Significance of Financial Technology

Financial technology also known as fintech is the ‘it’ word these days, a variety of products of the fintech are involved in our daily lives. But the question is what exactly is this fintech? Basically, fintech or financial technology is referred to an organization that is working in the sector of finances and empower technology in order to make financial services less complicated, automated and increasing the overall performance so that the end user or customer is satisfied. The sub-classifications of fintech include payments, investments, insurance, lending and borrowing, and so much more.

According to CrunchBase, a survey was conducted and it was found that globally there are more than 12000 fintechs that are being operated as of January 2019. The funding was being collected since 2013 and more than 100 billion US dollars have been gathered. The United States is considered to be the most active country in fintech when it comes to startups, India and the United Kingdom follow the United States respectively.

Now let’s have a look at the conventional valuation models that are used all the while valuing companies. Basically, there are five different approaches, namely:

  1. Discounted Cash Flow also is known as DCF
  2. Multiple of revenue or book value
  3. PE or price to earnings ratio comparable
  4. Replacement cost
  5. Competitive or strategic value

Out of the five, the multiple revenue or book value approach the most widely used one in order to reach the company valuation, however, to reach the ranged estimates different approaches may be used before making a final decision on choosing a number that would match all the requirements of the company, this includes the competitive, strategic, and return requirements. One thing to be kept in mind is that the approaches mentioned above are specifically for the businesses that are stable and mature, which means that these businesses have an established business with predictable cash flows.

Although these approaches are useful and effective for mature businesses, however, when it comes to the fintech organizations that are just starting up these approaches are quite difficult to implement. Since the startups do not have predictable cash flows also, in some cases there are even negative cash flows. This usually happens due to lack of assets and the rapidly changing flow of businesses.

Now let’s focus on the basic understanding of how you can value fintech components. The first thing you should understand is the differences between traditional businesses and early businesses. The main differences include the nature of the problem that can be solved, the ability to rapidly expand business on a geographical scale without any physical presence, and most importantly the low cost since there is no need for physical infrastructure everywhere you expand your business.

Based on the targeted market the fintech valuation is considered an art, although as the business progresses it turns into more of science since it turns from visions and dreams to data based intent on cash flows and markets.