Top 10 fintech ideas for 2024

Deutsche bank released their Top 10 financial ideas for 2024, noting investor concern surrounding the stability of the overall economy as well as raised interest rates, inflation, and pricing competition. However, Fintech stocks experienced a notable upturn in the final two months of 2023, fueled by optimism for a gradual recovery and an imminent bounce back.

“We believe that leading fintech players are well positioned to outperform in most economic environments given their resilient business models that benefit from both PCE and secular tailwinds,” writes Deutsche Bank analysts in a note.

Volume recovery

Deutsche Bank is predicting a mild recession for the US in 1Q24, with a 0.6% decline in real GDP and around 4.5% peak unemployment in 1H24. However, despite a potential slowdown in payment growth in the first half of 2024, fintechs are expected to benefit from the ongoing shift to electronic payments, helping offset any decrease in consumer spending.

Historically, payment companies tend to perform well due to growth in PCE and the move towards digital payments. Even if consumer spending stagnates during a recession, the shift to digital payments should sustain industry growth at about 3-5%

As the economy improves in 2H24, Deutsche Bank analysts suspect attention may return to high-growth stocks like MQ, SQ, and BILL, more aligned with a broader economic recovery.

Long-term preferences lean towards fintechs that increase user acquisition, engagement, and monetization while reducing credit exposure and showing a clear path to profitability.

Expansion in B2B payments

The B2B payments sector saw a slowdown in business spending in 2023, affecting companies like BILL and AVDX due to a shift towards cheaper payment methods by larger suppliers. Despite this, Deutsche Bank believes that focusing on higher-value payment methods remains critical for long-term success.

Success for B2B payment firms relies on boosting electronic payment adoption and expanding take rates. BILL leads in the SMB market, while AVDX excels in the middle-market. Other players like FLT and WEX are thriving with expanded corporate payment services, and solutions like AR automation at companies such as GPN and FLYW are streamlining processes and reducing costs.

“Although B2B-focused fintechs have faced a number of headwinds this year, we remain constructive on the long-term potential of the subsector given the value proposition and untapped green space ahead.” Writes Deutsche Bank.

Embedded finance opportunity

Embedded finance, the integration of financial services like payments, loans, and insurance into everyday apps, is gaining traction as consumers prefer seamless access to these services within their regular software rather than using separate financial institutions.

This shift toward integrated financial services not only improves the consumer experience, driving higher conversions and larger transactions for merchants, especially in substantial purchases, but also fuels omnichannel commerce and data-driven solutions like open banking and hybrid debit/credit options. It's projected that by 2026, embedded finance transactions will exceed $7 trillion, with consumers actively seeking easier payment options directly from merchants and non-financial entities.

MQ stands out in this field, offering virtual card solutions and tools for non-traditional companies. They predict a 22% annual growth rate for embedded finance, with accelerated wage access, B2B payments, and co-branded credit cards representing significant opportunities.

Affiliate marketing

Deutsche Bank predicts that affiliate marketing will keep gaining momentum in 2024, as fintech companies seek extra revenue streams through their networks or brand. Within their coverage group, Deutsche Bank identifies SQ and AFRM as particularly well-positioned to benefit from this trend.

While affiliate merchants don't directly generate revenue from payment volume, they earn income through affiliate marketing fees, establishing a fresh revenue channel. Although Deutsche Bank doesn't currently view affiliate revenues as a significant income source for SQ and AFRM, analysts believe they will continue to grow rapidly, presenting growth opportunities for both companies.

Expanding next gen POS

Payment processing has become highly standardized and competitive due to an influx of new payment service offerings. As a result, POS providers are now focusing on industry-specific tools to help businesses manage operations, retain customers, and grow. These tools offer new subscription-based revenue streams with added module fees.

Deutsche Bank expects elevated growth for next-gen PSPs and expects traditional vendors to broaden their offerings.

Analysts at Deutsche Bank forecast that next-gen POS providers will increase volumes at an ~18% CAGR and revenue at a ~24% CAGR through 2025. Given these superior growth rates, Deutsche Bank expects providers like SQ (Square) and TOST to prioritize advanced services. Additionally, financial institutions like FI and GPN are likely to promote next-gen POS solutions to their large customer bases.

Value-added services

Value-added services have become an increasingly larger part of the payments industry. Companies like V and MA have experienced substantial growth in these services, a trend that Deutsche Bank expects to continue in 2024.

These services, including cybersecurity, fraud management, and marketing, play crucial roles in the payments landscape and are essential for businesses. Networks have also employed AI to combat fraud for their clients, especially in detection and prevention.

As cross-border transactions have stabilize following strong post-pandemic growth, the expectation is that value-added services will contribute significantly to network growth in the future.

Expect rise in payment competition to continue

In 2023, the payment gateway/PSP industry faced concerns about competition and slowing growth, affecting major players like PYPL, Braintree, ADYEN, and Stripe. ADYEN's outlook reset but later reassured investors with new targets. Stripe delayed its IPO due to market concerns. However, expectations for the industry are improving in 2024.

While some worries have eased, competition remains dynamic. Braintree, ADYEN, and Stripe are expected to gain market share due to scalability and competitive pricing. Deutsche Bank’s estimates suggest ADYEN leading with around 38% of the e-commerce market in 2024, followed by Stripe at 32%, and Braintree at 18%. PYPL's new CEO will face challenges managing Braintree's growth alongside the branded business.

Apple Wallet

Apple Pay has steadily grown since its launch in 2014. A key driver for its growth over the past year has been its Tap To Pay feature. But its limitation to iPhone users opens opportunities for digital wallets like PayPal, Venmo, and Cash App. Cash App Pay, in particular, has shown promise with 2 million users and $113 million in volumes, forming a key part of Square's plans to link ecosystems and drive traffic to merchants.

However, PayPal faces challenges. While benefiting from pandemic-driven e-commerce growth, its core business growth has lagged behind industry benchmarks for over two years. Real-time data shows a declining market share for PYPL, indicating a preference for other digital wallets among consumers.

Is cross-border growth sustainable?

After a significant rebound following the pandemic, cross-border travel saw substantial growth benefiting V and MA. However, this surge is now stabilizing, indicating a potential slowdown in growth rates.

Recent TSA data shows a stabilized growth rate, while purchases by US consumers from US airlines declined in October, stabilizing during the holiday season. V and MA are positive about cross-border travel recovery and non-travel-related eCommerce, expecting modest growth.

Despite expectations for increased cross-border buyers in the US, Deutsche Bank believes growth is likely to slow due to supply chain issues, inflation, and availability of domestic products. eMarketer predicts a 3.4% growth rate, down from higher rates seen in previous years. This slowdown is due to factors like normalized cross-border eCommerce marketplace growth. eMarketer also foresees a modest 3% increase in cross-border purchasers for the following year.

Buy now, pay later

Demand for Buy Now, Pay Later (BNPL) services surpasses 5% of US e-commerce, set to grow by approximately 17% this holiday season, per Adobe. PYPL stands out in BNPL, while SQ benefits from its Afterpay acquisition, exploring embedded finance and synergies across its ecosystem. Other key BNPL competitors include Klarna, Zip, and Sezzle.

AFRM maintains leadership, offering varying AOV capabilities that attract major retailers like AMZN, SHOP, WMT, and TGT. Its hybrid Affirm Card has shown promising early success, expanding beyond e-commerce and targeting in-store opportunities.

Despite optimism for the Affirm Card's potential, financial risks and uncertainties in the macro environment pose valuation challenges leading Deutsche Bank analysts to anticipate potential stock volatility.

By Michael Elkins | [email protected]

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