Fintech Valuations Run into a Macroeconomic Buzzsaw

Fintech fundraising had a good year in 2021, with around 5,000 deals raising roughly $131.5 billion. Earnings multiples hit historic highs, with valuations as much as 25 times earnings according to some analysts’ estimates. Access to record funding led a number of fintechs to focus almost exclusively on growth, leading to an accelerated pace of hiring and customer acquisition.

In 2022, the world looks quite different. Interest rate increases, inflation, a looming recession and geopolitical tensions combined to shake up public and private markets. This pressure caused valuations to crash across the technology sector.

Fintechs have suffered with sharply reduced valuations and layoffs. In private markets, funding fell by 33% between Q1 and Q2 2022, and in public markets, fintech companies underperformed the broader technology sector. Fintech stocks fell 65% in Q3 2022 compared to the previous year, compared to 19% for the Nasdaq (see Figure 1). And a specific group of fintechs has been hit particularly hard: consumer-focused businesses, especially those focused on lending, such as “buy now, pay later” firms.

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The decline in technology stock valuations has been most significant for B2C Fintech companies

Interest rate hikes, changes in public market sentiment, slower digital adoption following the pandemic-induced spending spree, and lower consumer confidence contributed to the decline.

The interest rate effect

Interest rate hikes acted as a trigger to reverse the previous market glow, with the technology sector particularly hard hit. Technology companies, which tend to derive most of their valuation from future cash flows, have seen the present value of future earnings immediately shrink with the increase in discount rates.

Higher prices also mean higher yields for fixed-income assets, pushing some investors to reallocate their funds into some of these safer assets and away from risky asset classes.

Rising interest rates also affect lending companies and other fintechs in unique ways. These business models are heavily dependent on cheap access to finance and on the promise to customers of attractive prices. Stuck between rising costs of funds and elastic demand, companies now face the prospect of thinning margins or losing customers. In addition, they face a higher risk of default, which makes the economy look even less attractive.

Investor and consumer sentiment

As investor sentiment continued to sour, contagion began to spread in private markets. Fintechs may have been more affected because they attracted even more investor excitement and funding than other sectors, with 20% of venture capital going to fintech in 2021. This glut of the market resulted in fintech valuations growing far faster than other tech sectors, so some of the decline in value can be attributed to a return to more measured investments.

On the consumer side, the looming recession, combined with the pandemic-induced cooling of online retail, is likely to lead to a slowdown in consumer spending, as evidenced by Amazon’s third-quarter 2022 operating loss and flat net sales. Again, consumer loans and consumer neobanks will suffer the most, as consumers cut discretionary spending.

Implications for the fintech ecosystem

For fintechs and investors, the implications of lower valuations will vary depending on the funding stage.

• Early-stage companies are seeing increased interest from venture investors who shifted their focus to earlier, less expensive deals. But this new flood of money comes with more pressure to outline business plans with a clear path to profitability.
• Growth and late-stage companies, which have experienced the biggest valuation cuts, are likely to deviate from the 2021 mindset of growing at all costs. They will slow down hiring and increase cost discipline.
• Late-stage fintechs looking to go public are likely to delay that step to wait for more favorable conditions.

The good news: With more scrutiny and discipline, companies with strong fundamentals and sufficient agility to make the right changes will survive the next few years and may emerge stronger as a result. And for traditional financial institutions looking to expand their participation in the space and build select capabilities, depressed valuations can signal opportunities for strategic acquisitions.