Fintech is rarely out of the headlines for long, and the sector recently received a significant boost following the initial public offering (IPO) of CAB Payments (CABP) this month, which saw it achieve a market capitalisation of £850mn. Its first days of trading were not fully positive however, with a drop from the opening price of 335p to 310p.
With both the UK and EU finalising new fintech regulations, the sector should be sitting on the threshold of significant growth in secure markets, but the reality is much more complex.
The fintech payments sector looks, overall, to be in a better operating position than during the frenzy of 2020. There is no doubt that the way consumers are using “banking as a service” apps are changing the landscape of simple transactions. UK Finance reports that challenger fintech apps have taken a 22 per cent market share of the UK payments market since 2009. However, from an investor’s point of view, it is still uncertain whether the results we have seen so far justify valuations in the sector, which in many cases are now on a firm downward trend in any case.
Valuations under pressure
One obvious consequence of a sector that was born in a bubble is that it will struggle to maintain a residual fair value in the face of changing circumstances. The ongoing saga of Revolut’s banking licence (or lack thereof) is taking a toll on what the market thinks the company might be worth. For unlisted companies such as Revolut, the surest way of measuring this is to track how listed fund managers are valuing the stakes they hold. In Revolut’s case, Molten Ventures (GROW), formerly Draper Esprit, revealed in its last set of full-year results that it had cut the fair value of its stake by £40mn at £54mn. The manager originally invested £7.1mn in Revolut back in 2018.
The cut follows a high-profile downgrade from Schroders Capital Global Innovation Trust (INOV) – the company, which has invested in Revolut throughout its funding rounds, slashed the valuation of its stake by nearly half to end the year at £5.4mn. Overall, the write-downs imply an overall cut to the value of Revolut from an estimated £33bn at the height of the tech frenzy in 2021 to around £17bn now. NatWest (NWG), by comparison, has a market value of £22bn.
The cause of the jitters around Revolut, which is regulated by the Bank of Lithuania in its European operations, are the delays the firm has encountered in getting its UK banking licence approved. According to reports, the Bank of England’s prudential and conduct regulators plan to reject the licence application after questions were raised about the company’s balance sheet by its auditor, BDO, in the annual report for 2021.
The auditor questioned the “completeness and occurrence” of revenues totalling £476mn for the year. The figure represents a large chunk of the £636mn of total reported revenue for 2021.
A word to the Wise
Revolut’s problems leave Estonia-based Wise (WISE) as the standout banking-as-a-service company. The company recently reported its best set of full-year results since listing two years ago, with profits tripling to £147mn. However, there was a sense that Wise flattered to deceive as a good proportion of that performance came from interest it earned on customer deposits, which has been boosted by higher interest rates.
Analysts at Liberum Capital point out that there is a mismatch between net interest margin expectations for banks, which hover at a price/earnings ratio of six times forward earnings, compared with a long-term average of 10, and, on the other hand, the implied 40 times value ascribed to Wise’s net interest margin. Liberum also took issue with the fact that the company’s definition of adjusted cash profits excludes share-based payments, which has a distorting effect on peer comparisons.
The broker also noted that, while Wise is still the cheapest transfer specialist in the general market in terms of the cost of its services, the gap over the past year has started to narrow, which calls into question how wide the moat around the company’s earnings will continue to be as new competitors come to market and existing banks up their game by offering foreign currency current accounts, as Lloyds (LLOY) does for its savers, as a way of enticing tourists and digital nomads back to the fold.
The entry of CAB Payments should provide a handy new data point for investors in the sector. Its 2022 revenue (net of interest expense) was £109.9mn, with a pre-tax profit of £43.5mn – this sales figure was double the previous year, and profits were more than four times those seen in 2021. The industry has shown growth is easy. Maintaining profits will be more impressive.
