The past two years in the payments technology and
While investment firm
There were unsustainable growth levels across the fintech ecosystem during the pandemic, said Spencer Hurst, a principal at Lovell Minnick, a private equity firm that invests in fintech and payment technology firms, adding that companies that received valuations off of those unsustainable growth levels have had trouble growing into the valuation expectations in the last two years.
"What we are seeing now is a 12-month period where the federal funds rate has been 5% or more, providing a somewhat consistent market environment for fintech firms to operate in and investors to evaluate those fintech businesses in," Hurst said. "Businesses that have been operating successfully in the current environment are starting to come to market and command premium multiples because buyers have confidence in the ability of those businesses to perform strongly in all types of environments."
F-Prime, which produces an index of fintech valuations, estimated the global fintech market cap reached $1.3 trillion at its peak near the end of 2021, then fell to $389 billion at the end of 2022. 2023 saw a rebound to $573 billion, and F-Prime says so far in 2024 the fintech index has outperformed the S&P 500 by 114%.
But that doesn't necessarily mean the payments or fintech markets are booming. Revenue has made only a modest recovery, and investors are looking for "structurally attractive gross margins over revenue growth," F-Prime said.
"I am not yet seeing a trend toward higher valuations in the payments or fintech sector," said Aaron McPherson, principal at AFM Consulting.
S&P Global Market Intelligence's data shows that fintechs raising early stage and growth funding are getting smaller checks, with round sizes decreasing by 17% and 26%, respectively, between Q1 2024 and Q1 2023, said Jordan McKee, director of the fintech research and advisory practice at 451 Research and S&P Global Market Intelligence.
In the first quarter of 2024, here were 13 fintech funding rounds exceeding $100 million. That's down roughly fivefold from the first quarter of 2021, according to McKee.
"The span from mid-2020 to mid-2022 saw the fintech market get bloated," McKee said. "Ever since we have seen something of a cleaning fire sweep through the space, with valuations coming back down to earth."
A Wise story
U.K. payments company Wise recently reported strong earnings and projected growth for the next year, but still saw a decline in its stock price.
For the full year between March 2023 and March 2024, Wise reported volume of about $39 billion, up 15% from about $34 billion between March 2022 and 2023; its revenue during the same period was about $350 million, up 24% from about $282 million while income was about $1.5 billion, up from about $1.1 billion, an increase of 31%.
Despite that growth,
In an email, Wise's public relations office said "our strategy and priority has always been focused on the long-term opportunity we see ahead of us. What we're building is supporting 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, though at a slower pace than 2023, according to the company.
"Not all markets are created equal," said Harsh Sinha, Wise's chief technology officer, in an interview following Wise's recent earnings report. "A lot of companies coming out of the pandemic got funded and as the market changed, many took a hit."
Wise competes with firms such as Ripple and Revolut to support international payments with faster and lower-cost processing than many that use correspondent banks. Wise teams with local partners, such as fintechs and banks, to support a network for international payments. The company recently
That market is growing quickly. The volume of international transactions including business-to-business and consumer-to-business payments totaled about $150 trillion in 2023, according to
The underlying tech and network that banks have built or purchased to improve cross-border payments "isn't that great," said Sinha, noting that Wise controls about 1% of the global small-business payments share. "The market is very big and we're still a small part of it," Sinha said.
Wise in the past year integrated with Australia's national payments system, which enables transfers to and from Australia, with processing time of less than 20 seconds. It also launched a collaboration with Swift creating potential access to Wise for over 11,000 institutions, mostly large banks, Sinha said. "This becomes a viable option for us to move these banks' payment flows." 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 be having conversations with banks everywhere," Sinha said. "It's a pretty global business now."
High rates and downsizing
The economic picture for payment technology firms is still mixed.
"So we are seeing increasing 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 a trend of increasing profits and valuations before I'm ready to say that we've reached a bottom."
There has also been a steady stream of layoffs at
The Federal Reserve's recent announcement that there will probably be only
"That will depress fundraising, since there are attractive rates elsewhere in the market," McPherson said. "One of the things that drove the high valuations of 2020 and 2021 was a 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 firms could enjoy robust above-market growth indefinitely, and that the rich transaction economics of the moment were sustainable indefinitely. That and the view that self-described disruptors would reap outsize profits created a huge valuation bubble, according to Eric Grover, a principal at Intrepid Ventures.
"The herd of fintechs will be culled," Grover said. "Weaker and undercapitalized fintechs will fail or be acquired. Some, however, will emerge stronger and therefore start to see increased valuation multiples."
The core market opportunity for fintech firms remains robust, said Hurst, of Lovell Minnick. "The market size is enormous, there is a strong customer demand for tech-driven solutions and there is ample opportunity to sell multiple products to the same end customer."
When the fundamentals of a market are as strong as they are in fintech, interest will likely persist, according to Hurst. "The level of attractiveness is going to depend on the subsector of fintech and recent growth trends of each business."
