Fintech

The funding frenzy

I don’t write very often about fintech, mostly because I don’t understand much of it. I think this is generally a good rule to follow for people in my position. If you really don’t understand a subject, don’t write (or speak) about it. If more people followed this rule, there would be a lot less activity on social media and TV talk shows I suspect. And think of how much free time we would all have as a result.

Today’s post was triggered by an article in the July 17 edition of The Economist, with the same title as this post, Fintech: The funding frenzy. You can find the Economist article here. I suspect that many of you are not Economist subscribers (you should be, particularly at student rates) and so you may find this article is behind a paywall. And I know that many of you read my posts but don’t click on the links. So for the benefit of all of you, I will summarize some of The Economist’s findings below.

Fintech funding is booming. In the second quarter of this year, $34bn of venture capital funding went into fintech firms. The year to date total is more like $70bn, which is about 20% of all VC funding across industries. And this year’s fintech funding (for six months only) is already more than double the total for all of 2020, which itself was double the total for 2019. Fintech IPOs and mergers are also booming and valuations are high.

So where is all the money going? Much is going into banking-related ventures, eg payment platforms of various sorts. Wealthtech is also seeing a lot of action, eg online brokers and investment advisors. As is insurtech, eg claims payment and risk underwriting. I have written previously about the increasing use of AI in the insurance industry; you can find my previous posts here and here.

Historically, the majority of fintech funding activity took place in the US and more recently in China. But some very interesting things are also happening in Europe and to a lesser extent, Latin America. You may be familiar with some of these companies: Klarna (Sweden), Revolut (London), Wise (formerly TransferWise, London and Estonia), and Nubank (Brazil).

Fintech funding rounds are getting quite large and the valuations are high. Wise recently listed in London (secondary shares only) at a valuation of $12bn, Revolut raised $800mm privately at a valuation of $33bn. Klarna did a funding round in June at a valuation of $46bn. Nubank raised $750mm at a valuation of $30bn. And Robinhood is expected to price its IPO at an implied valuation over $30bn. These are very big numbers. The market cap of Capital One, for example is about $75bn. Wells Fargo and JPM are much larger, with market caps of $450bn and $200bn respectively.

How should we think about the current valuations of the fintech challengers relative to those of the established incumbents? I’m not exactly sure. But keep in mind that the big US banks trade at P/E multiples of around 10x. There is no reason that the banking-related fintech companies will necessarily trade at these same multiples when they mature, but even at a P/E of twice the current banking market multiple, the fintech challengers have a long way to go before they grow into their current valuations. And not all of them will make it that far. Some will fail, some will limp along and eventually be put out of their misery, some will be acquired and some (likely only a few) will become major players in the financial services industry of the future. But which ones? Alas, I have absolutely no idea and I am not sure the VC firms do either. (Well they clearly have ideas, but do they have the answers? I doubt it, hence the large amount of money being thrown at all these companies.)

Fintech is very much the future of the financial services industry, and it is important that we all understand more about this than we probably do today. And because I am not the right person to guide you down this path, I am going to refer you again to Marc Rubinstein, author of the Net Interest newsletter, which I read regularly and which I highly recommend to all of you. Marc is an expert; I am not. You can subscribe to Net Interest here. And I recommend Marc’s recent article on Revolut as well as his other articles on Wise and Robinhood.

I will be learning more about fintech with all of you, so you can expect more contributions from me in the future. But not until I think I understand it, at least somewhat better than I do today.