Why Fintech Companies Like Square and Stripe Are Thriving Right Now
Here’s why the economic downturn is actually benefiting payments and lending startups
Conventional thinking suggests there are two types of companies that would be hit hard in a sudden recession: first, the ones with nowhere to hide because they have exposure to every part of the economy, like payment providers, and, second, the ones who lend to borrowers who can’t otherwise get a loan, since those borrowers are likely the first to default.
Both of these businesses are part of the fintech space, which has surged over the last decade as some industries moved online, brick-and-mortar stores shifted to a tech-enabled model, and big banks retreated from making small loans. If fintech companies are at the bleeding edge of finance, we’d expect them to get hit hard by a sudden recession.
But that’s not what we’re seeing. In recent days, payment processors have stepped up big time. Visa committed to no layoffs, SoFi made a splashy, billion-dollar acquisition. Stripe raised an additional $600 million capital, bringing it to a $36 billion valuation, and Robinhood is planning to raise money, too. Square founder Jack Dorsey donated a stunning $1 billion worth of Square stock to his foundation to fight the pandemic and is using Square’s Cash App to help people get stimulus payments. Square is not alone in the latter project, either. Challenger bank Chime offered advances on stimulus checks, and Plaid is building an app to make it easier for companies to apply for Small Business Administration loans.
Fintech companies spent the last 10 years building products, from payments to lending, that were designed around a fast, flexible, software-first economy.
In a financial crisis, we learn which abstractions turned out to be faulty: 2008 taught us that complex credit products were better at hiding risk than mitigating it; 2000 showed that while the internet was a big deal, that didn’t mean any given internet business was bound for success; 1987 demonstrated that “be the first to leave” is not a viable strategy if it’s everybody’s strategy. If this pattern holds, fintech —…