A notable change of guard takes place in finance.
This week, the market cap of fintech payment company Square surpassed that of Goldman Sachs, the 151-year-old investment bank, for the first time.
Almost exactly two months earlier, PayPal outperformed Bank of America, the second largest lender in the United States, in market capitalization. By taking this step, the online payments pioneer was worth more than any American bank except JPMorgan Chase.
The meteoric rise of these two payment companies solidifies the arrival of the new guard: companies that started out as niche players in overlooked corners of finance and are growing rapidly with the rise of e-commerce and digital payments. Square's shares are up more than 140% so far this year, while PayPal is up 90%. The KBW Bank Index has now fallen by 32%.
"It's pretty impressive to look at some of these fintech companies and the credit they're getting today," said Devin Ryan, an analyst at JMP Securities, in a telephone interview. "The market differentiates between how businesses grow in the future and what they're willing to pay for it today, and financial stocks are seen as a more mature, highly regulated industry."
The coronavirus pandemic has accelerated the spread of digital payments across all industries and resulted in double-digit sales growth for PayPal and Square in the second quarter. And the immediate measures taken by central banks to support the markets from March onwards, as well as government stimulus payments to households, have resulted in more dollars chasing growth and benefiting fintech and tech stocks.
Meanwhile, thanks to the pandemic, banks like JPMorgan and Bank of America have jointly allocated tens of billions of dollars to anticipated defaults on credit cards, mortgages and commercial loans. And industry profitability is likely to be under pressure for years as the Federal Reserve keeps its policy rate at zero.
There are several ways to look at the performance differences: new versus old, technology versus finance, growth versus value, even west coast versus east coast. But perhaps the main difference is that the new guard epitomizes digital platforms that benefit from economies of scale more than banks, which are still primarily doing physical business and providing massive balance sheets for lending.
"PayPal is still mostly about payments, and they can take advantage of leverage in ways that banks just can't," said Conor Witt, research analyst at CB Insights.
However, valuations of popular tech companies were stretched ahead of a sharp drop on Thursday, and banks may prove to be the better number. There have been signs of foam in the market for months as names like Tesla and Apple rose day in and day out and the tech sector posted its biggest decline since March on Thursday.
Square's market capitalization hit $ 70.7 billion on Monday, outperforming Goldman's $ 70.5 billion. Thursday's withdrawal meant Goldman ousted the place later in the week. PayPal's market capitalization as of Thursday was $ 247.5 billion, compared to $ 225.4 million for Bank of America.
Ryan argued that some banks, particularly Goldman Sachs, weren't getting enough credit for their high-growth digital initiatives. But the longer-term trend is clear, he said.
"There is this arms race in digital finance and the legacy companies have legacy infrastructure to upgrade and existing operating margins," he said. "Companies starting with a digital backbone don't have these issues, so the cost of providing services is lower. I think some established companies will lag behind in the past."
With reports from Robert Hum of CNBC