Are Neobanks Finally Finding Favor?
Plus: Tracking fintech's growth slowdown
Hello and welcome back to Fintech Prime Time, where we use the F-Prime Fintech Index to analyze public and private fintech markets.
Today, Abdul and David take a look back on fintech’s first six months of 2024. They also check in on neobanks, which are starting to find favor among public and late-stage investors.
Tracking the Growth Slowdown, and Checking In On Neobanks
By David Jegen and Abdul Abdirahman
Over the last couple of years, public fintech companies have grown at a much slower pace. The chart below tracks the annual revenue growth rate for companies in the F-Prime Fintech Index since 2020 and, as depicted, median revenue growth exceeded 40 percent the four quarters to June 2022 — but has now dropped to ~25 percent.
Hippo and Nubank were the only companies to exceed 50 percent LTM growth — a year earlier, five companies grew more than 50 percent annually. Forecasts for the next 12 months show continued slower growth of below 20 percent. This slowdown is relevant to all of us in the fintech community, and it’s worth asking how much is driven by macroeconomic forces affecting all publicly listed companies, and how much is unique to fintech?
Macroeconomic forces are definitely a factor. Historically, high interest rates, supply chain disruptions, and concerns about consumer strength have caused other indexes to see a decline in annual revenue growth. As an example, the blended revenue growth rate for the S&P 500 for Q4 2023 was 4 percent, which is lower than the five- and ten-year averages of 6.9 percent and 5 percent respectively, according to Factset.
Even more relevant is the fact that public investors have pressured all high-growth tech companies to focus on capital-efficient growth and, starting in 2022, you see the median growth rate in both the F-Prime Fintech Index and the BVP Cloud Index begin to fall. Operators have been making the hard decision on whether to prioritize growth or manage burn by spending less on customer acquisition, which has led to slower growth. Like the F-Prime Fintech Index, the BVP Cloud Index saw peak median growth in Q1 2022 at 34 percent and has subsequently dropped each quarter, plateauing around 20 percent.
Naturally, financial services is one of the more sensitive industries to interest rates. While fintech subsectors like payments and B2B SaaS are more resilient to rate hikes and others (like insurance and wealth management) can actually benefit, lending and proptech have been feeling the sting for some time now.
Across the proptech subsector, revenue growth was 60 percent in 2021. By 2023, proptech companies were on average shedding 17 percent of revenue year-on-year, with all companies except Redfin in the red. All proptech companies have experienced negative year-on-year growth thus far in 2024.
Lending is faring slightly better than proptech. While some lending companies are seeing revenue fall, others are merely experiencing a slowdown in revenue growth. The subsector’s average 2021 year-on-year revenue growth of 91 percent fell to -26 percent by 2023, though category leader Affirm still grew 20 percent last year. While revenue growth has slowed for Affirm, it has never gone negative. Lending as a whole is at -1.5 percent revenue growth thus far in 2024, but Affirm and LoanDepot have both grown revenue. In the latter’s case, LoanDepot credits its revenue growth to higher interest rates and its strategic shift to focus on serving first-time homebuyers.
Finally, it’s worth noting that all tracking indices are influenced by their specific construction and, in the case of the F-Prime Fintech Index, there has not been a single fintech IPO for more than two years, meaning the average growth has not been pulled up by new, high-growth public companies.
On balance, with the exception of lending and proptech, we see most fintech companies performing in-line with the broader tech landscape. Growth has slowed because public investors have demanded capital efficiency and executives are appropriately assessing a more unstable macro environment. However, our central convictions around fintech remain the same: the business models powering companies in the F-Prime Fintech Index are strong, and those companies have only captured a small share of financial services revenue to date. We firmly believe companies in the Index have significant growth potential as markets stabilize and macro conditions improve.
Are Public and Late-Stage Investors Coming Around on Neobanks?
Long-time readers will remember our investigation into neobanks last summer, a favorite category among consumers that had struggled to attract public and later-stage investment dollars in a non-zero interest rate environment. At the time, we noted that public investors were concerned with three factors in the neobank model:
Credit Cycle: A downturn in the economy or a rise in credit defaults could significantly affect neobank profitability
Customer Base: Neobanks’ younger customer base have lower spending capacity which raises concerns about their ability to grow ARPU, despite rolling out new products
Low absolute unit economics: Neobanks that earn low absolute dollars per customer require high growth and new customer acquisition to achieve profit scale. This means their growth model is constrained, especially in an environment where capital is expensive
At the time, we were specifically referring to Dave, which has since been removed from the F-Prime Fintech Index for failing to meet the criteria. But these concerns generally apply to the neobank subsector writ large.
However, there are signs that public and late-stage investors are coming around on neobanks, partially due more evidence that with time and scale, the neobanking model could work:
Nubank reported record revenue for Q1 this year — $2.7B in total revenue, netting $378.8M. The news sent the Brazilian neobank’s shares up more than eight percent. The stock is up ~60 percent year-to-date and has a market cap of ~$60B, surpassing its IPO and peak market cap in early 2022.
UK-based Monzo recently raised a $435M Series I at a $5B valuation, a step up from its 2021 valuation of $4.5B. However, it should be noted that Monzo has a full banking license, which allows it to capture higher interest revenue, whereas many US neobanks heavily rely on consumer card interchange revenue.
Fellow UK neobank Revolut reported revenues of $2.27B, turning a profit for the first time even though an official UK banking license still eludes the company. Tiger Global is reportedly in talks to lead a $500M investment in the company.
Chime, the leading US neobank, also announced it attained profitability in Q1 2024 after growing revenue 30 percent year-on-year to ~$1.3 billion. Chime also has a strong balance sheet with $900M in cash to make strategic acquisitions, such as its recent purchase of Salt Labs.
Challenger bank Moneylion reported record revenue ($121M), adjusted EBITDA ($23M) and GAAP net income ($7M) in Q1. The company has also now reached 15.5M customers.
Do you think neobanks have turned the corner? Let us know in the comments!
A Quick Look at Fintech in Q2
As you can see in the chart above, multiples for companies posting more than 40 percent year-on-year growth fell in Q2 from 4.7x to 3.0x. The higher multiple for companies growing between 20-40 percent is due in part to a decrease in the number of companies in that group, thanks to the overall growth slowdown detailed above. Several companies also transitioned from the higher growth segments to the “less than 20 percent growth” category over the last quarter.
Multiples also fell across all subsectors with the exception of B2B SaaS and wealth and asset management, often erasing the modest gains in multiples those subsectors made last quarter.
One last thing: This month marks exactly one year since Fintech Prime Time started life on Substack — thank you to everyone who has read our stories and reached out over the last 12 months. If you have questions or suggestions, drop them in the comments or reach out to fintechindex@fprimecapital.com.