmo as of January—the all-time highest difference between the two.”
Overall, in the battle for the the digital wallet, SQ stock and PYPL stock look like buys here. Banks inherently aren’t as nimble as tech companies. So tech stocks like SQ and PYPL have edge in designing user interfaces and smaller but more loyal customer bases. While the mere fact of startups encroaching on bank payments is not enough to warrant a sell on big bank stocks, it’s not a favorable trend.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
