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Fintech Profitability – A Conundrum?

Profitability in the tech startup space is never really discussed as the general assumption is that it will take time to achieve. This is the norm more often than not. When we start to talk about Fintech (Financial Services Technology) startups similar principles apply, which again is not surprising as it is based on the same core investment thesis.

NovitasFTCL a Fintech only corporate finance advisory published an analysis on The Financial Performance of Unlisted UK Companies. The paper looks at the profitability of 127 more established Fintech companies in the UK and compares this to the performance of listed companies in the sector.   While this research does not cover the more recent entrants to the Fintech sector it does provide some interesting benchmarks for the performance which these companies should achieve or surpass.

The report throws some interesting results probability of which if considered through traditional lens is quite low. Commercial strategy and profitability are cornerstone of any successful business and the findings of the report shows the Fintech sector might have a lot more value than initially envisaged.

How the value in the Fintech sector will be realised and will there be disruption in core banking, which could be even more profitable is something that we will discuss on an ongoing basis and in future. In this blog, however, I will analyse some of the findings of this report and we should expect more in a forthcoming global profitability research and analysis courtesy NovitasFTCL. The discussed report can be downloaded from this link. The methodology, data sources and other elements related to the data are all discussed in the report.

The data primarily pertains to the years 2014 and 2015 as reported at Companies House in the UK. 127 Private Fintech companies by revenue (chart below) dictates and demonstrates we are in very early stages of the Fintech revolution.

 

Fintech Unlisted Revenue

Source: NovitasFTCL

The revenue data from the report is as would be expected in the nascent technology sector. The most revealing data set is one below which shows the Distribution of 127 Private Fintech Companies by Current EBITDA Margin.

Fintech Unlisted EBITDA Margin

Source: NovitasFTCL

Remarkable to note is that only 22% of the companies are operating at a negative EBITDA. This combined with the median revenue and EBITDA margin growth by sector for last 5 years reveals the segments with declining margins (read: Payments) and possible opportunities. The flavour this report provides can be applied across the globe more so in Western Europe and United States and at a cumulative level what we can draw is that there is a likelihood that we will move from regional centers of excellence to a global collaborative approach to increase EBITDA and the intrinsic values of the process rather than the firm itself.

The three key points that I derive (raise) as I analysed the profitability of the sector via this report are:

i)  is the data skewed when we compare Fintech focused on Retail versus B2B

ii) the myth that young technology companies cannot be profitable is untrue (more of this in the next research paper from NovitasFTCL)

iii) is the true penetration of Fintech within Banks and Retails consumers from a Revenue/EBITDA perspective much better than anticipated?

In the upcoming report it would be interesting to understand the segment based dynamics and growth by geographies and how the investors can look for more synergies.