FinTech: 2021 Valuation Multiples
Not only did the FinTech industry stand the test of the pandemic in 2020: many FinTech subsectors saw skyrocketing adoption rates due to a rapid increase of the use of digital channels by consumers.
Research firm CB Insights has released their latest annual report on the State of Fintech in 2020, which analyses how payments start-ups, banking, alternative lending, wealth management, insurance, capital markets, SMB and real estate companies performed the past year.
2020 saw a slight decline in funding (down 2% YOY) and number of fundraisings (down 13% YOY) for the FinTech industry.
With customers quickly moving to online banking and shopping because of COVID-19, and with the majority of workers and consumers projected to work from home in the near future, fintech companies have become prized acquisition targets as M&A activity grew YOY in 2020.
Unlike traditional banks, FinTech operations were not disrupted by the pandemic, helping companies in the space thrive.
Increasing virtual credit card activity and buying habits shifting online made the FinTech sector ripe for profitable M&A transactions and investments in the payments landscape (especially “buy now, pay later” options).
Europe overtook Asia in quarterly deal activity in 4Q20 for the first time since the start of 2019, although funding to Europe-based companies fell 17% quarter-on-quarter.
Over 400 billion transactions worth $7 trillion are expected to shift from cash to digital payments by 2023, growing to $48 trillion by 2030.
Sulabh Agarwal, who leads Accenture’s Payments practice globally, predicts that “the pandemic will permanently change how consumers shop and pay for products as they prioritize convenience above else”.
He also states that 75% of surveyed bank executives report increased urgency to modernize payment systems.
Accenture’s Payment Disruptability Index, which measures current and future levels of disruption for the payment industry, notes that disruption is highest in the U.S, but closely followed by the UK, highlighting a significant chance for start-ups and payment companies to seize the opportunity to provide payments services.
FinTech Valuation Multiples
SEG’s reports offer interesting insights into FinTech valuation multiples. Their index comprises 99 publicly traded SaaS companies, broken down by sector.
FinTech companies’ revenue multiples have been steadily rising in the past 2.5 years.
The fourth quarter of 2020 closed the year with a median EV/TTM Revenue multiple of 15x. The multiple had a slight drop in the first half of the year, but rebounded in the latter half, reaching its highest level in 2 years.
The median EV / TTM EBITDA steadily rose in 2020, with a slight drop in the fourth quarter. The multiple nearly doubled from the previous year, going from 21.4x in 3Q’19 to 41.7x in 3Q’20.
The majority of public SaaS companies (on which this analysis is based) remain unprofitable.
High EBITDA multiples show that investors continue to highly value fintech companies in the market, and are ready to pay a premium for growth even in absence of profits. So we can expect to see fintech companies trading at high multiples as they continue to disrupt the payments landscape.