PayPal & Square Are The New Wall Street Banks

I think Twitter is the future of communications and Square will be the payment network.” — Jack Dorsey, CEO

Imagine you’re in Lower Manhattan, walking down 200 West St. toward what used to be Goldman Sachs headquarters, a Wall Street goliath for over 150 years. Today, standing tall with a fluorescent green emblem buttressed at its pinnacle, which reads “Square”. Thats right, Marcus Goldman and Samuel Sachs are punching the roof of their caskets right now. As of September 2020, Jack Dorsey’s Square market cap is bigger than Goldman Sachs.

This wasn’t the first public fin-tech ousting, as tech giant PayPal toppled the second biggest lender in the United States, Bank of America in July 2020. This disorderly move makes PayPal more valuable than every big bank on the Street, except J.P. Morgan Chase.

The escape velocity of these two Silicon Valley payment companies reinforced a changing of the guards on The Street. At one point, these small players had been glossed over in the tech space as they occupied the cubbyholes of finance, but with the rise of digital payments and e-commerce, the tables have turned bigly. For instance, 24 fin-tech companies reached unicorn status in 2019, and almost half of consumers exclusively use digital banking for their financial needs.

“Across every industry, we’re seeing this surge towards a digital-first strategy” and our products are “probably more relevant and important across multiple industries than they’ve ever been before.” — Dan Schulman, CEO

Shares of Square have surged from $60 per share all the way up to $200. Similarly, Paypal shot up from a $100 handle to an all time high of $215. It’s no secret the virus has precipitated an increase in digital payments, resulting in double-digit revenue growth for Paypal and Square in Q2. Not that they’re “profiting off the virus”, but the Fed unleashing its’ bazooka in March and people receiving stimulus checks really was the perfect storm for the fin-tech sector.

While the Bay Area digital magicians are trailblazing their way to the financial apex, investment houses like J.P. Morgan and Bank of America have mutually set aside tens of billions of dollars for the impending doom of credit card defaults, mortgages, and commercial loans. The banks profitability will likely be stifled for years to come with the current state of Modern Monetary Theory and the Federal Reserve’s phobia of raised interest rates.

Financial Technology companies acquired $135.7 billion in global investments in the last year alone, and the total transaction value of digital payments is expected to reach $4.8 trillion by the end of 2020. Whats more, the development of artificial intelligence will seek to save the insurance industry nearly $1.3 billion by 2023, and almost 90% of financial institutions believe that part of their business will be lost to standalone fin-tech companies by 2025.

“There’s this arms race in digital finance, and the legacy firms have legacy infrastructure that they’re trying to retrofit, and legacy operating margins,” he said. “Firms that start off with a digital backbone don’t have those issues, so they have a lower cost to deliver services. I think some incumbents will be left in the past.”

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