Disrupters

Did Fintech Lenders Really Need Their Own Valuation Metrics?

Fintech is a completely new domain in the world of the financial and investment banking. It is one of the fastest growing industries in the global market. The fintech industry is setting up the scope and new opportunities for the people and businessmen to launch and invest their money into the fintech business ventures. The business ventures of the fintech industry are growing very rapidly and are known to have recently entered the stock market. The fintech companies are now entering the IPOs and expanding their reach in the global economy.

The main factor that deals with the investment in the stocks of that particular company is the evaluation of the business venture or the company. Earlier, with the craze of the fintech industry, the fintech lenders were hyped up. But in the recent times, it has been observed that these fintech lenders are now being underrated because of the over dependence on the valuation metrics. Experts say that the valuation metrics that were used till now was either best suited for the technology based companies or the financial services based companies. But fintech has a combination of qualities that belongs to both of these fields which eventually raises the importance of a separate valuation metrics for the fintech lenders.

For the comparison of the fintech lenders, a standard is required which is lacking these days. The instances of poor comparisons can be seen in the year 2014 when the fintech companies like Lending Club and OnDeck Capital went public. The valuation metrics that was used for these companies was more like valuing a SaaS company. These fintech lenders were overvalued by comparing them with the SaaS companies as these online lenders possess a risk factor associated with the capital loss, which is not the case in the SaaS companies. The comparison of these fintech lenders with the revenue multiplying companies was one of the examples of poor comparison. In the present times, instead of the revenue, these fintech lenders are now compared to the Price-To-Book ratio of the stocks in the investment banking sectors. This is also proven to be a poor method of comparison.

The fintech lenders control the distribution of their products by the technologies of the fintech, the workforce, the physical infrastructure of the financial institutions. This is the reason why the fintech lenders need a completely different approach for their assessment. The fintech experts suggest the Gross Profit Multiple as one of the best valuation metrics for these fintech lenders. The Gross Profit calculates the net investment income from the total capital along with the losses. In this valuation metrics, the risk of the capital losses are included which is different than the valuation for the SaaS companies. The other aspects like the relative growth rates, actual multiples, risks, margins, etc. of the fintech lenders is solely dependent on the individual online lenders. The gross profit multiple lays a base for separate valuation method of the fintech lenders.

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