The period of corporate earnings reports is quickly concluding, with results now available from major ride-sharing services, all of the largest technology companies, and numerous Software-as-a-Service (SaaS) businesses. Despite the abundance of data, The Exchange has focused its attention on two specific companies: PayPal and Square.

Our analysis isn’t centered on their total revenue or profitability. Rather, we’ve been carefully examining their financial reports for insights into the current state of the fintech industry. This is important because numerous highly-valued, privately-held fintech companies will eventually seek public investment, and many of these operate in markets similar to those of PayPal and Square.

What insights can be gained by reviewing the information PayPal and Square have shared with their investors?

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Quite a lot, as it happens.

As previously reported by TechCrunch following the release of PayPal’s third-quarter results, the company demonstrated positive performance from its Venmo platform, payment processing operations, and overall consumer engagement. These figures suggest a strong increase in consumer acceptance of fintech services during the pandemic, a trend we believe extended beyond PayPal and likely reflects a favorable climate for consumer-focused fintech businesses in general.

Square’s results reinforced this pattern, revealing largely positive data related to consumer fintech activity – with one significant qualification regarding the fourth quarter, which we will address later.

The performance of these established companies suggests a robust level of activity within the fintech sector, helping to explain the success of companies like Chime and Robinhood in 2020, and their ability to secure substantial funding to maintain their rapid growth.

A detailed review of Square’s earnings provides valuable information about consumer payment behaviors, card utilization, investment activity, and more. Let’s explore these findings and consider their potential implications for emerging fintech companies.

A Notable Year for Fintech in 2020

Let's begin with a discussion of the overall fintech landscape before focusing on specific areas.

A key statement from Square’s Q3 report highlights the interplay between the challenges presented by COVID-19 and its associated negative consequences, alongside a significant positive trend stemming from the same circumstances:

For those unfamiliar with Square’s earnings reports, “Seller” results represent the payment volume processed by businesses utilizing the company’s technology for transactions. Cash App represents Square’s consumer-facing, neobank-style service, encompassing peer-to-peer payments, banking solutions, and investment opportunities.

Several trends are contributing to positive outcomes for both the business and consumer divisions of Square, driving customers and users toward its offerings. This is a positive assessment. (Additionally, it’s reasonable to suggest that omnichannel commerce companies such as Blueshift and Clevertap may also be experiencing success. Further investigation into this possibility would be worthwhile.)

Now, let’s consider cards. Revenue generated through card transactions is a crucial component for many fintech startups, typically through interchange fees collected when users utilize a debit or credit card provided by the company. Here’s a look at Square’s card spend performance in 2020:

Quite remarkable, to say the least.

We aren’t suggesting that every fintech company offering cards is witnessing comparable growth. However, Square’s strong performance in this area indicates a robust market for these types of products. This is encouraging news for numerous startups, including Chime, Acorns, Brex, and Ramp.

The positive trends continue. A long-standing pattern within the fintech startup sector is the expansion of services offered by individual providers. This explains why Square’s Cash App now facilitates stock purchases, Robinhood enables cryptocurrency trading, Acorns has introduced checking-like accounts, and so on. Acquiring fintech customers is costly, so increasing their utilization of multiple services enhances their lifetime value, thereby improving a startup’s customer acquisition cost to lifetime value ratio – a metric highly valued by investors.

To illustrate this point, here’s Square’s analysis of how different segments of Cash App customers behaved during the period:

Our interpretation is that consumers are increasingly inclined to consolidate their financial activities within fintech platforms, suggesting that the efforts of fintech companies to broaden their service offerings have been successful this year.

The user base for fintech services also appears to be expanding. For context, here’s Square’s data on usage growth for its consumer Cash App service over the last three quarters:

Many individuals have multiple peer-to-peer payment services on their devices, making it difficult to directly correlate Cash App growth with overall trends in the consumer fintech space. Nevertheless, the growth rate shown above is undeniably positive and significant.

Turning to Robinhood, Public, Freetrade, and other platforms offering low-cost or commission-free stock trading, Square has also experienced strong results from its stock service. Here’s what the company reported:

These results are impressive. Furthermore, combining our observations regarding the benefits of offering multiple services within a single fintech ecosystem and the performance of the stock market, Square highlighted the following metrics:

Customers who engage with more services are more valuable over time. This is likely the reason why both Coinbase and Robinhood launched debit cards, albeit in a reversed approach.

The findings from PayPal and Square collectively suggest a thriving consumer fintech market. While 2020 has been a challenging year globally, it appears to have been a remarkably successful period for startups focused on helping individuals manage and spend their money.

However, some challenges lie ahead as we move into 2021. Here’s Square’s perspective on its performance in October, the first month of Q4 2020:

The absence of further stimulus measures could negatively impact fintech results. This is an important consideration given the ongoing debates in Congress, the continuing pandemic, and the outgoing president’s focus on disputing the election outcome rather than assisting his successor. The situation remains uncertain, but it appears that the positive trends of 2020 could diminish if the government does not take action.