Investors seeking high-growth opportunities understand that the recent success of digital technology and e-commerce companies could translate to excellent returns on investments in FinTech companies. While FinTech’s seemingly overnight success went largely unnoticed by many, banking executives see non-traditional financial firms as a disruptive force. That’s why 67% of executives interviewed in a recent survey said mobile payments have a significant impact on their industry.
FinTech focuses on innovations in the world of finance, like transparent mortgage systems, mobile payment solutions, bank account authentication, fraud reduction via identity verification, and secure access to real-time account balances. The FinTech industry makes setting up and running a business faster and less expensive for entrepreneurs. For consumers, it makes managing personal and business financial affairs accessible and convenient. FinTech industry growth also increases access to financial data and reporting for laypeople.
The demand for modern financial management tools is real. Credit card networks grapple with the negative effects of the pandemic while payment firms like PayPal, Square, and Plaid, which offer contactless payment methods, are poised for explosive growth. In 2019, FinTech acquired $125 billion worth of investment funds.
As the FinTech industry grows, it’s obvious that consumer demand for convenient and safe payment methods with low fees is here to stay. Three out of four digitally active people use money transfer and online payments services today, which represents a 400% increase in the number of users since 2015. For some investors, the opportunity to invest in a FinTech Pre-IPO fund presents an exciting opportunity with the potential to generate excellent returns.
Fidelity acquired UK-based WorldPay for $42.5 billion in July of 2019, creating a FinTech success story. Shareholders received $11 per share in cash plus 0.9287 shares for each share of WorldPay. The merger was the largest for the payments industry, even as WorldPay faced building pressure to increase its customer base and cut costs.
Chime is an online bank with a 35% share of digital bank accounts. Competitors include Ally Bank, which has the next largest share at just 9%. One of the biggest draws to this bank is their promise that account holders could get paid up to two days earlier when they use direct deposit than if they use a traditional bank. There are no overdraft fees, and Chime customers with direct deposits totaling more than $500 per month are eligible to use the online bank’s “Spot Me” feature, which allows a fee-free debit card purchase overdraft of $20 to $100.
Chime simplifies personal finance with a streamlined website and app that is easy to navigate (unlike many big traditional banks). Using a sophisticated AI testing method, Chime uses only marketing methods that improve their SEO. With two-thirds of their customer base under the age of 40, Chime has what appears to be a long road of successful banking ahead of them.
Plaid, founded in 2013, allows consumers to quickly and safely connect their bank accounts to apps. More than 11,000 banking institutions use Plaid to create a bridge to financial apps. Plaid currently works seamlessly with non-bank entities that take payments, including Coinbase, Carvana, Robinhood, Square, and Live Oak Bancshares. As these companies expand, Plaid is poised to grow with them.
Plaid connects more than 200 million consumer bank accounts spread across 11,000 banks to various payment apps, streamlining millions of consumers’ financial lives. The company has analyzed and facilitated more than $10 billion worth of transactions.
Plaid does more than just facilitate transactions. The company is committed to developing and supporting a credential-less ecosystem. Consumers often have difficulty accessing their own financial information due to complicated credential-based security systems. Plaid works with big banks to replace credentials with an API-based system that allows consumers to use financial tools that remain synced across the more than 4,500 apps in the Plaid network.
Plaid intends to commit three-quarters of its traffic to APIs by the end of 2021. In May of 2021, Plaid joined forces with U.S. Bank to upgrade customers to an API-based open finance experience. They’ve also developed data-access agreements with Wells Fargo, JPMorgan Chase, and Capital One with the intent of making data sharing safe and reliable.
Visa (NYSE: V) took interest in Plaid in 2020 and attempted a $5.3 billion acquisition of the company. The Justice Department blocked Visa’s attempt. They alleged that Visa’s acquisition of Plaid would eliminate the company as a low-cost alternative for online payments. The DOJ called Plaid an, “innovative alternative to Visa”. Plaid and Visa decided to part ways to avoid allegations that their partnership would violate antitrust laws.
Plaid, valued at $13.4 billion, raised $425 million in funding with a Series D that included investors Ribbit Capital and Silver Lake Partners. As consumers shift their financial activity online, Plaid plans to boost its 700 member team by 50% during 2021.
FinTech won during the pandemic when many others lost. Apple, Amazon.com, Google parent Alphabet, UPS, and FedEx didn’t see the losses that companies like Boeing Co., American Express, McDonald’s, UnitedHEalth Group Inc., and Exxon Mobil Corp., endured. Visa and Mastercard continue to struggle with problems due to decreased travel and overall consumer spending during the pandemic.
The recent global pandemic gave FinTech a boost, however. Lockdowns and quarantines made contactless digital payments a safe and easy alternative to traditional methods. As a result, PayPal outperformed other payment stocks, and Square (NYSE: SQ) gained close to 250% during 2020. FinTech companies seem to be giving consumers what they want and need as cash and checks become a less desirable way to handle money. This shift creates an exciting momentum in the space that’s catching the attention of investors.
There’s more to evaluating potential FinTech investment opportunities than tracking total payment volume. Savvy investors can look for companies with intellectual property in their arsenal that could make competing with their offerings more difficult for rivals. FinTech companies that continue to build their line of products and services are also worth watching.
Accredited investors with interest in the pre-IPO FinTech space may have difficulty gaining access to the most exciting pre-IPO stocks. Learning about the industry can be time-consuming, and the sector is growing quickly. In 2000, tech companies went public when they were four to five years old; by 2018, the median age for a tech company going public rose to 12 years.
The newest wave of companies in this space prefers to stay private longer to focus on product and company development. After they go public, they must report corporate and financial results to stakeholders and financial regulators. Becoming a publicly traded company is a cumbersome and complicated process that could easily knock a FinTech startup off track or slow down its progress.
Of course, there are some risks associated with pre-IPO investing. A private company could go bankrupt due to management problems or misuse of invested capital. A lack of liquidity in the private equity market means selling your shares may not be financially beneficial. Lock-up periods could prevent late-stage pre-IPO investors from selling their shares in a company until the lock-up ends.
Even with the obvious risks, pre-IPO investing is a popular alternative to public equity. There’s a real possibility of long-term growth potential as companies go through multiple stages of active growth. Stripe was a $5 billion FinTech company just five years ago. The Stripe investment value achieved a 360% annual return since 2016.
Here are some of the most successful IPOs of 2020:
Top technology startups have a current worldwide market valuation of more than $1 trillion. Financial technology is just one part of that pie, but it’s an interesting option for investors who want to get in on the excitement.
FinTech companies poised to experience explosive growth represent an interesting opportunity for investors curious about pre-IPO companies. FinTech makes managing finances simpler and safer for consumers. The finance of the future is here now, as shown by Plaid’s popularity as a company focused on democratizing financial services using advanced technology.
Contact The Spaventa Group today to learn more about investing in Fintech and opportunities in the private market.