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Sobering fintech valuations amidst macro headwinds

July 13, 2022

Close up of guest using smart phone while making contactless payment in a pub.

Swedish payments firm Klarna Bank AB has raised $800 million of funds at a valuation of $6.7 billion, down around 85% from its $46 billion valuation in 2021. One of the beneficiaries of increased online shopping driven by the pandemic, Klarna, which provides “buy now, pay later” (BNPL) services, went on to become Europe’s most valuable start-up from a valuation of $5.5 billion in 2019. But valuations have slipped this year in broader stock declines, and several major technology stocks have plummeted from their 2021 highs in recent months. BNPL rival Affirm has shed more than 80% of its value this year.

Much of this correction could be primarily attributed to the macroeconomic headwinds and inflationary worries that have resulted in declines across all global stock markets. Many fintech companies in this space rely on the securitization of loan and credit-card portfolios, or wholesale funding from banks, to fuel their credit operations, leaving them vulnerable to rising interest rates. With a difficult macro environment, reduced consumer spending could further exacerbate the strain.

Mobile payments have nevertheless continued to buck the trend and payments companies have thus far been more resilient as the world continues a fundamental shift from cash to digital payments. According to GlobalData’s Payment Instrument Analytics, the global mobile payment sector was worth at least $55.7 trillion in 2021, with China representing about 90% of the value of transactions made during that period. Across the world, the growth forecast ahead of mobile payment transaction value will be a CAGR of 21.8% between 2021 to 2025, reaching $122.5 trillion in 2025. In terms of volume, the forecast growth of mobile payment volume will be a CAGR of 19.9% between 2021 and 2025, reaching 2.2 billion payments in 2025.

Investments in financial technology, especially payments, have continued to balloon until early 2022. According to CB Insights, venture investments in fintech rose to $131.5 billion from 4,969 deals, up from $49 billion invested in 3,491 deals in 2020. Last year financial start-ups raised $132bn, more than twice of that in 2020; 150 of them reached a valuation of $1bn or more, thereby earning unicorn status. Quarterly fintech funding has slowed down 33% quarter-on-quarter, though, according to CB Insights Venture Q2’2022 report. This slowdown is expected to continue until next year.

While the BNPL value proposition still holds good, consumer payment preferences will continue influencing other parts of the fintech value chain. While companies like PayPal have focussed on growing into “super apps” modeled along the lines of Alipay and WeChat Pay, others are focussed on providing more choice of payment methods with an omnichannel experience to consumers. Online merchants and payment providers need to adapt to the emergence of m-commerce and develop web and payment solutions optimized for smartphones and tablets. Enabling solutions such as quick checkout or digit wallets when consumers shop on their smart devices should help reduce friction during online shopping. This can be reduced further if online payment platforms leverage biometric solutions that are integrated into smart devices. With the large OEMs now offering more services than proximity-based wallets like Apple Pay, the frictionless experience will determine the winners in the payments space. The mainstream usage of direct carrier billing in physical retail enabled seamlessly with QR codes at points of sale is yet another example of this frictionless payment experience.  

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