Fintech
How close is the payments technology sector to a breakthrough? | PaymentsSource
Wise has seen strong growth, although it expects slightly lower growth next year.
Chris Ratcliffe/Bloomberg
The last two years in payments technology and fintech industries were marked by declining ratings AND changes in strategy as companies look for signs of recovery.
While investment firm F Prime Capital and consultant Top consulting partner they say the ratings have turned the corner, Payments experts believe the market is still weak compared to the brisk pace seen in the late 2010s and early 2020s.
There have been unsustainable levels of growth in the fintech ecosystem during the pandemic, said Spencer Hurst, principal at Lovell Minnick, a private equity firm that invests in fintech and payment technology companies, adding that companies that received valuations at outside of those unsustainable growth levels have struggled to grow in valuation expectations over the past two years.
“What we’re seeing now is a 12-month period where the federal funds rate has been 5% or more, providing a somewhat consistent market environment in which fintech companies can operate and investors can evaluate those businesses fintech,” Hurst said. “Companies that have operated successfully in the current environment are starting to enter the market and command premium multiples because buyers have confidence in the ability of such companies to perform well in all types of environments.”
F-Prime, which produces an index of fintech valuations, estimated that the global fintech market capitalization peaked at $1.3 trillion towards the end of 2021, before falling to $389 billion at the end of 2021. 2022. 2023 saw a rebound to $573 billion, and F-Prime says the fintech index has outperformed the S&P 500 by 114% so far in 2024.
But that doesn’t necessarily mean payments or fintech markets are booming. Revenue has seen only a modest recovery and investors are looking for “structurally attractive gross margins relative to revenue growth,” F-Prime said.
“I don’t see a trend toward higher valuations in the payments or fintech space yet,” said Aaron McPherson, director of AFM Consulting.
Data from S&P Global Market Intelligence shows that fintechs raising early-stage and growth funding are receiving smaller checks, with round sizes decreasing by 17% and 26%, respectively, between Q1 2024 and Q1 2023. , said Jordan McKee, director of fintech research and consulting. practices at 451 Research and S&P Global Market Intelligence.
In the first quarter of 2024, there were 13 fintech funding rounds that exceeded $100 million. According to McKee, this value is approximately fivefold compared to the first quarter of 2021.
“The period between mid-2020 and mid-2022 saw the fintech market swell,” McKee said. “Since then we have seen a kind of cleansing fire sweep the space, with ratings coming back down to earth.”
A wise story
British payments company Wise recently reported strong earnings and forecast growth next year, but still saw its share price decline.
For the full year between March 2023 and March 2024, Wise reported volume of approximately $39 billion, up 15% from approximately $34 billion between March 2022 and 2023; its revenue in the same period was about $350 million, up 24% from about $282 million, while revenue was about $1.5 billion, up from about $1.1 billion dollars, an increase of 31%.
Despite this growth, Wise’s actions it fell more than 10% in the hours after the earnings report was released, although it has since stabilized. The decline was mainly due to the fact that it forecast annual income growth of between 15% and 20% for the year between April 2024 and March 31, 2025, which would be lower than the 31% growth reported in the previous year . Wise also cut prices in early 2024 as part of its strategy to support international transfers at discount rates, another move that drew criticism from analysts. Jefferies said Wise’s reduced projections were “disappointing given the price reduction.”
In an email, Wise’s public relations office said that “our strategy and priorities have always been focused on the long-term opportunities we see ahead of us. What we are building is to support the real needs of people and businesses, as seen by another year of active customer growth and strong financial results.”
Wise, which employs about 5,800 people, is still hiring, albeit at a slower pace than in 2023, according to the company.
“Not all markets are created equal,” Harsh Sinha, Wise’s chief technology officer, said in an interview following Wise’s recent earnings report. “Many companies that have come out of the pandemic have been funded and as the market has changed, many have taken a hit.”
Wise competes with companies like Ripple and Revolut to support international payments with faster and cheaper processing than many that use correspondent banks. Smart teams with local partners, such as fintechs and banks, to support a network for international payments. The company recently collaborated with Bluevinea small business banking technology company, to make it easier for businesses to make or accept payments in their own currency, even if they are located in different countries.
That market is growing rapidly. According to the report, the volume of international transactions, including business-to-business and consumer-to-business payments, amounted to approximately $150 trillion in 2023. Airwallex and Visual Capitalistwhich predicts the market will reach $250 trillion by 2027.
The underlying technology and network that banks have built or purchased to improve cross-border payments is “not great,” Sinha said, noting that Wise controls about 1% of the global share of small business payments. “The market is very big and we are still a small part of it,” Sinha said.
Wise integrated last year with Australia’s national payment system, allowing transfers to and from Australia, with processing times of less than 20 seconds. It has also partnered with Swift creating potential access to Wise for more than 11,000 institutions, mostly large banks, Sinha said. “This becomes a viable option for us to move the payment flows of these banks.” Wise’s other recent moves include obtaining a payments license in Japan, adding Standard Chartered as a partner in Hong Kong and expanding its card-issuing partnership with Tiger Brokers in Singapore. “We will have conversations with banks around the world,” Sinha said. “It’s a pretty global business now.”
High rates and downsizing
The economic picture for payment technology companies is still mixed. To blockfor example, announced better-than-expected results in its latest quarter, as CEO Jack Dorsey said the company achieved key objectives in the company’s turnaround plan, which he launched when he returned to the helm of Block after several years away from office.
Buy now/pay later fintech To assert it also delivered higher sales volume and narrowed losses during its latest quarterly earnings report. AND PayPal also reported strong earnings. Both Affirm and PayPal are among the payments companies that are betting heavily on new forms of artificial intelligence to spur future economic performance. One exception to the weakness is artificial intelligence, which is a bright spot in terms of VC money and valuations, McPherson said, adding that AI could divert investments from other uses.
“So we’re seeing rising valuations for payments and fintech companies that leverage AI, perhaps at the expense of other companies,” McPherson said. “I would like to see more of an upward trend in profits and valuations before I’m ready to say we’ve reached the bottom.”
There has also been a steady stream of layoffs technology companies, financial institutions and fintechs. These layoffs should lead to higher profits and higher valuations in the future, McPherson said.
The Federal Reserve’s recent announcement that there will likely only be an interest rate cut this year means financing terms for payment technology companies will remain challenging.
“This will depress fundraising, as there are attractive rates elsewhere in the market,” McPherson said. “One of the drivers of the high valuations in 2020 and 2021 was the lack of attractive investment alternatives.”
While the payments technology market was on the upswing, there were years of easy money, under the assumption that fintechs and payments companies could enjoy solid above-market growth indefinitely and that the country’s rich transaction economy moment was sustainable for an indefinite time. According to Eric Grover, an executive at Intrepid Ventures, this and the idea that so-called “disruptors” would reap huge profits created a huge valuation bubble.
“The fintech herd will be brought down,” Grover said. “Weaker and undercapitalized fintech companies will fail or be acquired. Some, however, will emerge stronger and therefore begin to see rising valuation multiples.”
The key market opportunities for fintech companies remain strong, Lovell Minnick’s Hurst said. “The market size is enormous, there is strong customer demand for technology-based solutions and there is ample opportunity to sell multiple products to the same end customer.”
According to Hurst, when a market’s fundamentals are as strong as they are in fintech, interest is likely to persist. “The level of attractiveness will depend on the fintech subsector and each company’s recent growth trends.”