Decoding Fintech: Does Growth Coin True Market Value?
Welcome to the inaugural episode of Global Fintech Buzz, where we provide forward-looking analysis for Fintech CFOs and professionals. The global fintech market has grown significantly in recent years, with a market size of $158.9 billion in 2022 and projected to reach $449.1 billion by 2028. As of July 2023, publicly traded fintechs represented a market capitalization of $550 billion, a two-times increase relative to 2019. In addition, as of the same period, there were more than 272 fintech unicorns, with a combined valuation of $936 billion and the majority being privately listed, a sevenfold increase from 39 firms valued at $1 billion or more five years ago.
Fintech, like other industries undergoing phases of rapid growth, maturity, and eventual decline as explained by the classic product life cycle theory, is transitioning from pursuing growth at any cost to a focus on sustainable, profitable growth—also known as value. One major determinant of value or sustainable growth is the growth strategy involved in the expansion. Ideally, firms can grow their topline through several avenues such as organic growth, an increase in market share, and mergers & acquisitions. However, the growth strategy with the highest potential of creating value is organic growth, specifically based on product innovation. The transformation of banking and financial services brought about by fintech compared to traditional banking is one of the reasons fintech has snowballed, especially in developing economies where the level of financial inclusion is low.
Source: McKinsey & Company
While the developed markets, particularly North America, currently boast the world’s largest financial services industry and serve as a crucial fintech market and innovation hub, it is anticipated that emerging markets, notably the Asia-Pacific region, will surpass them. Countries like China, India, and Indonesia are poised to lead this transformation, driven by their substantial underbanked populations, a significant number of small and medium-sized enterprises, and the increasing presence of tech-savvy youth and a growing middle class.
The African fintech market is projected to reach $65 billion by 2030, representing a 13-fold increase over 2021. Mobile phone penetration is expected to reach 74% in the Middle East and Africa by 2025. For context, Sub-Saharan Africa has more mobile users than the United States and the United Kingdom combined. Africans spend one-third of their daily lives on their phones. The majority of Africa’s 10+ unicorns are fintech businesses, with 40-60% of VC funding in Africa going towards fintech between 2021 and 2022. Hence, the future of Fintech in Africa seems to be even brighter.
Retaining a competitive edge and achieving sustainable growth and value in the fintech sector hinges on innovation. A case in point is Mastercard, one of the prominent US fintech companies. In its Q3 earnings call, the company revealed a winning strategy centred on substantial investments in technology to deliver cutting-edge digital solutions. Management emphasises the integration of innovation, technology, user experience, and trust to align with the preferences and expectations of consumers in their daily lives. This strategic approach begins with the implementation of top-tier digital solutions, prominently featuring Contactless and tokenization. Notably, Contactless transactions account for 63% of their in-person switch purchases, underscoring the widespread acceptance and the convenience and security inherent in these capabilities.
In the developed markets, an analysis of the big fintech players showed that the revenue growth rates for Visa Q2”23 and Q3”23 were 0.62% and 1.73% respectively. However, Coinbase revenue declined by -8.36% in Q2”23 from the previous quarter and declined by -4.77% in Q3”23. In Q3 2023, Coinbase’s transaction revenue, which was $289 million, represented a 12% QoQ decline, attributed to the crypto asset volatility, a main driver of its trading business, which has continued to decline. Consequently, total Coinbase trading volume declined 17% QoQ, albeit outperforming the global spot market, which declined 24% quarter-over-quarter. Furthermore, the company launched a new layer 2 solution called Base in Q3 2023. This can be argued to be a game changer in the industry as the Base platform enables developers to harness the full power, efficiency, and cost savings of a Layer 2 network with the convenience of it being built right into the Coinbase ecosystem.
Source: Company’s Quarterly Reports
During the second and third quarters of 2023, notable players in the emerging markets industry achieved double-digit quarterly gross profit margins (GPM). The only exceptions to this trend were Paybank and Futu Holdings, both experiencing quarter-over-quarter (QoQ) declines in their GPM in Q3 ‘2023 compared to the previous quarter.
Source: Company’s Quarterly Reports
Tencent has recently disclosed its investment in Primer, a unified infrastructure for global payments and culture, aiming to leverage its dominant market position. Subsequent to this investment, Tencent’s share price closed in green, indicating investor optimism regarding the anticipated advanced payment infrastructure that this partnership is poised to bring. This positive reception may translate into a lucrative investment, emphasising the strategic objective of diversifying the product portfolio and extending market reach. This financial injection marks a pivotal moment for Primer, ushering in a phase of accelerated growth, heightened innovation, and an even more pronounced global presence.
Buzz Summary
Looking ahead, the fintech market is anticipated to continue its upward trend. Arising technologies, including blockchain, artificial intelligence, and machine learning, will further disrupt and transfigure this sector. These technologies can potentially revise financial services, offering more effective, secure, and accessible results.
Successful implementation of cost management efforts is the key for fintechs in their next phase of evolution. Indian fintech company, Paytm, which specialises in digital payments and financial services, had a target of achieving breakeven by September 2023 but was able to achieve this six months ahead of schedule. Worthy of mention in achieving this was through the company’s disciplined cost management, revenue growth across businesses, and a business model with strong operating leverage.
Hence, the question of whether growth equates to value in the fintech industry stems from companies understanding what drives growth and what makes it value-creating. However, while firms typically strive for high growth, only the true innovation leaders would be able to sustain this growth and translate it into real value.
Are you a Fintech CFO or firm, looking to utilise the services of a forward-thinking research team? Kindly reach out to us at info@migasuto.com to offer you our Research, Copywriting, and Financial Analysis services.
