Predictably Unpredictable: Navigating the Volatility of Transactional Revenues

By: Medha Agarwal and Emily Man

As the pandemic accelerated the need for digital financial tools and services, many fintech companies saw incredible revenue and user growth in 2020 and 2021 leading to stock surges and high flying IPOs. For the first time, we now have a critical mass of public fintechs that we can look across to draw some early conclusions on business profiles and public market performance. Specifically, in the last two years, companies like Coinbase ($COIN), Robinhood ($HOOD), Affirm ($AFRM), Nubank ($NU), SoFi ($SOFI), Upstart ($UPST), and Marqeta ($MQ) have joined the public fintech ranks among companies like Block ($SQ) and Paypal ($PYPL).

Following a recent earnings with a handful of reportings that surprised the street we dug into the business models and recent performance of these public fintechs. 3 common threads stood out:

  1. Revenue is primarily transactional, meaning revenue is derived from taking a cut of money flowing through a company’s respective pipes (e.g. a crypto trade for Coinbase, loan interest for Affirm, interchange for Marqeta, Block, Paypal). This likely means revenue is one-time from individual transactions, in contrast to software license revenue which is fixed and recurring
  2. These transactions or payment flows are largely driven by discretionary factors (crypto and stock trading, BNPL spend, ecommerce and in store purchases, etc). As a result, revenues are tied directly to asset prices and underlying consumer behavior and therefore can fluctuate widely
  3. All of these companies benefited from acceleration of key macro themes as a result of the pandemic (ecommerce, retail trading, and/or adoption of digital financial products). As a result, many companies effectively borrowed against the future and posted record results in their first couple of quarters as public companies by pulling forward out-year growth

Why does this matter?

These characteristics may seem obvious but are still important to emphasize because of how they impact predictability of revenue growth. Given the nature of these business models, it is important to acknowledge that for fintechs revenue and growth will fluctuate. Coinbase and Robinhood are the best examples of this. Both have had huge swings in their revenue recently as equity and crypto valuations have corrected dramatically leading to lower user activity and revenue per user. As the data below shows, historical revenues for public fintechs often see similar volatility from quarter to quarter. Interestingly, every company in this set has had at least one quarter of revenue decline in the last 9 quarters. While the most recent quarters have certainly had dramatic exogenous factors, there will always be unpredictable factors that affect revenue to various degrees.

Source: Pitchbook

This is particularly striking when compared against similarly high-growth public SaaS companies below. Note that there’s a variety of business models and go-to-market motions among the companies in this set — some like Hubspot and Monday have relatively standard monthly or annual subscription revenues while infrastructure companies like Snowflake and MongoDB can have variability from usage and / or consumption. Even so, growth is notably less volatile for this set of companies — a stark contrast to the wild swings in the fintech companies exhibit.

Source: Pitchbook

What does this mean for fintech companies?

Fintech founders often say that their revenue is not technically SaaS because while it is not recurring, it is SaaS-like because it behaves predictably month over month in aggregate across their customer base at scale. While there are certainly elements of truth to this, the data above shows that this is likely to be the exception and not the rule.

We’re seeing some early examples of what happens when growth and revenue see a dramatic shock in today’s environment. Companies end up needing to make tough decisions to manage through the turbulence as Coinbase did by instituting a hiring freeze and rescinding offers and Better’s fresh round of layoffs. However, this characteristic has existed far before the recent changes in the market. Fintech revenues have always been volatile, regardless of scale, and they will continue to be so. Just because revenue accelerates dramatically for two quarters does not mean this is the new normal. The reality is that revenue can change much more quickly than a company is able to adjust opex. If revenues end up falling short of expectations, burn can be significantly higher than planned.

This not only has real business implications such as a meaningful reduction in expected runway vs. plan, but also can have long standing morale implications if the organization has to dramatically adjust to a new reality with pared down costs, layoffs, and reprioritizations. Therefore the implications of being overly aggressive on spend outlasts the quarter or two that are modeled incorrectly and take much longer to recover from than one would think. Acknowledging the reality that revenue can be volatile and changes can happen suddenly will allow companies to plan accordingly in advance of the next swing.

Against a backdrop of constant uncertainty, growing fintech companies have to be more careful managing cash and burn than SaaS companies that sign annual contracts and therefore have more time to analyze leading indicators of churn and and correct gradually. We have found that it’s critical to develop a clear framework to look at ROI (and therefore a clear hierarchy of importance). This allows for ruthless prioritization in circumstances like today where hard decisions need to be made.

Of course, for any business, it is important to plan for the long term. But there are definitely valuable insights to be gleaned from the revenue volatility and rapid course corrections that some public fintechs have had to make over the last few weeks. The impact of these rapid pendulum swings will have long lasting implications that go far beyond the upcoming couple of quarters. It is impossible to know today if these drastic changes were too little, too much or just enough.

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Medha Agarwal

Currently @RedpointVC. Former founder, ops, and consultant. Proud @HarvardHBS @Harvard @Radlwtcrew @Bainalerts alum. Recovering New Yorker, currently loving SF