Shailesh Dash


Sunset in the mountains

Few investments make a more compelling case than fintech in the current economic climate, opines entrepreneur and investor Shailesh Dash

Covid-19 has accelerated digitisation of businesses across the globe, leading to an enhanced consumer experience, operational efficiency and competitive edge. The world is now gradually acclimatising to this new normal and adapting to the changes. There has been a sudden surge in personalising digital solutions, especially in the financial services industry as the pandemic has put the banking system under stress.

Traditional banking is increasingly looking at fintech as a long-term growth strategy since the global recession in 2020 has aggravated their average cost-to-income ratio. Even prior to the pandemic, it was evident that fintech would play a pivotal role in transforming the financial services industry, but Covid-19 has undoubtedly amplified the pace of growth to unprecedented highs.

A recent survey showed that 44 per cent of the affluent millennial demographic registered for online or mobile banking for the first time during the pandemic, while a 200 per cent rise in new mobile banking registrations was noted by Fidelity National Information Services (FIS), with traffic jumping 85 per cent.

Contactless payments have also seen a huge spike in global popularity, as restrictions have elevated the use of remote services.

The surge in fintech popularity and adoption is both appropriate and justified by the crucial role it has played during the pandemic. The digital push during the pandemic has reduced customer acquisition costs while the market breadth has increased. The huge range of offerings under the fintech umbrella including payment processing, online/mobile banking, digital peer-to-peer (P2P) lending, and billing systems, among others have been a lifeline for millions since the outbreak.

With lockdowns in place, lack of access to funds and finances have driven many consumers to mobile wallets such as Apple Pay, Google, Venmo, etc. as well as to upgrade their credit and debit cards with tap-to-pay technology.

For traditional financial institutions, the significance of making robust digital and mobile solutions available was quickly reinforced, boosting opportunities within fintech as they sought partners to collaborate with, and enhance and digitise their existing business models. Meanwhile, income upheavals popularised budgeting apps that enable consumers to monitor balances and plan finances; while low-cost remittance platforms also gained traction, particularly for migrant workers.

Trading platforms have been another significant fintech driver, as heightened market volatility throughout the year propelled their usage, in particular platforms using latest technologies to enhance and improve trade execution and risk mitigation. Most notably, the pandemic provided an enormous boost to the e-commerce industry, boosting online payments by consumers.

The implications of the fintech industry’s multifunctional role have been extremely conducive to – and synchronised with – its massive expansion rates. The industry is anticipated to expand at a CAGR of 20 per cent between 2020 and 2025, reaching a market value of $305bn by 2025. Major companies and banks are investing deeply into expanding tech-integrated offerings to stay competitive, and these efforts are likely to drive the industry’s growth in the long run. Meanwhile, fresh developments within AI, blockchain, and other advanced technologies will continue to raise consumer demand, thus satiating the growing appetite for fintech services.

Amid such strong industry dynamics, few investments make a more compelling case than fintech. In the private market, rising demand despite an economic slowdown has enabled massive fundraisings and strong valuations for many fintech companies. For instance, payments platform Stripe has witnessed incredible growth in 2020. With new funding, the firm has been expanding its offerings and making acquisitions such as that of Paystack for a reported $200m.

Klarna is another payments processing platform that has created ripples across the fintech sphere, with its latest $650m funding valuing the firm at $10.7bn, highlighting its attractiveness. An impressive performance by Australian fintech unicorn Airwallex (>100 per cent growth in Q3 2020 net revenue) has resulted in the firm garnering over $200m in three funding rounds since April, further enabling it to expand globally.

UK-based Rapyd is another fintech player that has expanded at a staggering pace of 350 per cent to 400 per cent, and is expected to reach $100m in revenue in 2020, after a $1.2bn valuation in December 2019. The growing appeal has enabled fintech entrepreneurs including Robinhood’s Vlad Tenev and Baiju Bhatt, Chime’s Chris Britt, and Afterpay’s Nick Molnar and Anthony Eisen to achieve billionaire status during the crisis; while Klarna and Marqeta’s owners also inch towards it. Stock markets are by no means trailing, with listed fintechs’ stock prices rocketing to new highs.

Fintechs have made a strong rebound in the months following the market crash in lateMarch 2020, as investor interest surged amid improving market dynamics (Mastercard’s and Visa’s stocks surged 80 per cent and about 60 per cent respectively by August-end from their March lows; while fintech Lightspeed POS surged a whopping 323 per cent as of early November from its March lows).

Amid the current volatile environment, investing in quality stocks has become imperative for investors. Moreover, market dips usually present lucrative opportunities for buying strong companies at a perceived discount, making a strong case for several fintech players. Select stocks that have shown particular potential and stood out over the last few months make a strong case for consideration. PayPal, the market leader in online payments, has returned nearly 500 per cent since its 2015 listing, and recorded sales and adjusted earnings growth at 25 per cent and 41 per cent y-o-y, respectively in Q3 2020. The firm is also growing its user base at a robust pace, acquiring complementary businesses including e-commerce to further expand its addressable market, thus making it a ‘strong buy’ in the current environment.

Square is another strong fintech firm, whose sales grew 55 per cent y-o-y in H1 2020 and beat revenue and earnings estimates in its Q3 2020 results. The firm’s stock is now 415 per cent up from March lows and 213 per cent up in 2020. A significant growth driver is its Cash App, which saw payment volumes jump 322 per cent y-o-y in Q3 2020, and offers strong potential for growth through its bitcoin technology.

Meanwhile, newly listed fintech player Shift4Payments’ stock has surged 71 per cent since its listing in June 2020, and also beat earnings estimates in its Q3 2020 results. The payments processor’s business fundamentals suggest strong future prospects, with analysts rating it a ‘buy’ stock. Brazilian fintech StoneCo also presents a good buying opportunity as its stock has surpassed the market to rebound 291 per cent from April lows, while the firm’s Q3 2020 revenues also beat expectations to grow by 39 per cent y-o-y. Lastly, PagSeguro Digital, another Brazilian fintech’s stock has risen roughly 203 per cent from March lows, and 25 per cent YTD. The firm’s consistent performance (50 per cent growth in net income and 77.3 per cent annual sales growth over the past five years) is potentially indicative of a strong rise in long-term value.

Demand for digital financial services has been accelerated by the pandemic, and new avenues within financial services are opening up for growth. This rising appetite has already pushed revenue, earnings, profit margins and stock prices to new highs for several fintech companies, which is evident from strong P/E multiples and valuations. Technological advancements, such as the rollout of 5G, further suggest that this trend is not likely to dim anytime soon.

However, maintaining operational resilience should remain a top priority for fintech firms as many of them are transaction and volume based. Investors must keep an eye out particularly for fast-growing private fintech players that are eyeing a public listing in the coming months. Having said that, investors must also ensure that they separate the wheat from the chaff, and invest only in select companies that have a robust business model and are positioned to grow and thrive during, as well as post the current pandemic.