The UK stock market suffers from a paucity of exciting, growth-orientated companies. It’s one of the reasons why UK equities lag behind US equities, but there is hope. If there is one growth sector where the UK does brilliantly, it is financial technology (fintech). We have some real champions.
Consider Revolut. This digital bank has had its challenges in recent years, but August brought some very positive news: it announced that investors had valued the business at $45 billion in a secondary share sale. That was excellent news for long-term investors in the firm, such as listed venture-capital group Molten Ventures (LSE: GROW), which promptly announced that it had written the gross value of its Revolut stake up to £160 million, from £65 million in March.
Revolut is growing at a phenomenal pace. Its latest results showed sales of $2.2 billion and pre-tax profits of $545 million from 45 million customers, alongside customers’ balances of $23 billion. Whether that justifies a valuation of $45 billion is another matter, but Revolut is clearly on a roll. The firm is hopefully heading for a UK initial public offering (IPO) and we might see it joined by others. Klarna, for instance, although Nordic by origin, has headquarters in London and is said to be considering a UK listing. And Starling Bank is also reported to be mulling a blockbuster flotation.
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NuBank: the greatest growth story in fintech
Still, none of these UK-focused fintech heroes are actually world leaders. They are all doing a fantastic job, but if you’re looking for a fintech business to amaze, I’d suggest that two names stand out. Both are already listed on the public markets, in the US, so you can invest in both now. These are NuBank and – wait for it – JPMorgan Chase (NYSE: JPM).
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Let’s take NuBank first, which is listed under the name of Nu Holdings (NYSE: NU). Simply put, NuBank is the most astonishing fintech growth story on Earth. It provides low-cost digital banking to a large segment of the Brazilian population and is rapidly expanding into adjacent markets such as Colombia and Mexico. Crucially, this business is already solidly profitable and is selling its services into under-served markets where consumers distrust legacy financial services brands. And here’s the important bit: it’s also cross-selling like crazy.
That’s the crucial point to understand about how fintechs can make serious money. Revolut is doing the same because, in the low-cost, mass-market end of the banking market, you don’t make that much money from selling bank accounts. Instead, you make money from cross-selling investment accounts, business accounts, crypto accounts, credit cards and even customer-loyalty schemes involving airport lounges.
NuBank released hugely impressive second-quarter numbers in August. It boasted revenue of 55% up to $2.85 billion in the quarter (not far off Revolut’s annualised numbers), with earnings jumping 115% compared with the previous year. It also added 5.2 million new customers during the quarter and 20.8 million year on year, reaching a total of 104.5 million customers by 30 June. Crucially, deposits increased by an annual 64%, while non-performing loan ratios (the bank also lends money via 42 million credit-card accounts) actually decreased. Nu Holdings is expected to hit earnings per share of $0.43 in 2024 and $0.63 in 2025 – that puts the shares on a forward price/earnings (p/e) ratio of just 23 times 2025 earnings.
Chase: a legacy bank embracing a new world
There is an even cheaper US fintech giant. JPMorgan Chase trades on a forward p/e of a mere 12.5 times earnings. If one legacy institution is making fast progress in fintech, it’s JPMorgan. It’s rumoured to be spending well north of $10 billion on developing its fintech, and if you want evidence of what that money has bought, consider the UK banking app Chase. In just a few years, this low-cost banking app has snapped up two million customers, compared with Starling’s hard-fought 3.6 million (Revolut has a more international spread of customers).
Some obvious attractions that help explain its explosive growth are the 1% cashback on card spending (up to £15 a month) and savings accounts that pay as much as 5.1% per annum in interest. When I talk to youngsters in their 20s, around one in three say they use a Chase banking app, frequently alongside legacy banks such as Barclays or Santander.
But what should really worry UK banks is that Chase is reported to be considering launching a credit card. There have been some small stabs at building the next-generation digital credit card, but none have really taken off, leaving the market to legacy brands such as MBNA (now owned by Lloyds) and Barclaycard. If Chase moves aggressively into the credit card market, that could spell trouble for many traditional UK banking brands with very lucrative credit card business units.
I’d note one final irony: HSBC. If there were one UK bank that really could claim to be a pioneer in fintech and cheap-as-chips basic bank accounts, it would be HSBC and its First Direct brand, which still tops most buyers’ recommendation lists. Yet the Anglo-Asian bank has found itself mired in ongoing debates about its Asian focus, which has led to it disposing of several legacy businesses. Unlike JPMorgan, investors have not allowed it to reinvent itself as a fintech visionary, even though it has been one.
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