Are We Seeing the End of the “Growth at All Cost” Era?

2022 was a trying year for the global fintech industry, which faced several macroeconomic challenges, including rising inflation, skyrocketing costs of living and a looming global recession.

Venture capital (VC) funding plummeted 46% last year compared with 2021 as investors pumped the brakes on investments and focused instead on managing their current portfolios.

The public market, meanwhile, endured a severe correction, with emerging, publicly traded fintech companies recording a staggering 72% decline in 2022, according to the F-Prime Fintech Index.

A new analysis by Flagship Advisory Partners, a strategy consultancy and mergers and acquisitions (M&A) advisory firm focused on payments and fintech, found that, in these times of market turmoil, mature fintech companies are outmatching their higher-growth peers through balanced cost management, recording stronger profit performances in 2022 that generally exceeded expectations.

Established fintech companies, especially those in the payment sector, have natural economies of scale and gain cost advantages when production increases and becomes efficient, the report says. An analysis of a sample comprising 50 publicly listed fintech companies with mostly market values in excess of US$1 billion, revealed just that.

The Diversified Processors cohort, for example, which is made of fintech companies that provide merchant payments, card processing and other services such as Fiserv, ACI Worldwide and FIS, generated 13% gross profit growth between 2021 and 2022. At the same time, these companies were able to keep operational expenditure growth at a moderate level of 6%.

The figures mean that, for this cohort, gross profit growth surpassed expense growth by twofold, showcasing high efficiency and net income growth. These companies were able to achieve a weighted-average earnings growth of 32% during the period, the report says.

Fintech companies that performed well and which are highlighted in the report include Nexi, a payment technology company from Italy, which posted a 7% growth in revenue from 2021 to 2022 and a moderate 1% growth in expenditure; and Sea, a consumer Internet company from Singapore, which delivered 33% in gross profit growth and 22% in expense growth.

The end of the ‘growth at all costs’ era

On the other hand, many high-growth fintech companies, especially those operating in digital commerce and embedded finance, performed poorly in 2021 and 2022.

These companies “lost their way on expense management” by making growth investment the singular imperative in 2022, and will need to adapt to investor sentiment by putting a greater focus on profitability as well as expense efficiency this year, the report says.

The report highlights the Product Specialists, Software-as-a-Service (SaaS) Fintech and Business-to-Business (B2B) Fintech cohorts, in particular, which all recorded negative expense efficiency gains.

Within these cohorts, only six of the 22 companies delivered operating efficiency improvements where gross profit growth outpaced operational expense growth in 2022. These cohorts, unsurprisingly, realized the highest revenue increases, which stood at 34% for Product Specialists, 28% for SaaS Fintech companies, and 27% for B2B Fintech companies, but

These metrics indicate that high-growth fintech companies tend to “over-invest” but fail to achieve significant efficiency gains, leading to significant imbalanced outcomes in 2022, the report says.

For example, Shopify, an e-commerce company, delivered only 11% in gross profit growth but saw its operating expenses soar by 62%. Similarly, Affirm, a buy now pay later (BNPL) firm, recorded 19% in gross profit growth but expenses rose by a staggering 77%.

The analysis, which also looked at people costs, found a big difference between US high-growth fintech companies and their European and global peers. US companies are spending huge amounts of money on their employees, as evidenced by Square, Visa and Mastercard topping the studied sample with an average people cost of US$284,000, US$188,000 and US$176,000, respectively, in 2022.

In comparison, Nexi spent an average of EUR 71,000 (US$75,000) per employee in 2022, and Wise, which is headquartered in the UK and which spent an estimated GBP 50,000 (US$60,000) per person in 2022.

Against this backdrop, Flagship Advisory Partners advises US fintech companies to focus on establishing substantive offshoring or nearshoring operations to take advantage of reduced labor costs and subsequently, increased profits.

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