Top 10 US Fintech Firms Now Worth $130bn; Outperforming “Financial Incumbents” Says VC Firm

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Fintech firms had a stellar year in 2017.

To those of you who are thinking “well, I know about the hype, but where’s the proof?”, a new tracker from VC firm Matrix, the Matrix U.S. Fintech Index is a weighted index that tracks the performance of a portfolio of 10 of the leading fintech companies in the US.

The index reveals that, not only, in 2017, did these firms crash through the $100bn dollar mark in terms of total market capitalisation (it is closer to $130bn now), collectively, they also delivered 89% returns over the course of 2017.

That’s a remarkable 60 percentage points higher than the 29% returns delivered by a second portfolio, suggested by Tech Crunch for comparison purposes, which contains the top 10 “financial incumbents”, i.e. the 10 largest established, traditional financial services firms  – JP Morgan, Visa, American Express et al – in the US – as well as the S&P 500 Index.

As anybody with a Twitter feed who follows Donald Trump, or, more likely, follows people who discuss Trump’s policies, will know, the S&P 500 also had a triumphant 2017, reaching record highs, and growing from an impressive 2,300 points in January 2017, to a scarcely credible 2,691 points by the New Year.

The “incumbents” did a good job of fighting back in 2017, after a disastrous 2016 saw market valuations plummet and share prices drop, but there is simply no stopping the rise of the fintech firms, it seems.

Matrix defines fintechs as either “technology-first companies that leverage software to compete with traditional financial services institutions”, i.e. challenger banks, insurtech firms, peer-to-peer lending, or as “software tools that better enable traditional finance functions”, e.g. making payments, sending money abroad, accounting and HR services.

The table above, supplied by Matrix, makes for fascinating reading. We can see the top 10 “incumbents” and top 10 fintech firms in the US, and we can see that Paypal, founded in 1998, already has a larger market cap, $90bn, than American Express, founded in 1850, and one of the most recognisable brand names and financial services firms in the world!

To put things in better perspective, however, it is worth noting that Paypal’s valuation is an outlier compared to the remainder of the Top 10, including the likes of Square, Shopify, and Lending Club. Square is second on the list with a market cap valuation of “only” $14.8bn, followed by Shopify, $10.2bn, and the remaining 8 all have a market cap below $10bn.

Contrastingly, the incumbents top 10 all have market cap valuations above $65bn.

So, can we truly believe the hype about fintech?

If we were to translate this index to the UK, we would most likely be comparing the “unicorns”, i.e. fintech companies with a valuation above $1bn, such as Transferwise, Markit, or peer-to-peer lender Funding Circle, to, say, the big four high street banks, which have valuations between $35bn and $150bn.

There’s no doubt UK fintech firms, like their US counterparts, would be showing far stronger year-on-year growth – the hallmark of a successful tech startup firm is, after all, its ability to grow and scale rapidly.

But on the other hand, even a firm that has raised as much money as Transferwise has – around $400m dollars – can struggle to take market share away from the big banks.

The big banks may still be the public’s first choice for most types of financial services, mainly due to force of habit, but they are struggling to make profits in areas where fintech firms can excel. The big banks are supporting creaking infrastructure, large numbers of staff, outdated operating systems, and old school ways of thinking.

Compared to the services now being offered by leaner and more agile disruptive fintech firms, they are failing to deliver, and charging too much, and sooner or later, the public will catch on – all the signs point to this, and it is already happening to a significant extent. Fintech has entered the public consciousness and is slowly beginning to be trusted more and more.

 

The Money Cloud View

It is our strong belief that 2018 will be a year in which we see fintech firms and financial incumbents partner more than ever. In the US, Paypal has emerged as a genuine tech giant, but it could easily be argued that its services are complementary to, as much as in competition with major financial services.

Now that the Payment Services Directive is about to be implemented (roll on Jan 18th), banks will have no choice but to partner with fintechs who can access their services on behalf of their clients. Fintech firms will not need to prise customers away from their banks, they will need to ringfence certain core services – money transfer for instance – and strike deals with banks to take over these less profitable, out of date business functions, and reinvigorate them.

At The Money Cloud we are excited, to say the least, about what 2018 has in store for us, and what we have in store for it!

We will be releasing a brand new product that we expect will revolutionise the way that businesses and indviduals go about transferring money overseas. Customers will benefit from, complete transparency, competition amongst providers, and more choice than they have ever had before. The entire process will also be significantly speeded up.

So, our advice would be to not worry too much about market valuations and the battle for supremacy between the big banks and their fintech challengers. It’s much more important that we see innovation and collaboration – all to the ultimate benefit of the customer.

And as they say, to the victor, will go the spoils.

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