The financial industry has seen rapid innovations in the past decade. The merger of finance and technology has caused an explosion of life-changing fintech companies. During this same time, we've seen the rise of digital currencies, aka cryptocurrencies, which continue to gain traction as more institutional firms accept the technology.
Innovations present great opportunities to investors, which is why investors are so interested in the fintech and cryptocurrency spaces. For me, two innovative, world-changing companies on my radar are Silvergate Capital (SI 8.70%) and Upstart Holdings (UPST 3.39%).
Silvergate Capital has been providing solutions to cryptocurrency investors since 2013, giving it a first-mover advantage. Meanwhile, Upstart Holdings is a company focused on the buy now, pay later industry, providing customers with better access to credit in a more efficient way.
Both companies have been unstoppable, with Silvergate Capital stock up 287% since December and Upstart Holdings stock up 340% since its public debut in mid-December. These stocks have made a great run thus far, and here's why they could continue to be unstoppable going forward.
Silvergate Capital: A play on the rise of digital assets
Silvergate Capital is a chartered bank and originally focused on traditional banking activities, such as loan creation. This changed in 2013 when it shifted its focus to digital currency customers.
The bank saw an opportunity in digital currencies like Bitcoin early on, but it noticed a problem: The regulations governing them were complex and underdeveloped. This kicked off the bank's transition from asset generation to providing fee-based solutions to digital currency customers. Its focus on digital currencies shifted the bank's focus to building noninterest-bearing assets and generating a fair amount of revenue in the form of fees. This focus on digital currencies has paid off, especially given Bitcoin's 700% gain since the start of 2020.
Silvergate's pride and joy is its Silvergate Exchange Network (SEN), a proprietary, instantaneous payment network. SEN is available 24/7 and enables the real-time transfer of U.S. dollars between customers on different trading platforms. It also serves as a platform for developers to create new products and services.
The bank touts customers of all types, including digital currency exchanges, institutional investors, and other developers and digital currency miners. The strength for the bank comes from the economic moat it has built up thanks to network effects -- with Coinbase, Binance, and Bitstamp among the big names in the cryptocurrency exchange space using SEN, that's proven attractive to others as well.
Since 2017, Silvergate has grown its digital currency customer base from 244 to 969, representing a compound annual growth rate (CAGR) of 58%, while transaction revenue has grown at a 196% CAGR to $11.1 million last year.
As a result, deposit-related fees increased 126.4% on the year, to $11.1 million, and represent 59% of total noninterest income for the bank, helping total revenue increase 42% year over year. Its noninterest-bearing deposits increased to $5.1 billion during the year, representing 98% of the bank's total assets, which is why the bank can maintain a 0.01% cost of deposits -- something unheard of in the banking industry.
The bank is optimistic about another product, rolled out in January 2020, called SEN Leverage, which allows institutional investors to enter into a loan agreement with Silvergate Bank for USD financing. Silvergate is able to use its SEN to fund loans while the investor's collateral -- Bitcoin -- is held by a custodian in a separate, cold storage account. The bank has partnered with Fidelity Digital Assets and Coinbase, which act as custody providers holding the customer's Bitcoin. The product has seen steady growth in 2020, with third-quarter loan volume of $35.5 million, and fourth-quarter loan volume jumping to $82.5 million.
While the bank faces stiff competition from competitors like Signature Bank and JPMorgan Chase, which are working on their own real-time payments solutions, it has the first-mover advantage thanks to the years it spent building up its customer network through SEN. Silvergate Capital hopped on the digital currency trends early on and will likely be rewarded as a result, making this a solid high-growth-potential stock to add to your portfolio.
Upstart: Using AI to capitalize on the buy now, pay later trend
Upstart's founders were tired of seeing millions of creditworthy individuals being left out of the financial system. The former Google employees saw an opportunity in the financing space -- specifically, the buy-now-pay-later space.
The company differentiates itself from other lenders in how it determines risk, as well as with its business model. It aggregates consumer demand for loans through its website or app, uses artificial intelligence (AI) to quantify the true risk of the loan based on nearly 1,600 variables, and connects those consumers to banks. Best of all, the customer experience is as seamless as possible, with nearly 71% of its loans fully automated and approved in real time, without any phone calls or documentation required.
Upstart doesn't make money from holding loans in its portfolio and servicing them. Instead, the company focuses on improving its AI lending model, then has its banking partners handle the lending and servicing process. As a result, it is reliant on fees paid by banks for loans referred and originated through the Upstart website or app.
Referral and platform fees were $200 million last year, making up almost 86% of the company's total revenue. Another 12% of revenue, or $28.3 million, comes from servicing fees, although this will likely decline going forward. That's because Upstart wants to focus on referral and platform fees, which can be seen in the company's reducing its aggregate loans and notes from $266 million in 2019 to $98 million in 2020. Total fee revenue has grown at a CAGR of 45.7% since 2017, and despite the COVID-19 pandemic, its revenue still grew at a solid 42% last year.
The company has plenty to be excited about going forward. That's because it recently agreed to acquire Prodigy Software, a leader in cloud-based automotive commerce. The acquisition helps Upstart expand into the auto lending industry and is a great chance for the company to capitalize on one of the biggest buy now, pay later opportunities out there.
Upstart's management expects 2021 to be another stellar year, with revenue of $500 million, which would be a growth rate of 114% year over year. As Upstart grows and expands into different industries, its high-growth potential makes this another great stock that investors would love to have in their portfolio.