Central Bank's Rate Message Hits Fintech.

 

"The Federal Reserve's message this past week that higher rates are here to stay doesn't sit well with fintech companies.

The Global X Fintech ETF fell about 6% this past week. It closed Friday at its lowest since May, according to Dow Jones Market Data.

Shares of the buy-now-pay-later company Affirm dropped 17% this past week. Block, which owns a buy-now-pay-later company called Afterpay, dropped 15%. PayPal fell 10% this week while popular trading app Robinhood lost 9%. Opendoor, an online house-flipper, dropped 20%.

High rates are a threat to fintechs for two main reasons. The rate increases are meant to slow down the economy, which is putting pressure on consumers -- especially those at the margins who are often more likely to seek out a fintech lender. What's more, the companies' own borrowing costs are rising, squeezing their margins and threatening to put smaller players out of business.

Many fintechs performed well earlier this year, boosted by investors' hopes that high rates might soon peter out. But with the Fed's announcement this past week, many seemed to get the message that that isn't going to happen soon.

"Higher rates for longer are bad for emerging industries like fintech," said John Hecht, an analyst at Jefferies, which has a sell rating on Affirm.

Higher interest rates also give investors more options for safe places to earn yield. That makes them less willing to take on riskier bets such as buying stocks of relatively unproven companies.

Many of these fintech companies took off during the pandemic, when interest rates were low and potential customers were flush with cash. But that was before the Fed raised rates 11 times. The economy remains strong by many measures, including consumer spending, but the continued high rates are hitting many borrowers hard.

Companies are looking for ways to cope. Buy-now-pay-later companies are being pickier about which customers to extend credit to. They are also trying to unload some of their risk." [1]

1. EXCHANGE --- Central Bank's Rate Message Hits Fintech. Au-Yeung, Angel.  Wall Street Journal, Eastern edition; New York, N.Y.. 23 Sep 2023: B.10.