UK FinTech had a mixed start to 2024 with early trading updates continuing to flag macro risks. This has led to a few estimate resets, but valuation multiples at deep discounts offer investors an option to dip their toes in this exciting sector, with M&A offering downside protection.
The internet moment for FinTech yet to come. In our 2022 thematic note, we explored the idea of the FinTech sector being at the same moment in time as internet companies post the dot-com crash. We believe this parallel is yet to fully manifest, as we observe FinTech business models grappling with issues of higher interest rates, inflation, and other macro factors. As these business models adapt to the new normal and execute strategies effectively, we believe it should drive growth reacceleration and subsequent valuation re-ratings.
We are convinced the sector stands at the brink of some of the most interesting breakthroughs: (1) Open Banking coming into mainstream use, driving transparency and access; (2) Gen AI bringing a myriad of use cases in tailored analysis, anomaly detections and decision making; and (3) tech enablers like SWIFT moving to MX message type and global payments innovation (gpi), means we are at the start of a FinTech super-cycle. Going into 2024, we believe we will see significant cost declines, and faster settlements, as well as new product and services being built on top of Open Banking, SWIFT gpi and AI.
Figure 2: UK FinTech Market Map
Source: Compiled by Peel Hunt
Where are we in the FinTech cycle?
While FinTech as a concept has been around for a long time, it only took shape as a sector in the public markets after 2010. Since then, the sector saw a significant run up until mid-2021, due mainly to: (1) high margins; (2) predictable business models; and (3) technological advancements, resulting in stronger business models in the FinTech landscape. This has led to the FinTech sector outperforming Global Tech since 2014. Many market participants thought this had created a bubble in this space. Following on from our sector coverage launch a year ago, when we likened the FinTech sector’s current era to the early 2000’s dot-com bubble, we are now seeing weaker business models being weeded out, paving the way for more resilient and robust value propositions.
Figure 3: Global FinTech has outperformed Tech in the past 10 years
Source: Refinitiv Datastream
The average EV/EBITDA in the FinTech sector is now at some of the lowest levels in the past decade, which suggests the industry is presenting us with some of the best opportunities to invest. While company-specific idiosyncrasies exist, we try to look for strong business models.
Figure 4: FinTech valuations – lowest in the past 10 years
Source: Refinitiv Datastream
Key themes shaping the UK FinTech landscape
Earlier in the note we talked about some of the tech breakthroughs driving the FinTech sector in 2024 and beyond. While Open banking, Generative AI and other tech enabling services represent strong growth opportunities, we identify few sub themes which have actionable UK stock ideas behind them:
- PayTech accounts for vast majority of the listed FinTechs globally (66% of total). One of the key drivers of PayTech growth is e-commerce activity. E-Commerce saw a growth deceleration in 2023, which impacted the PayTech sector to a large extent. As per industry sources, global e-commerce should see an acceleration to 9%+ YoY growth in the year ahead.
- Cross-border Payments is a sub-sector that is influenced by FX movements and technological infrastructure. From a foreign policy standpoint, we saw cross-border sustainability targets set by the G20 countries in 2021. These targets were summarised by 4 key pillars: cost, speed, transparency and access. We have seen an increasing adoption of open banking bringing transparency and access. Linkages to domestic payments infrastructures like FasterPayments in UK and SEPA Direct in Europe have been reducing costs and improving settlement speeds. We see these trends continue as the G20 targets are met and technology advances. While we saw 2023 as the year for personal cross-border companies such as Wise (WISE.L) see significant flows, reflecting in topline growth acceleration, we believe B2B cross-border should follow suit.
- Specialised FinTechs focus on solving particular pain points of specific verticals, customer groups and functions, have the potential to dominate in the niche of their choice and use that as a springboard to expand into adjacencies.
- RegTech has seen growing demand especially in the wake of rising incidence of fraud and growing costs of compliance. In 2023 we saw a significant rise in credit file and loan fraud as many digital identities were stolen. We believe as criminals find new ways to infiltrate databases and regulatory requirements tighten, more and more companies will need to have systems and checks in place to protect them.
- WealthTech as a subsector expands from tech enabled wealth advisory to investment platforms that allow the users to buy & sell assets. Pension management forms an important part of the space. One of the reforms announced by the chancellor of exchequer in the UK in 2023 spring was introduction of Pot for Life. This reform is aimed at consolidating many small pots that have resulted from auto-enrolments to new pension pots every time an employee changes employer and reducing the so called “lost pots” that have resulted from people forgetting to consolidate their previous pension pots from previous employments with their new ones.