Unlocking Growth Potential: The Critical Role of Liquidity in Fintech
In the fast-paced world of financial technology, the secret to staying ahead of the curve is greatly influenced by a critical factor: liquidity, referencing the ability of fintechs and SMEs to quickly convert assets into cash without negatively impacting their market value. Liquidity is fundamental for fintech companies aiming for sustainable growth and operational flexibility. But why is it pivotal, especially as fintech firms evolve from startups to scale-ups?
Join us as we uncover how liquidity drives sustainable growth, ensures financial stability and discover actionable insights that will empower fintechs and SMEs to harness it for innovation, overcome challenges, and ascend to industry leadership.
In this context, liquidity refers to a fintech company’s capacity to meet short-term obligations and seize new opportunities through access to marketable assets—cash or assets that can be quickly converted to cash. Effective liquidity management enables a company to invest in expansion, ensure smooth operations, and minimise financial risks. As we delve into the role of liquidity in fostering operational flexibility and growth, we’ll highlight its critical importance and explore a real-world case study that showcases the impressive financial growth of leading fintech firms.
Fintech firms can maintain operational flexibility through liquidity in various strategic ways. These include:
- Adapting to Market Changes
The fintech sector is renowned for its rapid evolution, driven by shifting regulations, changing customer preferences, and technological advancements. Companies with robust financial resources can swiftly adapt to these changes. For instance, many fintech firms had to pivot their business models during the COVID-19 pandemic to accommodate the rise in online transactions and remote financial services. Adequate liquidity allowed these businesses to navigate the challenges and capitalise on new opportunities presented by the crisis.
Post-2020, amidst the global pandemic, funding for emerging firms decreased, but early-stage fintech companies, particularly those in seed and pre-seed stages, displayed resilience by securing a +26% increase in funding by 2022. Fintech funding, experiencing a -40% year-over-year decline from $92 billion to $55 billion, remained relatively stable over five years, maintaining a 12% share of total Venture Capital funding, with only a marginal -0.5% point decline in 2022.
U.S. payment service provider Euronet Worldwide’s robust liquidity management has enabled it to maintain operational flexibility and adapt to market changes. During the pandemic, Euronet quickly adapted to the increased demand for digital banking services in diverse ways, notably:
- Processing transactions for popular brands, enabling streaming movies, gaming, and other digital content to be accessed by consumers.
- Facilitating alternative payments from digital wallets using QR codes and other touchless payments at retailers worldwide.
- Euronet’s ATMs, outsourcing services, network participation agreements, and other ATM programs supply cash access in many communities left behind by bank closures.
- Investing in Technology and Innovation
Innovation is at the core of fintech. The fintech sector is centred on creativity. It takes constant investment in technology to be competitive. Financial flexibility ensures that digital financial institutions have the necessary funds to consistently invest in Research and Development as investment remains vital for developing new technologies, enhancing existing products, and staying ahead of competitors.
Euronet is a leader in electronic payment and transaction processing solutions for financial institutions, retailers, service providers, and individual consumers utilising global payment networks, platforms, and technologies through a collection of diverse technologies and services, business segments, and solutions that meet a wide variety of payment requirements and process transactions throughout the world.
Liquidity creation aids in generating profits and driving growth for financial institutions. It encompasses various strategies and mechanisms that enable these institutions to maintain sufficient cash flow and meet their financial obligations. From a broader perspective, liquidity creation benefits financial institutions in several ways:
- Scaling Operations
For fintech companies, scalability and growth are the main goals. With increased financial flexibility, these businesses can expand operations, attract more clients, and enter new markets, including new geographic regions or demographic segments, which require substantial financial resources. Adequate cash holdings ensures that fintech companies can invest in market research, regulatory compliance, local partnerships, and marketing efforts to successfully position in new markets.
Aggressive marketing and customer acquisition tactics are frequently used when scaling companies. To draw in and keep a bigger customer base, liquidity offers the resources needed to start comprehensive marketing campaigns, special offers, and customer engagement initiatives.
- Attracting Investors
For fintechs and SMEs, investor confidence is essential, particularly in the early phase of expansion. Strong liquidity management makes a company more appealing to investors due to lower risk and an increase in its ability to continue operations in the face of economic swings. The Fintech sector fared better in 2021, thriving on the back of the pandemic-triggered acceleration in digitisation and a financial system awash with liquidity. Funding increased by +177% YoY to $92.3 billion, and the number of deals grew by +19%.
Adequate liquidity guarantees that a business can attract funding necessary to finance its expansion plans, including product development, market expansion, and strategic acquisitions. Unsurprisingly, investors seeking a good return on their investments are drawn to this growth potential.
- Mergers and Acquisitions
Liquidity also plays a significant role in strategic mergers and acquisitions (M&A). Fintech firms with ample financial resources can acquire other companies to enhance their capabilities, enter new markets, or eliminate competition. Liquidity enables fintech companies to acquire firms that offer access to new markets, customer segments, or geographic regions. This strategic growth can significantly enhance the company’s market presence and competitive positioning.
Acquiring innovative technologies and skilled talent can provide a competitive edge. Financial flexibility enables fintech firms to invest in acquisitions that bring valuable intellectual property and expertise into the organisation.
Working capital, a vital measure of a firm’s short-term financial health and operational efficiency, ensures that fintechs have the necessary resources to manage day-to-day operations smoothly. As of December 31, 2023, Euronet had a working capital of $1,462.1 million, compared to a working capital of $1,372.7 million as of December 31, 2022. Thus signalling Euronet’s ability to meet its short-term obligations and manage its day-to-day operations efficiently and effectively.
Euronet’s current ratio, a measure of its liquidity, stood at 1.58x and 1.54x as at the close of the fiscal year 2022 and 2023 respectively, indicating Euronet’s ability to easily turn its current assets into cash to pay off its current liabilities.
Source: Euronet Annual Reports
Liquidity is more than just a measure of financial health; it is a critical enabler of operational flexibility and growth. Fintech firms that prioritise effective cash flow management can navigate market fluctuations, invest in innovation, and pursue ambitious growth strategies. With our in-depth industry knowledge and innovative approach at @Migasuto, we collaborate closely with fintechs and SMEs to develop customised strategies that drive growth, enhance competitiveness, and maximise success in the dynamic fintech landscape.
We at @Migasuto provide fintech businesses with excellent strategic consulting services. By using our fractional CFO services, fintechs and SMEs can access the knowledge and experience of our financial experts without having to hire a full-time CFO, saving them a significant amount of money. Strategic financial analysis, thorough financial reporting and analysis, cash flow management, and risk management are all included in our fractional CFO services.
Are you a fintech business leader looking to utilise the services of a forward-thinking finance team? Kindly reach out to us at info@migasuto.com for our financial advisory and brand equity services.
Disclaimer: This article is meant for informational purposes only and is not a recommendation to buy, sell, or hold a position in this stock. Migasuto will not be held liable for any investment decision taken based on the information provided in this newsletter.
References
- Investopedia (2024) – Cash Flow: What it is, how it works, and how to analyse it
- FasterCapital (2024) – How liquidity creation generates profits and growth for financial institutions
- McKinsey & Company (2023) – Fintechs: A new paradigm of growth
- Euronet Worldwide (2024) – Euronet Annual Report 2023
- Maddevs (2024) – Future of Fintech: Trends and Opportunities Overview
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