April 10, 2023   Enterprise, FinTech and Alternative Finance, Innovation and Resources, Leadership, Productivity, Competition, Human Capital, Health, Research   No comments

Efficiency: The Key to Success for Rapidly Growing Fintech Companies

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Flagship Advisory Partners | Joel Van Arsdale, Pedro Giesta, and Francesca De Fina | Mar 16, 2023

For the last decade, particularly during the pandemic, fintech was synonymous with high growth, oftentimes assigned unobtainable topline growth expectations. In 2022, expectations came crashing back to reality.  There is now an urgent need for high-growth fintechs to refocus on expense efficiency in 2023

  • Our sample includes 50 publicly listed fintech companies with (mostly) market values in excess of $1 billion. We assign each company to a cohort, based on their categorical business model. We do this in order to understand business model variation within our analysis.
  • Fintech, particularly payments, is supposed to be a business model with natural economies of scale; revenue growth (or gross profit) should outpace operating expense growth. In Figure 1, our Diversified Processors cohort illustrates this principle well. This cohort generated 13% gross profit growth (8% gross rev. growth) vs. 6% opex growth between 2021 and 2022.
    • Interestingly, none of our other cohorts produced positive operating efficiency in the aggregate between 2021 and 2022; all other cohorts saw deteriorating expense efficiency on a weighted average basis.
    • The Good: 13 companies in our total sample (50) delivered a Gross Profit Growth / Opex Growth ratio greater than 2
    • The Bad: 4 companies in our total sample (50) delivered an Opex Growth / Gross Profit Growth ratio between 1.5 and 2.0
    • The Ugly: 3 companies in our total sample (50) delivered negative gross profit growth and 7 companies in our total sample delivered an Opex Growth / Gross Profit Growth ratio greater than 2.0.

See:  Some Exciting Fintech Stats (2023-2025)

  • The clear conclusion here is that many high-growth fintechs simply lost their way on expense management, believing that growth investment was the singular imperative heading into 2022. Such companies face a different set of expectations in 2023.
  • People costs are often the largest category of expense for fintechs.  U.S. fintech companies in particular should be focused on establishing substantive offshoring or nearshoring operations as an operating model where a vast-majority of people are paid at U.S. compensation levels appears to be a challenging hurdle for delivering strong profitability.

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