PayPal’s Market Cap Is Almost Double Goldman Sachs; Why Wall Street Needs to Pay Attention

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PayPal (PYPL), which is only about 24 years old, has surpassed Goldman Sachs (GS), one of the world’s largest financial institutions, in terms of market capitalization. PayPal currently has a market capitalization of nearly $267 billion, while Goldman Sachs has a market capitalization of about $136 billion. This exemplifies what is happening to traditional Wall Street banks as a result of rapid technological advancements in the financial sector.

Given this phenomenon, traditional banks should be on high alert, as history is filled with examples where technological advances rendered behemoths obsolete. Nokia, for example, was dragged down by the smartphone movement; Kodak was swallowed up by the introduction of digital photographs. Nobody at that time could fathom such large companies falling so abruptly. These examples should be considered as cautionary tales of what can potentially happen to even the biggest of traditional banks if they fail to evolve.

Ecommerce pumping fintech growth

Businesses are currently investing heavily in products that are easy to use, efficient, and secure. With the advancement of technology, the number of products that consumers can obtain from the comfort of their own homes is rising rapidly. If you want to get a mortgage, the Zillow app will give you multiple options. If you want to buy a pair of pants online, you can even pay for them in installments at zero markups. Moreover, the coronavirus outbreak has enhanced traffic to ecommerce websites, necessitating the development of innovative payment methods.

Low interest rates, improved technology, and rising consumer demand fueled by companies’ buy now, pay later strategies have all contributed to the growth of fintech companies. In this environment, banks are failing to keep up with fintech companies.

The Fintech Revolution

Interest in the fintech space is rising exponentially. Global venture capital funding into fintech companies reached $52.3 billion in the first half of 2021, demonstrating the enormous demand for digital financial services. In addition, since 2010, fintech firms have raised a staggering $1 trillion in capital. Furthermore, the valuations of fintech companies have steeply risen, with Revolut and Nubank now valued at $33 billion and $30 billion, respectively. Similarly, Square has a market capitalization of approximately $122 billion.

Wall Street Banks at risk

It’s not as if technological advancements have never had an impact on traditional finance. Metal coins were introduced as a result of advances in metallurgical engineering, while paper money was introduced as a result of the invention of the printing press. Similarly, advances in electronic communication have made the concept of an ATM, from which individuals can withdraw money without the presence of a human, a living reality. So what makes the quick surge of fintech firms different from earlier advances?

Unlike technological advancements that aided banks in the development of new products and services, financial technology is allowing tech companies to enter the banking arena and compete directly. According to the most recent figures, fintech companies now generate 38% of unsecured personal loans, up from 5% in 2013. Similarly, because of their solid funding, these fintech companies can offer competitive rates on savings products as well. As a result, now is a critical time for bank CEOs to devise a strategy to weather the storm.

How can banks evolve?

There are multiple steps that banks can take to not only endure, but also thrive and add value to their shareholders. Traditional banks can acquire fintech companies to make their products more efficient and aligned with the needs of their customers. This is the strategy that JPMorgan chose when it decided to acquire OpenInvest, which is currently backed by Y Combinator and Andreessen Horowitz. Similarly, Citigroup and Goldman Sachs were involved in nearly 51 and 69 fintech deals, respectively, between 2018 and 2020.

Another approach is to begin investing in fintech startups through venture capital funding rounds. Citi, Goldman Sachs, and JPMorgan have all acquired equity stakes in startups related to cryptocurrencies, wealth management, and capital markets in recent years. But still, things are not moving at a pace that can help them to ward off major threats.

The third option is for banks to form partnerships with fintech companies in order to benefit from the expertise of both types of financial institutions. The collaboration between Goldman Sachs and Apple is a good example of such an approach. According to reports, the two companies are joining forces to launch new credit cards. Goldman Sachs will bring regulatory and financial expertise, while Apple will bring technological capabilities to the table.

The Bottom Line

Whatever path banks take, one thing is certain: the fintech revolution is too large to ignore. Will both business models coexist, or will new fintech firms make traditional banks obsolete? Unless banks implement some of the aforementioned strategies, they are at risk of being trampled by nascent fintech firms. As a result, traditional banks must decide whether to resist the revolution or embrace it wholeheartedly. One thing history has taught us is that markets are not kind to institutions that resist change and fail to adapt quickly.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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