If the money is the ultimate commodity, how can fintechs – which sell money, move money, or sell money loss insurance – create products that stay differentiated and create lasting value over time?
And why are so many software companies, which already offer very differentiated offerings and serve huge markets, are preparing to offer financial services integrated into their products?
An attractive new category of hybrid business is emerging at the intersection of software and financial services, creating a buzz in the investment and entrepreneurship communities, as we discussed in our virtual conference “Fintech: The Endgame” and the accompanying report this week.
These specialist companies – in some cases software companies that also process payments and hold funds on behalf of their clients, and in others, finance-focused companies that incorporate workflows and features that more reminiscent of software companies – combine some of the best attributes of the two. categories.
From software, they design for strong user engagement linked to useful and intuitive products that promote long-term retention. From financial data, they rely on the ability to generate income indexed to the growth of a client’s business.
Fintech is poised to revolutionize financial services, both reinventing existing products and creating new business models as financial services become more prevalent in other industries.
The powerful combination of these two models rapidly increases the value of the public and private market, as investors give these “super” companies premium valuations – in the public sphere, nearly double the median multiple of pure software companies, according to one. Battery analysis.
The almost perfect example of this phenomenon is Shopify, the company that has made a name for itself selling software to help business owners start and run online stores. Although it reached a notable scale with this original SaaS product, Shopify today derives twice as much revenue from payments as from software by allowing these business owners to accept credit card payments and by acting as its own payment processor.
The combination of a software solution pegged to the growth of e-commerce, combined with a profitable payment flow growing even faster than its software revenue, allowed investors to grant Shopify a 31x multiple on its forward revenue, according to CapIQ data as of May 26.
How should we rate these fintech companies, anyway?
Before even talking about how investors should value these hybrid companies, it’s worth pointing out that in both the private and public markets, fintechs have been notoriously difficult to value, sparking controversy and debate within the investment community. .