21st June 2023
The UK payments industry, encompassing merchant acquiring, payment gateways, digital wallets, and payment service providers (PSPs), is a rapidly growing sector. The payment industry has experienced impressive growth in recent years, driven by technological advancements, shifting consumer preferences, and the rapid rise of e-commerce. As a result, the global payments market is expected to reach an astounding $8.94 trillion by 2027 (Grand View Research, 2020). Transaction volumes reached £97.1 billion in 2020, with an anticipated CAGR of 8.2% through 2025 (UK Finance, 2021).
However, a contraction was witnessed in the fintech landscape in 2023, with a 12% drop in global deal volume, compared to the previous year (Fintech Global, 2023). Nonetheless, the sector’s growth and innovation potential remains strong. Amidst heightened competition, accurate financial reporting and robust analysis emerged as the decisive differentiator for fintech firms.
Significance of Accuracy
In the dynamic world of fintech, trust and transparency form the bedrock of lasting success. This is especially true when it comes to financial reporting. While the rules of finance and accounting might be complex and ever-changing, the essence of financial reporting remains consistent: to provide a clear, accurate, and transparent picture of a company’s financial health and performance.
Today, more than ever, this transparency is not just desirable, but demanded by stakeholders – investors, clients, regulatory bodies, and the public. Let’s delve into why financial reporting is a strategic necessity in this evolving landscape. By prioritising and leveraging accurate financial reporting and in-depth financial analysis, PSPs can enhance their attractiveness to investors. These practices not only ensure compliance but also serve as strategic tools to showcase the company’s financial health, resilience, and growth potential.
Key financial metrics
- Investment Valuation: The cornerstone of financial reporting is the balance sheet, which provides a snapshot of the company’s assets, liabilities, and equity at a specific point in time. This snapshot allows investors to evaluate a company’s net asset value (NAV), the total value of its assets minus liabilities. A rising NAV over time may indicate that the company is growing and may be an attractive investment.
- Financial Performance: The income statement, another fundamental component of financial reporting, details a company’s revenues, costs, and profits. Gross margin and net margin, derived from the income statement, are crucial indicators of a company’s profitability and efficiency. High margins indicate that a company is effective at converting sales into profits, which can attract investors looking for profitable businesses.
- Going Concern Assessment: The going concern principle assumes that a business will continue to operate in the foreseeable future. This principle can be impacted by significant uncertainties, such as financial difficulties or regulatory issues, which need to be disclosed in the financial statements. Transparent disclosure about going concern issues helps build investor confidence as it shows the company’s management is proactive in identifying and communicating potential risks.
- Cash Flow Analysis: The statement of cash flows shows a company’s cash inflows and outflows over a given period. It’s split into operating, investing, and financing activities. Positive cash flow from operating activities is often seen as a good sign by investors because it means the company is generating cash from its primary business operations.
- Leveraging Financial Analysis: Fintech firms can use financial analysis to track their progress, identify areas for improvement, and make better business decisions. Key metrics like return on investment (ROI), return on equity (ROE), and return on assets (ROA) are all derived from financial statements and can demonstrate a company’s efficiency at using its capital to generate profits. Regularly presenting this analysis to potential investors can be a powerful way to demonstrate financial acumen and showcase the company’s potential. This transparency can encourage investors to engage, building relationships and fostering confidence in the company’s management.
- Navigating Regulatory Changes: In a highly regulated sector like fintech, regulatory compliance is critical. Companies that effectively navigate regulatory changes, adapt their operations accordingly, and clearly communicate these changes in their financial reports can reassure investors about their regulatory risk management.
The fintech sector is constantly innovating. Financial reporting must keep pace with these changes. It’s a strategic tool that speaks volumes about a company’s health, ambition, and ability to navigate change. This section unpacks the profound implications of sound financial reporting and analysis. From underlining the strategic imperatives to exploring the benefits of outsourcing financial analysis, we delve into the roles of transparent financial disclosures in shaping investor perception and trust.
Sound Financial Reporting: A Strategic Imperative – Accurate financial reporting is more than just statutory compliance or historical record-keeping. It’s a strategic communication tool that showcases a company’s operational efficiency, fiscal responsibility, and strategic direction. Monzo, the UK-based digital bank, exemplifies this principle. They emphasised the enhancements to their financial reporting systems in their 2020 annual report, improving their operational decisions and bolstering stakeholder confidence (Monzo Annual Report, 2020).
The Advantages of Outsourced Financial Analysis – A thorough financial analysis grants a detailed view of a company’s financial performance, operational efficiency, and prospects. The insights drawn from such analysis play a critical role in management decisions and stakeholder communications. Outsourcing this vital function can unlock numerous benefits, including access to expert resources, fresh perspectives, and uncovering hidden opportunities. A case in point is Stripe. The fintech giant outsourced part of their financial analysis functions, allowing them to concentrate on core activities while gaining financial insights from external experts. This decision played a role in Stripe’s ongoing success, including a $600 million funding round in 2020 (Financial Times, 2020).
Wirecard: A Cautionary Tale – The necessity of maintaining high standards of financial reporting and transparency is evident in the case of Wirecard, a German fintech company. Following an accounting scandal that revealed $1.9 billion missing from their accounts, Wirecard filed for bankruptcy in 2020. The scandal eroded investor confidence, and the company’s shares plummeted over 80% in mere days (Bloomberg, 2020).
Building Investor Confidence – Transparent and accurate financial reporting and analysis significantly influence investment decisions. Revolut is one company that has prioritised improving their financial reporting and analysis processes. They highlighted the importance of financial reporting and analysis in their annual report, leading to operational decisions that communicated effectively with investors. This focus on financial transparency contributed to Revolut’s successful $500 million Series D funding round in 2020 (Business Insider, 2020).
Navigating Regulatory Changes – The regulatory landscape for fintech companies is in a state of flux. In this changing environment, fintech firms must demonstrate compliance commitment through transparent, accurate, and timely financial reporting. TransferWise (now known as Wise) is an example of such a commitment. Their proactive compliance with regulatory changes and their transparency in financial reporting played a role in their successful $292 million secondary share sale in 2019 (TechCrunch, 2019).
In an ever-evolving financial technology landscape, robust financial reporting and analysis is no longer a choice, but a necessity. Beyond mere compliance, these practices form the backbone of credible, trustworthy business operations and can be leveraged to attract investors. To adapt, thrive and maintain investor confidence in this rapidly changing market, PSPs must prioritise their financial reporting processes, ensuring they accurately reflect their financial performance and potential. Partnering with experts in the field, can provide an edge in navigating these complexities, leaving you free to focus on your core business.
As your fintech firm navigates the intricacies of the financial and regulatory landscape, haysmacintyre offers expert guidance and support. By delegating your financials to us, you tap into our specialist industry knowledge and deep understanding of the unique challenges and opportunities that fintech companies face.