How to WeValue fintech startup

Levon
Levon
Nov 3 · 2 min read

Startup news are all about fintech. The most fascinating one: Axios reported that a little-known fintech startup recently raised money at a valuation north of $5 billion. It is a debit card SaaS company in the interchange wonderland.

Interchange is a fee charged to a merchant to process a card payment. It is generally within 2 and 3% of the purchase. So when you pay $5 for your cappuccino, your local coffee shop gets only $5*-3% = $4.85, 15 cents is the interchange. There are lots of intermediaries here — merchant acquirers (whoever provided the card reader terminal), merchant’s bank, payment network (like Visa), cardholder’s bank, others (e.g. a SaaS company). So everybody has a share from those 15 cents. And any intermediary would be lucky to get 1%, meaning 5 cents of it.

Let’s try to do a simple valuation following prof. Damodaran’s advice. According to the Federal Reserve’s payments study total value of debit card payments in 2017 was $2.88 trillion. Rounding to $3 trillion. Let’s assume a card startup is so good, it can capture 1% of it. It means the total addressable market is worth $30 billion. Then, assuming it is such an impressive company that it grabs 10% of the market, i.e. it crashes old banks and all neobanks and takes their customers — $3 billion in annual revenues. Now, let’s say brilliant engineers figure out a code that it doesn’t cost them much to acquire customers and process transaction (they also get underpaid), they somehow avoid regulators and any associated regulatory costs and as a result they get 20% net margin, i.e. $600 million in annual profits.

Now let’s come up with its cost of capital — 15–17% (r) for a great startup. Let’s assume the market size (payments volume) continues to grow at 5.5–6.8% (g) annually. We get a present value of $600 million/(r-g) = $5–6 billion.

So $5–6 billion is the peak for such company. Who is investing? SB&MBS?

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade