Fintech suffered a sharp fall in market value last year
Fintech-focused venture capital firm F-Prime Capital released its 2022 Fintech Index on Tuesday, showing sharp falls in revenue multiples across the industry.
The report assessed the capitalization, liquidity and growth of the 55 listed companies within F-Prime’s Fintech Index, including household names such as PayPal, Affirm and Opendoor. Together, the group has a market value of USD 397 billion as of 31 December.
Just over a year earlier, this figure was a much higher 1.3 trillion dollars.
“2022 was a very different year to 2021, in many ways it has been very sobering,” F-Prime Capital Senior Associate Abdul Abdirahman said ahead of the report’s release.
F-Prime’s report shows that while the public market correction has been far-reaching, fintech has had a sharper decline than most. F-Prime’s account is consistent with similar findings reported by Moody’s last week, which, citing CB Insights, showed that global fintech funding fell by 46% from 2021 to 2022.
A challenging macro environment and rising interest rates ensured a thinner liquidity market, and not all fintechs were affected equally, explained Abdirahman.
Fintech companies that focus on lending experienced the same pains as traditional banks. Prior to March 17, 2022, the last federal funds rate increase was in 2018. Since that date, the federal funds rate has been raised eight times, from 0.25% to where it is now 4.75%.
According to Moody’s, the rising interest rates are also undermining the competitive advantage fintech had over large banks due to funding problems, which made it more difficult to finance operations and acquire customers. Banks, on the other hand, “have access to stable deposit funding given their well-established brands and customer relationships” Moody’s Vice President and Senior Credit Officer Stephen Tu noted in a press release.
Proptechs, or fintechs designed to connect people to mortgages, were also affected by interest rate increases because they led to a decline in origination loans. A decline in originated loans meant that the app’s revenue declined; and therefore the value fell.
“On the other side, business-to-business [software-as-a-service] and the payment companies have not seen much of a decline. B2B SaaS companies have more recurring revenue and generally have longer contracts. Sometimes they also have diversified income streams,” Abdirahman explained.
In the current market, he said, investors are scrutinizing high-growth companies more today than they did in 2021 with an eye to capital efficiency. Fintechs looking to appeal to investors need a lower burn rate, he said.
Upside in the sector
But despite a challenging 2022, Abdirahman believes fintech companies and investors like himself should be optimistic – for several reasons.
“Fintech is still in the early stages of capturing financial services revenue,” noting that currently “fintechs capture less than 10% of the market,” he said. It represents “a huge opportunity,” he said.
Abdirahman added that while less than 25% of F-Prime’s Fintech Index companies were profitable over the past 12 months, collective revenue between the companies increased $19 billion, or 15%, over the first three quarters of 2022 .Some big companies, he noted, experienced impressive growth, such as Bill.com’s 143% annual growth. F-Prime expects almost half of the Fintech Index companies to be profitable in the next 12 months.
Finally, industry-specific apps continue to emerge, such as Toast, which provides software solutions for the restaurant industry.
Toast-like apps are now emerging for verticals like daycares and salons, and they can take advantage of more of the market by adding layers beyond payments to lending, payroll, insurance and more, Abdi Rahman so. With its lending arms, such industry-specific fintechs can underwrite businesses better than some financial institutions because they already have detailed sales data, he added.
By layering, Abdirahman noted, these fintechs are able to increase their average contract size by two to five times.
“You’re able to capture more revenue from the customer you already have, and it’s so much easier to get more from the customer you already have, and solve their different pain points, than it is to get more customers,” Abdirahman said. “In the past, investors would overlook them because it’s hard to reach your market across the country, but through digital marketing you can do it.”
