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After PayPal lay-offs, is there still an appetite for fintech?

The fintech sector has struggled amid the wider economic downturn, and PayPal recently took the decision to cut 2,000 staff in a bid to reduce its costs. But there are still opportunities for growth in a widening field, as NatWest’s acquisition of workplace savings fintech Cushon demonstrates.

- NatWest’s purchase of Cushon gives the UK bank further inroads into fintech.

- PayPal is slashing 2,000 staff as inflation bites, though stock climbs 5% after 2022’s epic falls.

- The Global X FinTech ETF offers exposure to PayPal shares 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 course of the year and in January it announced it would be cutting 7% of its workforce, or about 2,000 staff, amid what it termed a “challenging macroeconomic environment”.

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

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

Current management will retain the remaining 15% stake in the company.

Fintech opens up NatWest’s options

So far this year, NatWest’s share price has climbed 6.9%, after gains of 22.1% in 2022.

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

Growth was pinned to higher interest rates, which outperformed funds used for bad loans. The UK bank reported net interest rates of 2.85% for 2022, projecting 3.2% for 2023. A buyback of up to £800m is also slated for the first half of 2023: the bank is part-backed by the UK government.

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

PayPal, meanwhile, announced Q4 and full-year 2022 results on 9 February.

It said net revenues were up 7% year-over-year for Q4 and 8% for 2022, but expected 2023 revenues to slow to growth of 7.5%. Full-year forecasts of $4.87 per share basis missed analysts’ outlook of $4.75, as collated by Refinitiv.

Fintech slated to grow

Investors will hope NatWest’s move further into fintech via the Cushon deal offers new income avenues.

At present, Cushon manages approximately £1.8bn of savings for its 500,000 customers. Founder and CEO Ben Pollard last year said the company was aiming to invigorate a “boring” pensions arena. NatWest plans to roll-out Cushon as an option for commercial clients this year, with offerings including a master trust pension and workplace ISA.

At its own earnings, PayPal said pressures on discretionary spending would dent its outlook, thanks to the macroeconomic slowdown and shoppers tightening purse strings.

In a call with analysts, acting finance chief Gabrielle Rabinovitch said: “The rate of e-commerce growth in our core markets has decelerated. Inflationary pressures have affected discretionary consumer spending and post-Covid-19 spending patterns are still evolving.”

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

However, there is reason to believe that fintech, which encompasses 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 $194.1bn last year and will grow at a CAGR of 16.8% to $492.8bn in 2028.        

Funds in focus: Global X FinTech ETF         

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

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

FINX has gained 12.2% year-to-date, despite being down 30.2% 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, at 2.14% of AUM. FKU has climbed by 10.5% year-to-date, but is down 11.9% over the past 12 months.

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