Financial technology has brought financial services into the digital age. And the COVID-19 pandemic has accelerated the trend to bring business to the world online.
There are two fintechs that are making great strides in this environment Tradeweb Markets (NASDAQ: TW) and Silvergate Capital (NYSE: SI). Both are customer-oriented innovators who are rewarded by the markets. In the past two years, Tradeweb’s stock has doubled, and Silvergate’s has returned nearly 900% – both of which have S&P 500the return of 46% over the same period.
1. Tradeweb Markets
Tradeweb provides an electronic trading platform for large institutional investors in a variety of markets. Its clients include hedge funds, insurance companies, central banks, and market makers, and it helps them trade assets such as US Treasuries (first marketed in 1998) and corporate bonds and stocks.
The company derives its income mainly from transaction fees. Its greatest sources of income are its interest rates and credit products such as government bonds, high yield bonds, and corporate bonds. These account for 79% of total sales. From 2004 to 2020, the company grew sales at an impressive annual rate of 12.5%.
Tradeweb takes a bigger stake in the markets in which it competes. For example, Tradeweb’s share of the US Treasury market rose from 7.5% to over 17% between 2016 and this year’s third quarter. The share in other markets is also growing. The volume of the stock and money markets on its platform has outpaced the growth of those markets since 2015.
Tradeweb does this so well by listening to its customers and constantly updating its trading platform to meet their needs. For example, the company bought earlier this year Nasdaq‘s fixed income trading platform for $ 190 million. The acquisition helped improve Tradeweb’s platform by providing customers with a variety of ways to trade government bonds, improving access while reducing trading costs.
A new tailwind for Tradeweb’s business could be the increased volatility of interest rates over the next few years. Federal Reserve officials have raised concerns about inflationary pressures in the economy and signaled three rate hikes for 2022. Rising interest rates could likely lead to increased volatility in the treasury market – thus increasing Tradeweb’s revenues as trading volume increases.
2. Silvergate Capital
Silvergate Capital is a bank focused on serving cryptocurrency customers. When it first entered the cryptocurrency market in 2013, the regulatory complex was not yet developed and those who worked in the area had difficulty navigating through it. Silvergate helped these early customers, like exchanges, by providing infrastructure to support essential functions such as money transfers and customer account controls.
Silvergate has evolved its solutions for cryptocurrency customers over time. A few years ago the bank launched its Silvergate Exchange Network (SEN). This payment network helps customers transfer US dollars between exchanges, such as Coinbase and Binance. Silvergate has grown the zero interest bearing deposits significantly. From 2019 through this year’s third quarter, Silvergate’s non-interest bearing deposits grew from $ 1.5 billion to over $ 11.3 billion. These deposits have been a significant source of funding for the company over the past several years.
A new product the company launched this year is SEN Leverage. This product enables institutional investors to borrow via Bitcoin as collateral. The product has generated a lot of interest. SEN’s leverage commitments were $ 322.5 million for the third quarter, up 25% from the second quarter and 808% from the third quarter of 2020.
The bank also announced a partnership with Diem Networks as the exclusive issuer of Diem USD. Diem USD is a stablecoin backed by US dollars that is intended to provide infrastructure for 1.7 billion adults worldwide with no or no bank details. Diem was originally part of Meta platforms‘Libra Project.
This partnership shows how much trust Silvergate has gained in the cryptocurrency space by listening to customers and innovating to meet their needs. It’s a great company with a bright future – which makes it a solid stock to buy and hold for the next decade.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all reflect critically about investing and make decisions that will help us get smarter, happier, and richer.