Going digital: the FinTech market is boiling; market size, CAGR and the prominent companies
Huge offerings, yields of hundreds of percent, disruptive technology - how is the fintech revolution progressing and how are fintech companies looking? Hint - not in the method of profit multipliers
The only thing that is clear at this time, when a virus is raging around the world, is that digital is growing. While bank stocks and stocks with "old economy" activity are suffering from the crisis, digital stocks are rising and there is one area, which combines technology with the world of finance that is rushing forward - fintech.
What is "FinTech"?
FinTech is an abbreviation for financial technology, meaning technologies that make financial processes easier, more efficient and more profitable. FinTech companies develop a wide range of software, applications, and a variety of other solutions to achieve these goals. The useד of fintech include online banking platforms, payment apps, online loans and more that combine advanced algorithms alongside artificial intelligence.
The demand for products and services from the world of fintech is rising among consumers. A comprehensive study conducted in 2019, examining the reasons why customers choose the bank, found that in the first place "Trust" received the most common answer with 63% of respondents, in second place easy-to-use online banking services with 57.6% of respondents, and in sixth place mobile applications with 44.4% of respondents.
The fintech industry is developing rapidly. And despite the tremendous growth we are seeing today, analysts still believe there are incredible growth opportunities for fintech companies of all sizes. MasterCard estimated in 2017 that over 80% of transactions worldwide are still cash-based, although that percentage has certainly plummeted since, it's still a huge opportunity for fintech companies.
By 2025, credit card payments alone are expected to reach about $ 45 trillion a year. If we also include person-to-person transfers and business and international transfers, we will cross the $ 185 trillion threshold a year, according to Visa data. This is a huge market that fintech companies can penetrate.
"This is the right time to think big and be brave"
The world's largest accounting firm, Deloitte, identifies a number of growth opportunities that the COVID-19 virus has brought to the fintech market. First and foremost, the company notes that social distancing is accelerating the shift to online consumption, including of financial services. Along with providing independent services, the accounting firm observes, there is an ongoing acceleration of partnerships between fintech companies and veteran financial institutions, which often lack sought-after digital solutions.
The partnership trend is not just reserved for financial entities, fintech companies are looking for opportunities for collaborations with large technology companies and other service companies, as the demand for advanced financial systems is growing. What's more, the Covid 19 virus may accelerate non-contact payments, allowing consumers to pay without using cash or other contact surfaces.
Another advantage, in the long run, that exists in fintech companies is the promotion of the financial economy around the world. The global economic downturn following the spread of the virus "underscores the importance of financial systems in both developed and emerging economies," the company said. The fintech systems provide greater accessibility to the banking system among underprivileged populations, which creates a great opportunity for collaborations with the government sector as well.
There are currently 1.7 billion adults in the world without access to the banking system, an improvement over 2.7 billion people in 2011. This number is expected to shrink significantly.
The money goes to Fintech
In 2018, fintech companies raised about $ 39.75 billion in 1,707 transactions. Double the amount raised in 2017 for a similar number of transactions. Since then the growth has continued. Because this market is supported by venture capital funds, these companies usually reach the stock market when they are larger, leaving less room for return among investors. In 2020 we saw a number of significant issues, the business payment solutions company Bill, the LMND, and Rocket the subsidiary of the largest mortgage lender in the United States.
In the mergers and acquisitions sector, too, we are seeing increased activity in the fintech industry, and this may continue. In 2019, two of the three largest fintech deals ever took place, with Fiserv acquiring First Data for approximately $ 21.8 billion, and FIS acquiring Worldpay for $ 35.3 billion. Alongside smaller acquisitions of PayPal, MasterCard and Visa over the past few years, it would be surprising if we did not see further significant mergers in the fintech industry over the next few years.
In short, the forecast for Fintech is growth that is developing rapidly in the coming decades. Smaller disruptive companies will continue to shock the industry, IPOs and acquisitions of mergers and acquisitions will likely continue at high levels, and fintech will continue to increase its market share and seize the new opportunities created.
What to pay attention to?
Most of these companies are in the initial growth stages, and the analysis methods that work for the traditional financial sector will not always work well in this sector. On the one hand it is important to read the right numbers to make sure that the business is indeed functioning well and is on the right track. On the other hand, it is equally important to go beyond these numbers and get an idea of the opportunities facing society and the factors that are difficult to express numerically.
Using traditional valuation indices, such as a profit multiplier (P / E ratio) or sales multiplier (P / S ratio), can make it difficult to analyze fintech stocks. Unlike large banks and other stocks in the traditional financial sector, many of the most promising fintechs are not yet profitable, trading at astronomical multipliers from their annual revenues. This does not necessarily mean that the stock will be expensive, so the following factors should also be considered:
Sales growth: One of the most important questions in the fintech world is how fast the company is increasing its revenue. Fintech companies can grow by over 50% in revenue, which can justify a high sales multiplier.
PEG multiplier, profit relative to growth: This index can be useful for investing in growth stocks, if the company you are examining is profitable. Take the traditional profit multiplier and divide it by the expected profit growth rate of the company in the coming years, and divide by 100. For example, a company with a profit multiplier of 100, and a profit growth rate of 40%, the PEG ratio will stand at 2.5. This figure can help compare the different companies growing at different rates.
Customer retention and profitability: Good fintech companies retain their customers. Excellent fintech companies make their customers spend more money as time goes on. The fintech companies report the rate of retention of revenue from customers, and if this number is above 100%, it means that the company is increasing its revenue from existing customers. At the same time, it is important to examine the companies' gross and operating profitability rates, since growth is important, but no less important - to make a profit. Growth at the expense of declining profitability is not always right for investors.
By Or Zarfati, October 8, 2020, Published on BizPortal (Hebrew)