In 2015, Nick Molnar was living with his parents in Sydney, Australia, and selling jewelry from a desktop computer in his childhood bedroom. Hocking everything from $250 Seiko watches to $10,000 engagement rings, the 25-year-old had gotten so good at online marketing that he had become Australia’s top seller of jewelry on eBay, shipping thousands of packages a day.
That same year, he teamed up with Anthony Eisen, a former investment banker who was 19 years his senior and lived across the street. They cofounded Afterpay, an online service that allows shoppers from the U.S., U.K., Australia, New Zealand and Canada to pay for small-ticket items like shoes and shirts in four interest-free payments over six weeks. “I was a Millennial who grew up in the 2008 crisis, and I saw this big shift away from credit to debit,” the now 30-year-old Molnar says today. Either lacking credit cards or fearful of racking up high-interest-rate debt on their credit cards, Molnar’s generation was quick to embrace this new way to buy and get merchandise now, while paying a little later.
Five years later, Molnar and Eisen, who each own roughly 7% of the company, have become billionaires—during a pandemic. After initially tanking at the start of lockdowns, shares of Afterpay—which went public in 2016—are up nearly tenfold, thanks to a surge in business tied to e-commerce sales. In the second quarter, it handled $3.8 billion of transactions, an increase of 127% versus the same period a year earlier.
Buy Now, Pay Later
After a steep drop in Afterpay’s stock in March, the e-commerce boom and credit-card-weary Millennials have propelled the installment payment company’s stock to record highs, nearly doubling its value in six months.
They are not the only ones whose fortunes have taken off in the last few months. According to Forbes’ analysis, at least five fintech entrepreneurs including the two Aussies have been vaulted into the billionaire rankings by the pandemic. Others include Chris Britt, founder of digital bank Chime, and Vlad Tenev and Baiju Bhatt, the co-CEOs of “free” stock trading app Robinhood. Several other founders from such companies as Klarna and Marqeta have also gotten boosts and are suddenly approaching billionaire status.
As in other sectors, the Covid recession has created both fintech winners and losers. For example, LendingClub, which offers personal loans to higher-risk consumers, laid off 30% of staff; small business lender On Deck was sold in a fire sale.
But for a sizable crop of consumer-facing and payments-related fintechs, the virus has delivered a gust of growth, just as it has for e-commerce behemoth Amazon and work-from-home players Zoom, Slack and DocuSign.
“Consumer fintech adoption was already strong prepandemic, especially among the 20s to early-40s age group,” says Victoria Treyger, a general partner who leads fintech investing at Felicis Ventures. “The pandemic has become a growth rocket, fueling the rapid acceleration of adoption across all age groups, including 40- to 60-year-olds.”
Several Covid-driven developments are helping specific types of fintech players. For example, consumers’ shift to more online spending and delivery services is a boon to certain companies powering payments. Marqeta, a specialized payments processor whose clients include Instacart, DoorDash and Postmates, has been in talks to go public at an $8 billion valuation, four times what it was valued at in March of 2019. That would give CEO Jason Gardner, who owns an estimated 10% of Marqeta, a stake worth $800 million.
Meanwhile, the $2 trillion-plus CARES Act Congress passed in March, with its $1,200-per-adult stimulus checks, student loan payment holiday and (now expired) $600-a-week unemployment supplements, helped many Americans keep financially above water—and some digital banks like Chime to prosper.
Spending on the travel and luxury items U.S. consumers typically put on credit cards has fallen with the pandemic, while spending on debit card necessities is up.
Source: MoffettNathanson analysis of Visa’s U.S. credit and debit transaction volumes.
In the second quarter of 2020, amid Covid lockdowns and fears, consumers slashed spending on travel, restaurants and luxury items they usually put on their credit cards, but continued to spend on necessities and smaller items—the sort of things they’re more likely to pay for with debit cards. During that quarter, Visa credit card transaction volumes were down 24% from the year before, while debit card transactions were up 10%, according to research firm MoffettNathanson. And debit cards (rather than checks or credit cards) are the spending vehicle most frequently offered by fintech neobanks like SoFi, Dave and MoneyLion.
San Francisco-based digital bank Chime, in particular, has used the stimulus payments to its advantage. In mid-April, about a week before the $1,200 government-stimulus checks started hitting Americans’ accounts, the company advanced customers that money, eventually extending over $1.5 billion. “Following the stimulus advance, we had the largest day for new enrollments in the history of the company,” CEO Britt reports.
The pandemic has depressed total consumer spending, and the unemployment rate remains at a high 8.4%—two factors that affect Chime’s middle-income customer base. Yet, on a per-user basis, the “average spend per customer is up over last year,” Britt says. “Part of the reason for that is the government programs around stimulus payments and unemployment.”
Today, Chime’s annualized revenue is running at a $600 million rate, according to a person familiar with the private company’s numbers. At its eye-popping new valuation of $14.5 billion announced along with a $485 million fundraise in mid-September, venture capitalists are valuing the company at 24 times its revenue. Some investors are asking if Chime should get such a lofty value when Green Dot, a publicly traded fintech that offers checking accounts and prepaid debit cards for low-income customers, trades at two times revenue. “We really look more like a payments-processing business,” answers Britt. That’s because virtually all of Chime’s revenue comes from interchange—the fees merchants pay when Chime’s users swipe their debit cards. The company doesn’t make money on interest through its new secured credit card (that’s a starter card where the holder puts up money to cover his or her credit limit), although Britt says he doesn’t rule out lending in the future.
Now Britt himself has sailed into the “three-comma club.” Forbes estimates his Chime stake is at least 10%, meaning his holdings are worth $1.3 billion-plus (Forbes applies a 10% discount to all private company holdings). And he’s planning an IPO. “Over the next 12 months, we have a number of initiatives to get done to make us even more IPO-ready,” he says.
Then there’s the Robinhood phenomenon. The boredom of being stuck at home, wild stock market swings and government stimulus checks have turned some Millennials and Generation-Zers into day traders and options players. Robinhood’s most recent fundraising round in September gave it an $11.7 billion valuation and its cofounders a paper net worth of $1 billion each. But considering Morgan Stanley’s $13 billion February acquisition of E-Trade and Schwab’s earlier purchase of TD Ameritrade for $26 billion, some think Robinhood could garner a $20 billion valuation if it went public or were acquired.
Cofounders of Robinhood
Under stay-at-home orders, and with coronavirus stimulus checks in hand, some Americans began actively trading stocks and options on Robinhood, helping to make Baiju Bhatt and Vladimir Tenev (pictured in 2015) into billionaires.
If there’s one fintech segment that has been an unalloyed pandemic winner, it’s the business Afterpay is in: online point-of-sale installment financing. It’s benefiting from both consumers’ shift to online buying and their reluctance, in these uncertain economic times, to take on new credit card debt.
While Afterpay’s Nick Molnar and Anthony Eisen hit billionaire status in July, their competitors aren’t far behind. Take Klarna, which was founded in Stockholm in 2005 and entered the U.S. market in 2016. Two of the three founders, Sebastian Siemiatkowski and Niklas Adalberth, met while flipping patties at a Burger King in Sweden. They pioneered the buy-now, pay-later model in fintech, calling it “try before you buy” and letting people own products for 30 days before making their first payment. (That’s a lot more attractive than old-fashioned layaway, the store system once popular for Christmas gifts and large appliance purchases, in which buyers had to make all their installment payments before getting an item.)
Klarna CEO Sebastian Siemiatkowski is using installment financing to build a banking business. “If you talked to a Swedish bank or a German bank and asked them, ‘Is Klarna a threat to your retail banking offering?’ They would definitely say yes.” KLARNA
Klarna charges retailers 3% to 4% of each transaction—slightly lower than the 4% to 5% Afterpay charges—to offer its service. One key difference that separates the two companies: Klarna is becoming a full-fledged financial services business. It became a licensed bank in Sweden in 2017 and offers longer-term financing of up to 24 months, with interest charged, for high-ticket items like laptops sold through a small number of retailers. Siemiatkowski has already turned Klarna into a digital bank in Europe with a debit card for spending on everyday purchases. He’ll likely do the same in the U.S. soon.
The pandemic has catapulted Klarna’s business onto a steep trajectory. By the end of 2020’s first half, its U.S. customer base hit 9 million, up 550% from the same period the year before. Globally, 55,000 consumers are downloading the Klarna app every day, more than two times last year’s pace. Klarna is now available in 19 countries, has 90 million users and expects to bring in more than $1 billion in revenue this year. When it raised a new round of funding last week, its valuation nearly doubled from a year ago, hitting $10.7 billion.
Cofounder Victor Jacobsson has a 10% stake, while Siemiatkowski’s has 8% in the still-private company. (Niklas Adalberth retains just 0.4% after selling some shares to fund his philanthropic organization and investing in startups. Neither he nor Jacobsson are still involved in Klarna.)
Not surprisingly, as the installment purchasing fintechs gain more customers and attention, they’re also facing additional scrutiny from regulators. In March, Afterpay agreed to fork over $1 million, including $905,000 in consumer refunds, after California’s Department of Business Oversight (DBO) concluded the late fees Afterpay charges meant it was running an unlicensed lending business. “Afterpay rejects the view that the Company operated illegally,” the Australian company said in a statement. “While Afterpay does not believe such an arrangement required a licence from the DBO, Afterpay has agreed to conduct its operations under the DBO licence as a part of this settlement.” A spokesperson adds that Afterpay “has been applying for, and has been granted licenses [in other states] where needed.” In 2017, Klarna was fined $15,000 in New Hampshire for operating without a lending license. Today Klarna has such licenses in every U.S. state.
Another fintech winner in the installment-payment business is Silicon Valley-based Affirm, the creation of serial entrepreneur Max Levchin, a founder of PayPal, which itself jumped into the installment business just last month. Between November 2019 and July 2020, Affirm nearly doubled its U.S. users to 5.6 million. It raised $500 million last week at a valuation of more than $5 billion, up from $2.9 billion last year. While Levchin’s exact stake is undisclosed, it’s likely worth hundreds of millions.
Eight years after founding Affirm, Levchin has raised $1.3 billion in venture capital and ridden lucrative partnerships with Peloton and Shopify to a valuation of more than $5 billion. BLOOMBERG
Affirm has also enjoyed a special Covid kicker from pricey home fitness gear. Since 2015, it has powered financing for Peloton, whose sales have surged as affluent young consumers, missing the motivation of group exercise classes, have flocked to buy the $2,000-plus stationary bikes with their streaming workout classes. Affirm also now finances purchases of Mirror, the hot $1,495 in-home fitness coaching device acquired by Lululemon this summer.
Of course, the fintech companies’ current lofty valuations depend on consumer spending staying strong and consumers retaining some of the online shopping habits they’ve developed over the past six months. With a preelection agreement between Congress and the White House on a new stimulus package looking unlikely and the future course of Covid-19 unknown, there are no guarantees. But for now, these fintechs are riding high.