For much of this year, global fintech activity has remained strong, largely driven by increased consumer demand and small enterprises side-stepping high-street banking systems amid a high interest rate environment.
Despite the positive turnaround in operational activity, new investment deals continue to decline. In Q3, global fintech funding declined to $7.3 billion, a 25% quarter-over-quarter decline.
However, new insights reveal that the U.S. currently leads in the global fintech market, representing 60%, or six of the top ten deals made during the third quarter. All top three positions were held by American fintech names, including a $1.0 billion funding deal for Sedgwick, an Ohio-based employee compensation managed care organization (MCO).
Across the board, the fintech funding landscape remains volatile, with investors retreating from big-dollar deals. Higher market uncertainty, geopolitical tension, and an overactive interest rate environment have seen many investors shifting gears, looking at established fintech firms to provide near-term buoyancy.
Investors remain hawkish about the financial and banking services sector. However, new digital developments, coupled with rising consumer demand, could present a more attractive opportunity for investors’ long-term strategy. Though new deal activity remains muted, a handful of companies managed to outshine expectations following stronger third-quarter financial results.
Fidelity National Information Services
FIS (NYSE:FIS) is an operator of one of the largest financial technology service providers worldwide and serves banks, capital markets, and various financial institutions. Annually, FIS processes more than $10 trillion in global transactions with a strong focus on banking and market technology.
Third-quarter financial results showed impressive gains across the board, with FIS reporting $2.6 billion in revenue, up 3% on a GAAP basis and 4% on an adjusted basis. Stronger Adjusted Earnings Per Share (EPS) of $1.40 rose by 49% compared to the same period last year, allowing management to raise its adjusted full-year outlook and adjusted EPS full-year outlook.
Recent quarterly earnings represent the first full quarter since FIS completed the sale of a 55% stake in Worldplay to global private equity firm GTCR. The "Worldplay" sale was announced in January 2024, and by July, FIS completed the $11.7 billion sale, retaining a 45% non-controlling minority stake in Worldplay.
Based on third-quarter results, banking solutions remain FIS' biggest, and perhaps most lucrative business segment. In recent reporting, banking solutions revenue rose 3% on an adjusted basis, totaling $1.8 billion compared to the same quarter last year.
Improvement of adjusted EBITDA margin added to the company's cost-saving initiatives, allowing for better operating leverage. Strong business signings during the third quarter can help lift upcoming financial results and leave an opportunity for improved delivery during the first half of next year.
On the stock market, a robust share performance sees year-to-date delivery up more than 40%, and adding 2.25% since the start of the fourth quarter through November 28. With a Value Score of B and a Momentum Score of A, FIS delivers an impressive range of opportunities in a highly competitive market.
Nu Holdings
Globally, Nu Holdings (NYSE:NU) services more than 109.7 million customers, adding over 5 million new customers during the third quarter of the year. The Brazil-based company operates a vast network of financial services, with a presence now in Mexico and Colombia, and is one of the largest credit operators in Brazil.
The third quarter represented one of the company's most outstanding performance periods, with year-over-year revenue up by 56%, setting a new record at $2.6 billion. Total gross profit ended at $1.34 billion, marking an improvement of 76% year-over-year. Increased financial delivery comes on the back of stronger gross margins of 46%, up 3 percent from 43% in Q3 2023.
Customer acquisition played an important role during the third quarter. In Brazil, Nu Holdings added a robust 1.1 million customers each month through the three months ending September 30. The total customer base in Brazil now stands at 98.8 million, with expansion in international markets adding 1.2 million new customers during the quarter.
Better-than-expected customer performance in international markets was primarily driven by the delivery of new financial products. For instance, in January this year, Nu Holdings announced the launch of Cuenta, a financial product aimed at Colombian-based clients.
Cuenta, a savings account that provides customers with unlimited transfers free of charge, forms part of the company's strategic roadmap to capture a larger market share in the country. By the start of this year, Nu Holding had held roughly a 5% share of the Colombian financial services market, serving over 800,000 credit card customers.
Share performance experienced major volatility during its initial public offering in December 2021. However, in more recent months, NU delivered impressive market gains, with share prices up approximately 66% since the turn of the year. Share prices peaked at $15.89 on November 11, before sliding back down.
The recent announcement of Warren Buffett's Berkshire Hathaway (NYSE:BRK) (NYSE:BRK) lowering its stake in the company has caused share prices to fall. Berkshire has reduced its share of Nu by 20% in recent months. The investment firm now owns a total of 86.4 million Nu shares, down from the 107.1 million shares owned since the company's IPO.
But this move shouldn't be an indication that Berkshire and other major players are dumping Nu for something more prestigious. There's still plenty of legroom for Nu Holdings, and with new regional market opportunities opening, Nu could soon dominate the financial services sector in Latin America.
Rocket Companies
Rocket Companies (NYSE:RKT) provides mortgage, real estate, and financial services to large commercial and private individual customers. The Detroit-based fintech company leverages key market data, innovative technology, and financial best practices to maintain a highly competitive advantage.
Loan and mortgage activity remained largely volatile throughout the third quarter. In September, the U.S. The Federal Reserve announced the reduction of interest rates, calling a jumbo-sized rate cut of 0.50%, and bringing rates down to a range of 4.75% to 5%. This was the first rate reduction since March 2020.
In November, the Federal Open Market Committee (FOMC) announced that the central bank would be cutting interest rates, again, bringing the benchmark policy rate down by a quarter of a percentage point to the 4.50%-4.75% range.
Moving forward, the central bank is looking to deliver a more gradual rate-cut approach heading into 2025. This activity has created plenty of volatility within the lending and mortgage space, and despite interest rates coming down, mortgages remain elevated on the back of sticky housing inflation and rising property prices.
However, Rocket Companies delivered strong third-quarter results, including an adjusted revenue improvement of 32% year over year. Total revenue for the quarter ended at $648 million, with adjusted revenue ending at $1.32 billion. Delivery remains within the company’s high-end performance range expectations.
Elsewhere, the company reported adjusted EBITDA of $286 million, the highest on record in over two years. Additionally, there were modest improvements, with an adjusted net income of $166 million, or $0.08 adjusted diluted earnings per share during the third quarter.
The company's lending business arm, Rocket Mortgage, received a Fitch Ratings upgrade to BBB in November. This significant achievement marks the first time a non-bank mortgage provider achieved an investment-grade rating in more than two decades. Rocket Companies called this an achievement that underscores Rocket Mortgage's financial strength, stability, and disciplined capital management.
Share performance has largely remained unchanged this year, with RKT coming down over 30% since its peak in August. The forward-looking guidance shows that an improved housing market, coupled with increased consumer confidence could help bolster share performance in the first half of next year.
Closing Remarks
This has been another challenging year for the fintech market. Increased economic volatility, coupled with uncertainty in key regional capital markets have seen commercial investors pull back, and instead refocus their forward-looking strategies.
For institutional investors, fintech companies could present an upside leading into 2025, with major players in this industry seeking to expand operational activity and look at capturing a larger consumer base.
An improved interest rate environment, coupled with more positive economic growth could help bring fintech back into its former spotlight and help regain robust performance capabilities amid uncertain times.
Disclosure: No positions in any companies mentioned.
