Over the last 10 years, investors poured more than $370B into fintech startups across the globe. As a result, we now have a sector comprised of many companies operating at scale — and with plenty of room to grow. In our recent State of Fintech report, my colleagues and I took stock of the sector’s progress over the last decade, identifying the companies that have reached (or are about to reach) enterprise scale.

 

As a Sector, Fintech Is Now Operating at Scale

A decade ago, Coinbase did not exist; now, it generates $2.8B in revenue a year, and is one of 25 companies in the F-Prime Fintech Index whose revenue exceeded $1B in 2023. That’s more than half of the companies in the index.

Having achieved scale, the larger companies in the F-Prime Fintech Index are still growing rapidly. Public companies like Oscar Health, Nubank, Wise, and Bill.com are posting LTM revenue growth in excess of 50 percent. Toast brought in $3.6B in revenue in 2023 — 45 percent more than in 2022. Meanwhile, a contingent of privately listed companies like Circle (102 percent) and Chime (95 percent) are nonetheless operating at a similar scale to their public counterparts with $1.6B and $1.9B, respectively. The 10 fastest-growing companies in the F-Prime Fintech Index are growing at 54.1 percent, whereas their counterparts in the Emerging Cloud Index are growing at 33.3 percent.

 

Plenty of Scaled Fintechs Remain Private

Outside of the public markets, we find a cohort of scaled fintech companies that have reached a high level of maturity, but continue to operate privately. Stripe is a great example. The company has raised more than $9.1B from private investors, with the latest coming in around $6.9B. However, it earmarked a sizeable portion of the round to pay employees’ personal tax liabilities for expired shares, due to Stripe’s long tenure as a privately held startup. The company is subject to endless speculation about when it will finally go public. Others in this category include Klarna, which brought in $2.1B and is reportedly considering a public listing, and Revolut, which has $1.9B in revenue.

Overall, startups are staying private longer. According to Nasdaq, the median age of a company at its IPO in 1980 was six years. In 2021, the median age was 11, thanks in part to the increasing volumes of capital flooding into the private markets. However, companies like Stripe, Binance, Klarna, Chime, and Circle represent a crop of scaled fintechs that are reaching the limits of the private markets, and will soon find themselves with no option but to go public. The fintech floodgates are about to open even further.

 

Scaling Fast

Beyond the largest players, the F-Prime Fintech Index also lists a group of companies that are poised to join the billion dollar revenue club. Remitly, for instance, posted 46 percent revenue growth, ending Q3 with LTM revenue at $871M. Payoneer grew 36 percent to reach $790M LTM revenue by Q3, and Xero grew 27 percent to $982M. These companies could post even slower growth in 2024 and still reach $1B in revenue.

It is worth noting how quickly these companies reached this milestone. Block (fka Square) went from zero to more than $1B in revenue in a matter of five years. It took Nubank, Stripe, and Adyen seven, eight and 11 years, respectively. As early stage investors, we often ask ourselves whether a company can bring in more than $1B in revenue someday, and it is re-affirming for the sector to see private startups scaling so rapidly. The speed and scale of their growth validates our conviction about the size of the markets they’re chasing. Many of these startups are still operating in their local markets or in just a handful of countries. Like many older multinationals, they will be able to continue scaling as publicly listed companies selling internationally and would benefit from the prestige and resources that come with public listing.

Overall, the number and size of companies poised to go public or cross the billion-dollar revenue threshold heralds further growth for the fintech industry. Over the next five years, we believe the F-Prime Fintech Index’s market capitalization will grow significantly from new public listings.

We encourage you to tinker with the F-Prime Fintech Index, which now includes head-to-head comparisons; dynamic charts comparing company performance (by market cap, revenue, growth, margins, multiples, and more); and multiples benchmarks to help explore the connections between valuation multiples and performance metrics like margins and growth rates.

 

Originally published in Financial Revolutionist.

F-Prime’s David Jegen joins Judy Shaw of NYSE Floor Talk to discuss the F-Prime Fintech Index and the state of fintech in 2024.

 

In sectors like mobile banking and commission-free trading, fintech companies have had a profound on financial incumbents. In other areas, the future of banking and fintech is still being developed.

Fintech is growing up.

Over the last few decades, a generation of startups have surfed a wave of new technology spanning digital payments, roboadvisors, blockchain, and more, staking out a share in new and existing financial markets. Meanwhile, many incumbent financial service providers have sunk or swum based on their ability to anticipate, react to, or adopt new technology.

For the last three years, we at F-Prime Capital have produced our annual State of Fintech report to track the sector’s road into adolescence. 2024 marks a decade since fintech started to attract meaningful venture investment (that is, more than $10B annually), so in this year’s report we looked back on fintech’s impact on the broader finance industry.

Where did startups truly innovate and disrupt incumbents? Which sectors owe their technological innovation to startups and incumbents alike? Where did incumbents prove difficult to disrupt, or simply outmaneuvered the disruptors? And are there any sectors where these questions have yet to be decided?

 

True Startup Disruption

In the race against incumbents, startups have had the most disruptive impact in two sectors: embedded payments and commission-free trading models.

Software-based payments startups have been enormously successful. Riding on the creation of the PayFac model in the 1990s and the API-ification of payments in the 2010s, payments have been increasingly embedded into software vendors and are often the first of many adjacent fintech products offered.

In 2017, software-based payment companies Toast, Flywire, and the still-private Stripe processed just shy of $60 billion in payments, but by 2022 their total payment volume jumped to $927 billion — rising from 3 to 42% of incumbent FIS’s volume.

In the wealth management world, Robinhood won a generation of new and active investors with a mobile, gamified mobile experience and, most importantly, a commission-free trading model.

Though not the first company to rely on payment for order flow (PFOF) as a major revenue source, Robinhood’s dramatic rise in 2019 spurred incumbents including Interactive Brokers, Charles Schwab, TD Ameritrade, and E-Trade to forgo commissions. Schwab and Ameritrade (which later merged) estimated that nixing trading fees eliminated $1.4 billion in annual revenue, although much of that was ultimately recovered through PFOF.

 

Startups and Incumbents Both Disrupted

Broadly speaking, incumbent banks have adapted well to the past decade’s wave of fintech innovation, while startups have also managed to carve out meaningful market share.

Both were able to drive and adapt to changing technology in the consumer banking space. Neobanks like Chime, SoFi and Varo found success providing “new front doors” for consumers — between them, the three companies’ apps were downloaded over 8 million times in 2023 alone. Meanwhile, incumbents were able to quickly adopt neobanks’ more attractive features like zero overdraft fees and continue to see substantial user base growth. Mobile app download data suggests incumbents and disruptors are both winning the race to be consumers’ primary financial relationship.

On the business banking side, startup neobanks like Mercury and Brex benefited from early 2023 bank instability — receiving an estimated 29% of Silicon Valley Bank (SVB) deposit outflows. However, most companies were drawn to the security of J.P. Morgan, an incumbent that has recently acquired innovative fundraising and cap table businesses to bolster its startup product offering. In the wake of the SVB collapse, it secured an estimated 50% of the stricken bank’s deposit outflows.

 

Where Incumbents Remain Entrenched

By facilitating “hands-off” investment and trading, the rise of roboadvisors opened the door to millions of consumers who were otherwise unreachable to wealth and asset management companies. Early innovators like Betterment and Wealthfront created and owned a $200 million assets under management market in 2012, but weren’t able to secure distribution before incumbents innovated. Within a few years of launch, Vanguard and Charles Schwab developed and launched competitive products that swiftly gobbled up a growing market: by 2021, total roboadvised assets under management had reached $415 billion — and more than 85% owned by incumbents.

Peer-to-peer (P2P) lenders emerged in the 2000s with the ambition to disrupt traditional banking by eliminating the middleman, offering borrowers lower interest rates and retail lenders an attractive return on their investment.

This worked until it did not: in 2014, more than 84% of P2P lender LendingClub’s originations were funded by retail investors, but by 2020 retail sources of funding dried up to only 20%. Both LendingClub and Funding Circle have sunsetted their P2P lending products and instead grew to rely on institutional sources of capital — the very model which they had set out to disrupt. LendingClub went full circle and acquired a bank (Radius Bank) to secure a stable source of bank deposits.

 

Where Disruptors’ Impact Remains to be Seen

We identify three areas where the dynamic of startup disruption and incumbent innovation remains to be seen: crypto, real-time payments in the US, and generative AI.

Crypto has had a volatile history and its use cases are still dominated by investment and speculative trading. However, stablecoins show promise in both their ability to act as a store of value (in markets where the local currency is volatile or inflation is rampant) and as a new transaction method. In 2022, stablecoin transaction volume reached $6.9 trillion, surpassing that of PayPal at $1.4 trillion — suggesting crypto’s real value may lie in payments, after all.

Last year’s launch of FedNow, the U.S.’s late-arriving real-time payments system, generated a lot of speculation about whether real-time payments (RTP) could rival other payment methods in this country. For now, the effect of RTP in the U.S. remains to be seen. While RTP’s volume share of non-paper-based transactions dominates in India and Brazil (83% and 49%, respectively), the figure is just 1.8% in the United States.

Similarly, we are still in the very early days of a generative AI-driven innovation wave and its lasting effects in financial services. For now, fintech disruptors and incumbents are mentioning AI in company earnings calls at a similar rate, suggesting equal levels of focus on the technology across the industry.

The last decade of financial innovation brought remarkable change to the ways consumers earn, save, borrow, build wealth, and move money — and we look forward to seeing how our list of genuine fintech disruption changes over the next decade.

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Originally published in The Financial Brand.

Throughout its history, finance follows a predictable pattern. Waves of excessive risk-taking are followed by the three common corrections: a flight to safety, regulatory scrutiny, and jail time for the worst offenders. The junk bond market imploded along those three familiar lines in the late 1980s. Ditto for the 2008 financial crisis. 

In 2021, a 10-year wave of fintech innovation and disruption culminated in a $1.3T market cap for public companies listed in the F-Prime Fintech Index. Then, in 2022, the market fell back to Earth and the usual corrective results followed in 2023. In their flight to safety, investors abruptly demanded capital efficient growth and cut fintech valuation multiples. By now we could fill a school bus with the fintech executives who are either under indictment, awaiting charges, or already in jail, including leaders at FTX, Bitwise, Frank, Wirecard, Terraform, and Binance. And in the last 12 months, regulators have finally started to throw their weight around the fintech sector. In our most recent State of Fintech report, my partners and I refer to 2023 as the year of “reg on, risk off.” 

For now, we wanted to take a look at the more enduring element of any corrective cycle: regulatory action. The fintech industry experienced a meaningful shift in regulator scrutiny, rule-making, and enforcement in 2023, which will have a lasting impact on the sector. 

Banking
The Office of the Comptroller of the Currency (OCC) has is scrutinizing the relationships between fintech startups, banking-as-a-service providers (BaaS), and chartered banks. This triad has been incredible valuable to the fintech ecosystem, but banks like Blue Ridge Bank, Cross River Bank, and First Fed Bank have recently found themselves in the regulatory crosshairs. Many banks are responding by suspending fintech startup programs, re-asserting stricter compliance controls, or exiting the space altogether. It’s clear to us that regulators would prefer chartered banks bypass BaaS providers and manage fintech programs directly. We think BaaS and embedded banking is here to stay, but it will become more expensive and everyone is moving more slowly until the regulatory guardrails solidify. 

The Consumer Financial Protection Bureau (CFPB) has been busy making headlines with proposals to cap overdraft and not-sufficient-funds fees. While in aggregate these will not make a big impact on the banking industry, we think it’s a fascinating culmination of neobank disruption which taught consumers (and apparently regulators) that banking could function without the fees. 

In the realm of open finance, the CFPB proposed Section 1033 of the Dodd-Frank Act enshrining consumer access to their financial data with banks (though notably not yet with brokerages). Thanks to aggregators like Plaid, Quovo, and Yodlee, the US has had de facto open access for years, but it is good to see it protected, though we’re watching for unintended consequences if new limits are placed on secondary use of the data.

Payments
FedNow, and the renewed push for real-time payments (RTP) in the US, is a big story, though the lack of deadlines or forced bank support ensures we will see much slower adoption in the US than in countries like Brazil and India. Of course, there are many other reasons the US would have adopted more slowly, like credit card rewards and already high-performing alternative payments rails. 

We are focused on how risk and fraud will be addressed with RTP, and see increased scrutiny of other digital wallet transactions as a preview. Fed Reg E does not require banks to reimburse consumers who mistakenly send funds through error or fraud, yet the CFPB is understandably looking at the $1 trillion of digital wallet transactions and asking if they should. Bowing to pressure, last year Zelle voluntarily began reimbursing some affected consumers, and we believe we will eventually get to a greater harmonization of consumer protections regardless of the payment rails.

Finally, it wouldn’t be a year without someone complaining about interchange, though last year the Federal Reserve actually proposed a debit card interchange fee reduction that would be the first since 2011. As before, fintech companies could side-step the lower fees by working with exempt banks under the Durbin Amendment to the Dodd-Frank Act (banks with less than $10B in assets.)

Lending
Seems like everyone is asking how to regulate By Now Pay Later (BNPL). In the OCC’s December bulletin, the regulator issued new requirements for banks that support BNPL transactions around risk management, disclosure guidelines, and borrower safeguards. The CFPB issued its own report focused on similar issues. And following Callifornia’s lead that formally incorporated BNPL under state lending laws in 2020, many states are addressing BNPL this year. We expect BNPL to gradually align with other consumer lending regulations, but this will not materially slow its rapid growth.

Across the country, states are passing or considering legislation dealing with early wage access (EWA), where hourly workers can smooth out pay cycles by accessing their wages without waiting for weekly or monthly pay cycles. Nevada and Missouri adopted laws that protect users from large fees when using EWA, while a law in Connecticut (and another pending approval in California) would designate EWA as a “loan.” 

Wealth and Asset Management
In March, the Department of Labor urged retirement fund providers to “exercise extreme care” when considering an investment in cryptocurrency, opting for statements over regulation for now. 

More regulation is coming for the private funds industry (aka Alternatives) with a notable step in that direction in 2023. At $16T in assets and an expanding base of retail investors, the Securities and Exchange Commission (SEC) began requiring registered advisors to make quarterly disclosures about their fees, as well as performance and potential conflicts of interest.  

Proptech
While more litigation than regulation, in October, a federal jury found that the National Association of Realtors had colluded with some of the largest real estate brokers in the US to inflate commissions. The ruling had immediate implications for property tech companies like Redfin, Zillow, and Opendoor, which all saw their stock price sink in the aftermath. It is remarkable that US consumers continue to pay such high commissions for selling a home, but it remains to be seen whether this ruling can do what Redfin and a decade of digitization has not.  

Crypto
Several jurisdictions, including the European Union, released detailed crypto regulatory frameworks seeking to prevent fraud, money laundering, and other forms of illegal financing via cryptocurrency. Here in the US, the SEC is continuing its policy of “regulation via litigation,” filing roughly 55 enforcement lawsuits during Chairman Gensler’s term at the agency’s helm. And in a huge milestone for the crypto sector, the SEC also approved the listing of 11 bitcoin ETFs. 

Conclusion
Heightened regulation follows waves of innovation and increased risk-taking, and that’s generally a good thing. The lag permitted a decade of new startups to innovate, expand consumer options, and further digitize the financial industry. 2023 marked the beginning of the “reg on, risk off” era, and while regulation may go too far as well, we think the increased regulatory scrutiny will prove beneficial. We must all work with regulators to develop regulation that protects consumers while permitting innovation, gives businesses clear rules to comply with, and if not too much to ask, harmonizes disparate regulatory frameworks across analogous products (e.g., payment rails) and across federal and state regimes.

 

Check out our full State of Fintech report here.

Financial APIs are driving an overdue wave of innovation.

Over the last few years, open finance has become one of those vaguely defined fintech buzzwords. But with increasing regulatory movement in the US and nearly 70 million consumer accounts now interacting with financial APIs, it has become more relevant than ever.

Open finance has its roots in open banking, which refers to the use of application programming interfaces (APIs) to build applications fueled with consumer banking data. While largely invisible to consumers, open banking innovation has powered the novel ways that consumers now borrow, build wealth, and move money. The shift towards open banking has long been underway in the US and has paved the way for new open finance applications to flourish.

We define open finance similarly to open banking, but more broadly: the use of APIs to build applications that supplement consumer banking data with other information, defining users’ financial lives across their profiles of wealth, debt, insurance, sources of income, and more. The reason that open banking regulation is so exciting is that it’s the first step towards a world of open finance, where consumers can more fairly access financial products designed for their unique needs.

A Brief History of Open Finance

One might trace the origins of open banking in the US back to 1997, when Microsoft, Intuit, and CheckFree formed a combined open API standard known as the Open Financial Exchange (OFX). But open banking really started to catch on post-Great Financial Crisis when the US government enacted Dodd-Frank and created the Consumer Financial Protection Bureau (CFPB).

Now, after more than a decade, Section 1033 of Dodd-Frank — referring to consumers’ right to access their own financial data — has taken the main stage. In October 2023, the CFPB proposed the Personal Financial Data Rights rule. If it’s finalized in the fall of 2024 as anticipated, the rule would implement Section 1033 and codify open banking in the US.

The Rise of Financial APIs

A key driver in the adoption of open finance is the proliferation of financial APIs, and their superiority over earlier screen scraping technology. Drawbacks to screen scraping include connectivity issues any time a website experiences an update or outage, and heightened risk for financial institutions who are unaware who is scraping their consumer data and for what purpose. Instead, APIs dictate how systems can securely and efficiently exchange discrete data elements — and are the key enabling technology for open finance.

The adoption of APIs in financial services has accelerated over the last few years, as institutions have come to realize the heightened security, efficiency, and customer experience associated with them. At the same time, recent CFPB proposals are continuing to shepherd financial institutions toward a world of open APIs, enabling consumers to easily port financial data between providers. The Financial Data Exchange (FDX) emerged as an industry group whose open API standard incumbents and fintechs alike have rallied around. It is estimated that the FDX API now touches 65 million consumer accounts, up from 2 million just four years ago.

The Evolution of Bank Cooperation

The 2000s and 2010s saw a substantial debate over the right to access consumer financial data. At the time, data holders (namely banks and other incumbent institutions) cited IT costs imposed by data aggregators scraping their websites, while data users (like fintech applications) asserted that they were merely accessing consumer-permissioned personal data to better serve the end user.

Case in point: For several days in 2015, J.P. Morgan and Wells Fargo restricted customers of Mint (a then-popular, now-sunsetted account aggregator) from accessing their bank account information. Banks pointed to technical concerns such as data security and server capacity, though competitive threats loomed too. Even when institutions didn’t fully restrict access, they had other tactics at the ready: strict security standards, time-of-day restrictions, increasingly granular user permissioning, and costs for access.

Flash forward to today: Incumbents have come around to the promise of open finance as the technical advantages of APIs — and their customer experience improvements — have become more apparent. Disruptors and incumbents are increasingly collaborating here, too: members of the industry group FDX include a healthy mix of incumbents (like Bank of America and Wells Fargo) and disruptors (like Plaid and MX).

API technology, regulatory encouragement, and shifting consumer preferences are all fuelling a wave of new open finance startups. So what would it look like if the promise of open finance were fully realized?

Open Finance in Action

Many users already feel the benefits of linking their bank accounts with popular financial applications like Venmo, Coinbase, and Robinhood via Plaid. However, at F-Prime we imagine that same level of data access expanding to other areas of a user’s financial life.

A large population of consumers still don’t have fair access to credit. Lenders can use payroll API solutions like Argyle to verify sources of income or solutions like Trigo to validate a customer’s ability to pay rent on time. Financial institutions can use Method to aggregate a consumer’s outstanding liabilities and reveal where they can refinance at a lower price, or employers can use it to offer debt repayment benefits to their employees. In the insurance space, Canopy Connect can help agents surface existing insurance policies and help potential customers dig for more competitive options.

This wave of consumer financial data aggregators will leave institutions and fintechs looking for an “aggregator of aggregators” solution, either routing between providers to maximize uptime or to paint a more accurate financial picture of the consumers they serve. Meld is one example. Others, like Prism and Pave, take consumer data via these APIs and produce financial insights in pursuit of a more modern and comprehensive credit score.

Looking Ahead

It will be a while before that vision becomes reality — 1033 is still directional sentiment, not regulatory action just yet. The proposed rule also only covers a subset of consumer financial accounts: deposit accounts, credit cards, and digital wallets. It says nothing about payroll data, for example. Meanwhile, the thousands of regional banks, credit unions, and other smaller financial institutions that make up the United States’ uniquely fragmented banking landscape will struggle to keep up with the required technological standards.

That said, in the long term we can see the growing array of consumer financial data APIs coming together to a holistic, real-time, and accurate financial identity for every consumer. Easy access to financial services and more tailored financial products will result. We are excited to see the institutional response to the new regulations and technology currently impacting the market — but we are much more excited about the effect that open finance will have on the end user experience for millions of Americans.

 

Originally published on Fintech Prime Time.

Assessing the industry’s rebound

For the fintech industry, it has been a wild couple of years. 2021 was a year of record-breaking valuations, revenue multiples, and VC funding. We then experienced an over-correction in 2022, with massive drops in valuations and multiples, and investors differentiating truly disruptive fintechs from those that merely provided a slightly better version of an existing financial service.

Access the full 2024 State of Fintech report here. 

The F-Prime Fintech Index reflected this rise and fall. In 2021, we measured public fintech companies’ market cap at $1.3T. By the time it found its floor the following year, the industry was worth $389B.

Now, heading into 2024, we see the fintech market in the midst of a rebound, with public valuations and multiples improving as investors prioritize profitable, sustainable growth. By the end of December, the F-Prime Fintech Index’s market cap stood at $573B. Overall, the Index rebounded 114 percent in 2023, and continues to outperform the S&P 500 by 540 percentage points. Revenue multiples have also made a modest recovery, though public investors are rewarding capital efficient growth and structurally attractive gross margins over revenue growth.

Correction Still Rippling Through Private Markets

While the public markets are in recovery mode, the over-correction of 2022 is still affecting private markets. We saw investment volume drop by around 50 percent last year to 1,639. However, it’s worth noting that more private investments were closed in 2023 than every year in history before 2019. Fintech has become one of the largest sectors in venture capital, and that is not changing.

Post-Series B valuations took the biggest hit in 2022 and while they climbed slightly in 2023, it is misleading because only the strongest companies raised in 2023. Those that could wait, did, and tried to grow into prior round valuations. 30-40 percent discounts in secondary trading are a leading indicator of 2024 valuations for some late-stage private companies.

2024 will be a tale of two cities, with high-performing companies continuing to raise without difficulty, while others struggle. Of the 819 companies that raised a Series A round in 2021, 43 percent — more than 350 — have not yet announced a Series B, acquisition, bridge round, or shutdown. Bridge rounds can only extend so far and most will need to raise or find a suitable landing in 2024.

 

M&A Activity Did Not Bounce Back

2023’s $98B in fintech M&A pales in comparison to 2021’s $349B. While we expected heightened activity from private equity and strategic buyers in 2023, the first half of 2023 was extremely quiet. High interest rates hampered PE borrowing patterns, scaled fintech companies lost their high multiple acquisition currency, and strategic acquirers were focused on reducing their operational expenses. The collapse of Silicon Valley Bank helped no one. However, the second half of 2023 M&A was brisk and portends a more vibrant 2024.

 

Reg On, Risk Off

Throughout the history of finance, waves of excessive risk-taking tend to usher in an era of regulatory scrutiny — think of the 1980s junk bond market and the 2008 financial crisis, for example. Having reached the “excessive risk” period in 2021, fintech has now entered a period of regulation.

Relationships between BaaS providers and charter banks are under scrutiny, as are private fund managers and retirement products that include cryptocurrency. Financial service providers are being urged to adopt risk management practices around its buy now, pay later products, and there is downward pressure on debit interchange fees. These are just some of the regulatory actions that impacted fintech this year — check out the report for a full list of the most important pieces of regulation we’re watching heading into 2024.

Reflecting on a Decade in Fintech Innovation

A decade into the fintech era, it is becoming clear where startups have disrupted existing financial services and where they were outmaneuvered or outlasted by incumbents.

Startup-led innovations like software-based payments (Stripe, Toast, Flywire), BNPL (Affirm, Klarna), and commission-free trading (Robinhood) genuinely disrupted incumbents and meaningfully shifted business models, revenue streams, and customer expectations. Elsewhere, incumbents embraced the very innovations startups introduced, leading to broad industry adoption more than disruption. For example, mobile banking and consumer-permissioned API access to financial data are now the norm.

In some sectors, incumbents “found innovation before startups found distribution.” For example, Betterment and Wealthfront pioneered robo-advisors, yet incumbents now control 80 percent of the market.

We should verbalize what you’re reading between the lines here: fintech startups have changed the industry in countless ways, but financial services incumbents are doing just fine. The top five banks have added $580B in market cap since 2003, and the top brokerages added $5.8T in client assets in the last five years.

Finally, the book is still being written for crypto, real-time payments, and GenAI.

 

Reasons for Continued Excitement

The industry is now operating at scale, with more than half of the 49 companies in the F-Prime Fintech Index posting over $1B in revenue in 2023. Yet these companies still only scratch the surface on their potential, capturing less than 10 percent of total US financial services revenue. There is still so much room to grow.

Even scaled fintechs — that billion dollar revenue club — are just getting started and growing an average of 45 percent annually, more than three times the rate of public incumbents. We expect the IPO window to open in 2024 for scaled fintech companies like Stripe, Klarna, Circle… and hopefully many more. We will add them to the F-Prime Fintech Index when they meet our published criteria.

 

Go deeper: Access the full report via the F-Prime Fintech Index here.

Unpacking Fintech’s Q4 Rise

Fintech as a whole rose in Q4. Before we jump into the numbers, it’s worth highlighting a few notable stories hidden within them:

The Return of Buy Now, Pay Later: In the 11 months ending December 6, consumers spent $64.9B via BNPL platforms — a 15 percent jump from a year earlier. The markets reflect that rise, with BNPL provider Affirm’s revenue multiples tripling since Q4 2022. The company now trades at 11.2x. We have not seen that level of persistence for a publicly listed digital lender before — after all, Affirm has moved beyond B2C point-of-sale lending. On that note, in November the company announced that its partnership with Amazon had expanded to cover payments on its B2B store. Meanwhile, a surge in BNPL usage over Black Friday and Cyber Monday (up 20 percent on Black Friday and 42 percent on Cyber Monday) also lifted the company’s earnings.

Fellow BNPL provider Klarna is one of the top candidates to go public in 2024. But keep an eye on regulators, as the OCC recently issued a bulletin to help banks manage the risks associated with BNPL. For a deeper analysis on the vertical from an unapologetic BNPL evangelist, we enjoyed Simon Taylor’s “rant” earlier this month.

Crypto Spring?: Coinbase is currently trading at 15.1x, up from 1.3x in the depths of the crypto winter. That’s a stronger bounce than we’ve seen in cryptocurrency prices — Bitcoin has rebounded from $16,529 in December 2022 to $42,800 this month and Ethereum is now worth $2,562, up from $993 in July 2022. $4.6 billion changed hands on the new bitcoin ETF’s first day of trading — though the price has corrected post-launch and Vanguard did not join the likes of BlackRock, Grayscale, and Fidelity in launching a spot bitcoin ETF.

Shopify’s on a Roll: The e-commerce platform’s multiples have increased again QoQ and now trades at double its Q4 2022 multiple at 14.5x. What’s driving this growth?

• After pulling the plug on its logistics side quest in May, the company has re-focused on its main game: building e-commerce stores for brands, adding enterprise clients, facilitating better omnichannel and mobile commerce experiences, and building its wholesale offerings.
• That wholesale business is gaining traction, with B2B GMV up 61 percent in the first half of 2023. New customers include Kraft Heinz, Brooklinen, and Momofuko.
• Shopify has been well-placed to harness the tailwinds propelling vertical SaaS. Across the fintech category, investors consistently reward vertical SaaS companies over other fintechs for their recurring revenue, high gross margins, and economies of scale.

And now, for those of you who love diving into the details on public stocks, we have:

 

The Q4 Numbers

LTM revenue multiples rose across the board in the last quarter of 2023, from 4.0x in Q3 to 4.8x in Q4. Multiples rose for all growth rates and verticals within the sector.

By Growth Rate:

Source: F-Prime Fintech Index

Companies that grew less than 20 percent (typically the larger companies in the Index) saw the biggest jump in Q4, almost doubling from 1.8x to 3.4x thanks to a broad recovery in market capitalization and enterprise value. The other two growth segments saw modest gains — find an interactive version of the chart above under “Historical Metrics” on the F-Prime Fintech Index.

By Vertical:

Source: F-Prime Fintech Index

Wealth and asset management saw the largest jump, with average multiples rising from 3.4x to 7.3x. Coinbase and (to a lesser extent) Robinhood drove the rise — see below.

Proptech companies collectively traded above 1x for the first time since Q2 2022, rising from 0.9x to 1.5x. Digital mortgage platform Blend drove the rise for the second quarter in a row.

 

Zooming In on WAM

Driven by rising equity and crypto prices, WAM companies’ assets under management and transaction volume have rebounded. The overall crypto market capitalization is up 62 percent to $1.3T since the beginning of 2023. Since the WAM sector is mainly a tale of two companies, let’s check in on the main players individually:

Net quarterly revenue for Coinbase was down six percent in Q3 to $623M, but still higher than the $576M 12 months earlier. The company is marching towards profitability on a GAAP basis, only losing $2M in Q3 2023.

However, those aforementioned gains in the value of crypto assets and a corresponding rise in trading volume mean that Coinbase’s Q3 numbers were less than impressive in light of trade-based revenues. In the third quarter, Coinbase generated $289M worth of trading revenue (down 21 percent year-on-year), with $275M (95 percent) coming from consumer activity and another $14M (5 percent) from institutional traders. Those figures were $310M and $17M respectively in the second quarter of 2023, and $346M and $20M a year ago. For now, Coinbase’s main growth comes via interest-based income (including interest earned on customer custodial funds and loans), as well as subscriptions and services like its stable coin arrangement with Circle and USDC.

Source: Reuters

Monthly active users over at Robinhood have been declining month over month, but it has compensated somewhat with steady increases in its earnings per client over the last six quarters. Similar to Coinbase, it has also seen its revenue boosted by rising interest rates, with income from interest surpassing transaction-based revenue for the first time in the company’s history.

Source: Reuters

Index Removals: Finally, while M&A activity continues to pick up in both public and private markets, no F-Prime Fintech Index companies were acquired this quarter. However, crypto trading platform Bakkt no longer met our criteria and was removed from the Index.

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Written with Zoey Tang.