Growth, Profitability and Capital Efficiency in the UK fintech sector
In fintech, as for many other sector, the market pullback ushers in a paradigm shift from the age of growth-at-all-costs to the age of efficiency.
Balancing the trade-offs between growth and profitability in order to drive efficient growth is now top of mind for many fintech leaders.
An analysis of the top 32 UK fintech companies (the benchmark) show that in 2022 some fintech players have been outstanding in growing both the top line and the profitability.
In 2022 the average fintech company grew revenues by 140% vs. 2021, with the highest growth rates for Allica Bank (517%), Tandem Bank (287%) and Starling (141%). The best performers are all lenders for the SME sector, and have benefitted enormously from the rates increase of the Bank of England.
If we consider the other side of the table, probability, things are different, with just 8 of the 32 fintech companies analysed showing a positive EBITDA.
However, we know that growth is often expensive in a very regulated and competitive sector like fintech, so the best metric to analyse the sector is probably the Efficiency Score, calculated as Annual Revenues Growth Rate plus/minus the EBITDA Margin of the different companies.
15 companies have a positive Efficiency Score (growth rate +/- EBITDA Margin), almost doubling the companies that have positive EBITDA Margin.
Companies like Monzo, Atom and Tandem Bank are still loss making, but have reached in 2022 a growth rate of the revenues higher than their negative EBITDA Margin.
For example, Monzo has a positive Efficiency Score of 34%, thanks to a growth rate of 88% and a negative EBITDA Margin of 54%.
The message is that the fintech sector invested heavily for growth in the last years, but some signs of capital efficiency are emerging in the sector and in addition to the positive effect of the recent interest rate increase, its possible to assume that the sector.