Fintech’s Great Reappraisal

Sarah Lamont is an Associate at F-Prime Capital, where she focuses on early-stage investments in fintech. Prior to joining F-Prime, she was a senior consultant at Oliver Wyman, where she was a member of the Private Capital practice, advising financial sponsors across the transaction lifecycle—from pre-transaction commercial due diligence to post-transaction portfolio support.

In an OpEd for The Financial Revolutionist, Lamont describes how 2022 changed fintech differently across subsectors, outlines fintech’s revised priorities, and envisions a positive future for fintech:

When we launched the F-Prime Fintech Index early last year, fintech was flying high coming out of 2021. With 77 public listings (eight of which were among the largest 10 fintech exits in history), revenue multiples exceeding 25x, and a combined market cap of $1.3T, fintech was hard to ignore.

To say 2022 was a rough year for fintech is an understatement. Ending 2022 near a ~$400B market cap—more than $850B market cap lost—with a 70 percent drop in revenue multiples, fintech lost last year’s hype and it’s safe to say the bubble popped.

In light of plummeting valuations, a few things have become clear: not all fintech sectors are created equal, disruptors are shifting their focus from growing rapidly to becoming profitable, and though fintech disruptors are now being valued more like the incumbents they set out to disrupt, some will bounce back as they prove genuine market disruption.

Not all fintech sectors are created equal

In B2B SaaS, a principle known as “rule of 40” states that for a SaaS company to endure, its combined revenue growth rate and profit margin should exceed 40%. In fintech, there isn’t as linear a relationship between these variables—in other words, there’s no analogous rule of 40 for fintech. This became especially clear over the last year, when payments and B2B SaaS companies exhibited more resiliency in the downturn compared to other sectors.

The difficulty in summarizing the performance of fintech as a whole lies in the varying business models between sectors (and even varying within sectors). The metrics for defining success range from take rates in payments to loss ratios in insurtech. Even macroeconomic effects like rising interest rates—which generally hurt the performance of all public equities to some extent—have varying impacts on different fintech business models. Those relying on customer cash balances (banks and brokerages) stand to win by generating higher net interest income, while those relying on consumer loan originations (lenders and proptech) naturally see dampened volumes with softened customer demand.

Shifting focus from growth to profitability

Prior to 2022, the fastest growing companies were also those being rewarded with the highest revenue multiples. For the first time since we’ve started tracking revenue multiples, the fastest growers (those whose LTM revenue growth rate exceeds 40 percent) are not being rewarded for it. In 2022, investors were consistently valuing those fast-growers lower than their counterparts with growth rates between 20-40 percent.

Over the last 12 months, 13 out of the 55 Fintech Index companies were profitable. Based on aggregate analyst estimates for public companies, it’s evident that companies are hearing investors loud and clear, and are replacing a growth-at-all-costs mindset with a focus on achieving a positive net income margin. In 2023, nearly half of the 55 Fintech Index companies are forecasting profitability—with payments and B2B SaaS leading the way.

Disruptor vs. incumbent valuations

Though disruptors were once garnering a high multiple premium over their incumbent counterparts, fintech multiples now resemble those of traditional financial institutions. And while disruptors in some sectors—payments, B2B SaaS, and banking—still outperform their respective incumbents, disruptors in other sectors—lending, wealth, proptech, and insurtech—now underperform their “tradfi” comparables.

In every sector, from payments to proptech, there are fintech companies whose disruption can be categorized as merely a “better version” of traditional financial services. These companies move the needle on customer experience, meet shifting customer expectations, or use novel data sets for underwriting models. That kind of differentiation ultimately does not protect disruptors from experiencing incumbent-like returns. Eventually, the market will distinguish between “better versions” of traditional financial services versus those that prove market disruption.

The future for fintech remains bright. A previous wave of fintech IPOs shows us that this over-correction will be only temporary for those who do prove to be genuinely disruptive. Even scaled fintech companies with over a $5B market cap continue to grow more than 50 percent year-on-year. Most notably, fintech disruptors have only just begun capturing the giant that is financial services industry revenues.