The golden age of financial technology (fintech) is upon us. The pandemic has created a dynamic shift in the way consumers and businesses behave on a daily basis, making them heavily reliant on the enhancement of technology.
Currently, three fintech companies – Square, Shopify and PayPal – are all worth over $100 billion. Coinbase, Stripe and Adyen are not far behind. More recently, we have seen several fintech companies go public. In the US, 2020 saw the highest number of companies going public, and it is also the first time in US history that companies have made $100 billion through initial public offerings (IPOs).
However, there has been some uncertainty regarding how to value these companies in order for them to go public due to fintech being relatively new to IPOs compared to other enterprise software. Additionally, Fintech employs a variety of business models, which means some are transactional and others are working on hybrid business models.
Fintech has a variety of options to choose from when going public. They can choose to take the traditional IPO route and get a direct listing (one of the most common ways) or merge with a special purpose acquisition company (SPAC).
What is an IPO and a SPAC?
An initial public offering is the process that businesses undergo to offer parts of their private corporation, known as shares, to the public in a new stock issuance. Offering the public an opportunity to buy shares into the business allows the company to raise funds from public investors.
The transition from private to public is a very significant moment for companies and their private investors, as the initial investments will likely include share premiums while allowing public investors to participate in offerings.
A special purpose acquisition company (SPAC) is a company set up by investors. The sole purpose of a SPAC is to raise capital through an IPO in order to acquire another company in the long run. A SPAC has no commercial operations, so it does not offer any services or products. At large, it is only asset-based, with money typically raised from its own IPO.
In most cases, a SPAC is created or even sponsored by a body of institutional investors or personnel from private equity or hedge funds. Once a SPAC IPO raises money, the funds go into an interest-bearing trust account. The funds are held there until the founder of the SPAC finds a suitable private company looking to go public.
Fintech IPOs in 2021
Business behavior was heavily dictated by the Covid-19 pandemic in 2020. As companies move toward recovery, activity in IPOs are swelling, making the outlook for 2021 more buoyant. A number of key trends and industry insights from regional to consumer levels have set the perspective for the backdrop of IPOs in 2021. The events of the past few months – with lockdowns easing – have shaped market activity and will continue to do so.
This year’s surge in IPOs is due to the record-setting amount of IPOs in 2020. Three fintech candidates are set to take 2021 IPOs by storm. They are Robinhood, AvidXchange and Chime. But there are a number of trends driving the potential for 2021 to become a signature year for fintech.
Covid has accelerated the adoption of new technology. For example, contactless payments took off in 2020 as cash was not being accepted by many retailers, with some people making their first-ever contactless payments during the pandemic. This trend could continue long into 2021, and this could be just the beginning of the changes to come. Consumers are now interested in convenience and safety rather than exposure to unnecessary solutions.
Another trend driving fintech growth is the inclusion of those who have limited or no access to banks and financial services across the globe. According to The World Bank Group’s Global Findex database, around 1.7 billion adults had no traditional bank account in 2017. With the help of the fintech community, banks and governing agencies will be able to include more people in the economy by providing access to these resources, potentially increasing the capital pool.
And lastly, with a wealth of education now available regarding the dramatic effects of the pandemic on climate change, consumers are now more aware of their positions in saving the planet. A study found that 92% of customers think their banks should actively contribute in some way to help preserve the planet, and 87% believe that eco-friendly banking should include eco-friendly payment cards.
Taking into consideration the effects that the pandemic has had on fintech – including fintech’s unexpected explosive growth and its alignment with the trends and needs of today’s customers – it’s no wonder that 2021 is becoming the year for booming fintech IPOs.