In 2021, the fintech space was booming, with fintech-related companies delivering one of the most successful initial public offerings of all themes and the US hosting the most fintech IPOs, accounting for 58% of global fintech IPOs and 67% of total fintech IPO proceeds.
Six of the top 10 fintech IPOs, Nubank (NU), SoFi (SOFI), Paysafe (PSFE), Robinhood (HOOD), Affirm (AFRM), and Marqeta (MQ) were on US exchanges alongside heavy hitter Coinbase (COIN). I like several of them a lot.
Over the past few years, fintech IPOs have amounted to some hefty returns, with total IPO proceeds standing at $29.3 billion and Q2 2021 accounting for the highest number of fintech deals with a total of 16 TMT IPOs, bringing proceeds of $12.6 billion.
In fact, between 2018 and 2021, the number of fintech IPOs increased more than three times with IPO proceeds from fintech quadrupling… there were 56 fintech IPOs, with the space being lucrative for investors and generating an average return of 621%.
Trouble in Paradise
Up until recently, this had us looking forward to the possibility of 2022 being another landmark year for fintech IPOs. Unfortunately, that’s not how things seem to be playing out. And, as it turns out, one of the most volatile sectors has turned out to be technology and financial services.
Through February of this year, the overall IPO index reading stands at about 66, well below previous highs of more than 171, a double-digit percentage point decline in several stocks so far. The average return is looking poor, at just more than -27%. It’s looking like quite a few of the fintechs that went public during the pandemic have not lived up to the hype when it comes to returns, and the returns being generated are primarily from a handful of companies in the space that are doing well.
Overall, publicly traded fintech stocks have fallen by 40% since late October, with companies like Block (SQ) and PayPal (PYPL) off 60%. A few of the companies that have delivered in the last few years have been Upstart (UPST), up 281% since its debut, Futu Holdings, gaining 158% since starting to trade, Bill.com up more than 480%, and Doma Holdings, who’s earnings showed revenues up 17% to $138 million.
Are The Numbers Reliable?
A notable problem in the fintech space if fraud.
To illustrate, let’s look at Chime, a digital bank based in San Francisco that was initially positioned for a potential IPO at the beginning of 2022, but has now delayed its initial public offering until the second half of the year, if not longer. Chime had been targeting this month to go public at a valuation between $35 billion and $45 billion after their revenue reached nearly $1 billion in 2021.
While Chime has said that fraud issues have not played into their IPO timing, the company has been at the center of some serious headaches for customers and businesses. It has been reported that Budget, Enterprise, and Dollar would not accept Chime cards, or would only accept them for certain types of transactions at one point.
Avis, which owns the Budget and Payless car rental brands, reportedly blackballed Chime and some Marriott Courtyards, Holiday Inns, Extended Stay Americas, and La Quinta franchise locations have also reportedly instituted fintech card bans.
It also appears that fintechs are blocking each other in some cases. Robinhood, a free stock trading app with 22 million active users, has banned transfers from specific institutions, including LendingClub, First Century Bank, Green Dot, Metropolitan Commercial Bank, Lincoln Savings Bank, and PNC Bank, and online banks such as HMBradley have become weary after noting a significant rise in fraud coming from transfers from Chime and Cash App accounts.
We are definitely seeing an uptick in merchants limiting or blocking debit and credit cards being offered by Chime, Cash App, and other neobanks (banks that operate exclusively online).
Types of fraud we’re seeing in the space include “first-party fraud,” where customers rack up charges and then pull the money out of their accounts to pay those charges before the transaction settles, the illegal collection of unemployment insurance, customers disputing large numbers of legitimate charges, the purchasing of information on the dark web to obtain customer login credentials, and identity theft.
This could lead to distrust among customers and present a problem for some fintechs moving forward… digital bank brands could suffer since it’s possible consumers won’t want to rely on a banking service that isn’t accepted by other apps for money transfers. If bans between digital banks continue, it could impact all fintech startups, and the space could suffer since fewer fintechs means less innovation. This could also be bad news for the underbanked or niche populations that some of these fintechs are serving.
A Pause Is Required
While we had high hopes that the fintech space would deliver in 2022, those hopes may now be dashed, with some companies that looked promising now unlikely to IPO, pushing back their IPOs, or hovering only in the realm of possibility.
There were quite a few companies that at one time were reported to be looking at an IPO in 2022, but are now a question mark, such as Stripe, Plaid, Trustly, and WorldRemit. Although, there are still a few on the table, including Zopa, Shawbrook Bank, Klarna, Checkout.com, Revolut, and N26.