“Fintech,” an admittedly fuzzy term, has attracted a gold rush of investment. There are 58 fintech unicorns that are backed by venture capital, worth a combined $214 billion, according to CB Insights. Investors are particularly frenzied in Asia and Latin America, while Africa recently got its first fintech unicorn.

It’s no secret there’s too much money chasing too few real opportunities, but the fear of missing out still outweighs the fear of losing money. “We’ve reached the peak,” said Matteo Concas, co-founder of Penta, a business banking startup. He was formerly head Italian operations for N26, a digital bank. “Bubble or no bubble, there is a lot of funding in fintech. There is a lot of potential as well,” he said.

Our survey of the of the top 10 most valuable fintechs provides insight into the bets that deep-pocketed investors are making around the world. Digital banks in developing markets are prominent, and the biggest unicorns are nearly all trying to make money in consumer markets. Lots of money has been poured into money-losing companies, and even more into profitable ones.

For this guide, we focused on private financial companies that were founded after 2000. We left out crypto companies like Coinbase (last valued at around $8 billion) because they have more in common with gambling than traditional financial services.

Do these high-flying fintech firms have real potential? Of course. Are there any faux-unicorns hiding among them? Almost certainly. Figuring out which is which is the billion-dollar question.

Table of contents

Valuations: Get rich quick | Consumer cash grab | Financial cafeterias | Developing market gold rush | It pays to be in payments | Next-generation brokers | Bank on it | The unicorn herders | What’s SoftBank up to? | Final thoughts

Valuations: Get rich quick

Many of the world’s most valuable fintechs rose to the top of the rankings in a short period of time. Stripe’s valuation increased by $13 billion in just eight months—an annualized return of more than 90%. Three others doubled their valuations (or more) between funding rounds: Klarna, a Swedish startup for shopping loans and payments, Brazil’s Nubank, and China’s Ant Financial. This is what the fear of missing out looks like:

Chime, a San Francisco-based digital bank, isn’t included above because its 350% valuation jump wouldn’t fit on the chart. Such rapid jumps suggest that valuations aren’t linked to fundamental metrics like profitability and revenue. The challenge for a lot of fintech founders is that sooner or later their “paper value” will have to reconcile with reality, says Tripp Shriner, a partner at Point72 Ventures, the venture arm of a hedge fund founded by Steven Cohen.

Some fintechs have already had a rough re-entry when sky-high valuations fell back to Earth. Peer-to-peer lenders soared in value during late-stage investment rounds, and “very soon faced the harsh reality of public markets,” Shriner says. Funding Circle, Lending Club, and OnDeck have all lost about three-quarters of their market value since their IPOs. At least two in the UK have gone into administration. Instead of replacing banks, several are now seeking to become banks to survive. Financial disruption is far from a sure thing.

Consumer cash grab

With only one exception, the highest-valued fintechs are, like their Big Tech cousins, targeting consumer markets. Paytm is mainly concentrating on India’s 1.2 billion consumers, while China’s Ant Financial (and its e-wallet partners) have more than a billion users around the globe. San Francisco-based Stripe, by way of its business customers, is targeting the $33 trillion global consumer payment market.

That makes Greensill, the lone company on the top-10 unicorn list that isn’t chasing consumers, conspicuous. The UK-based supply-chain finance company made the top 10 only because one investor—SoftBank—decided in May that Greensill was worth twice as much as it was in 2018, according to PitchBook data.

“I’ve been very, very, vocal about what I call ‘fakies’ or fake unicorns on paper, and can they stand up to scrutiny,” says Mark Tluszcz, chief executive of self-described contrarian investment firm Mangrove Capital Partners. “And the answer is that many unicorns can’t. The private markets are a very inefficient pricing mechanism. The judgement day will come and that is when you go public. Because then you go from one person setting your price to all of the sudden tons of analysts doing that.”

Financial cafeterias

As they look to scoop up consumers, a growing concern is that many startups are offering similar products with little differentiation. Debit cards, stock brokerage, high-yield savings accounts are becoming de rigueur among fintech unicorns, particularly in the US and Europe, as companies tack on new services to acquire customers and push further into consumers’ financial lives.

For some companies, like Ant Financial and WeBank, these services are revenue-generating products. For others, they are a means to acquire customers, essentially giving away foreign-exchange or brokerage services with no clear path to profitability. “If we presume there will be product parity and the same customer bases, what are they competing on?” asks Shriner of Point72 Ventures, who previously worked in JPMorgan’s strategic investment group.

Developing market gold rush

Three out of the five highest-valued fintech startups are based in emerging markets (four out of five if you also include Tencent-backed WeBank in China), where financial services for consumers are less developed. Bringing banking and payments to a vast population of mobile-phone wielding consumers worked for Ant Financial in China, and investors are hoping to repeat the trick in places like Latin America, Africa, and India:

It pays to be in payments

There are some services, like ride-hailing or peer-to-peer lending, where there are questions about the business model actually making money. Payments isn’t one of them. Card networks Visa and Mastercard charge a few basis points for each transaction and made more than $16 billion in profit last year. Ant Financial and Tencent’s WeChat Pay dominate payments in China, Paytm is hoping to do the same thing in India, and Stripe is looking to ride the global wave.

E-commerce makes up about 20% of digital transactions (the rest is made up of things like point-of-sale card transactions), and these payments are growing at around 20% a year, according to Bernstein research. “The tailwinds from e-commerce remains under-appreciated in our view, especially as new categories of spend continue to move online,” wrote Bernstein analysts earlier this year.

Valuations for all types of payment companies have skyrocketed. Not that long ago, the price-to-earnings ratios for Visa and Mastercard more closely resembled the valuations of traditional banks. They’ve since diverged sharply.

Next-generation brokers

Each generation of Americans has had a dominant stock brokerage that is native to their preferred mode of communication: Charles Schwab pioneered telephone brokerage, while Etrade rolled out online trading. Now, Robinhood is native to the smartphone.

Each step in the evolution of brokerage has made it easier to shop around for the best deal, putting pressure on fees. The Robinhood-induced war on brokerage commissions is part of the reason why Charles Schwab is in talks to acquire TD Ameritrade.

By one basic measure—number of customers versus valuation—Robinhood is beginning to look cheap relative to Etrade.

But as the war on fees intensifies, a question for the upstart is how quickly it can diversify its revenue. (Charles Schwab derives only around 10% of revenue from brokerage, while brokerage is the majority of revenue for Robinhood.) Right now it offers fee-free trading by making money on rebates (also known as payment for order flow), which is something Etrade and Charles Schwab also do. That practice is controversial and could come under pressure from watchdogs.

Robinhood is looking to grow, in part, by expanding geographically, and has opened a waiting list for UK customers. But retail stock and options trading is highly regulated in each country, which is why the business that tends to be fragmented along national lines. It’s not clear that the world is ready for a globalized stock broker.

Bank on it

Banking was invented in, by some accounts, around 2,000 BC. Curiously enough, all these millennia later, some of the most sought-after fintech upstarts are banks.

Three out of the top five most valuable financial startups are, or operate, banks in developing markets—Ant Financial’s MYbank, Tencent-backed WeBank, and Nubank of Brazil. These firms have the opportunity to grab large chunks of market share in big economies where there is no deeply entrenched incumbent bank or financial services provision is inefficient.

So-called challenger banks have raised more than $3 billion this year, according to CB insights. These digital upstarts raked in $1.3 billion in the third quarter alone, the most ever for a three-month period. Investors poured $400 million into Brazil’s Nubank in July, while Revolut in the UK is reportedly in discussions to raise $1.5 billion in a combination of debt and equity.

Public markets aren’t very bullish on large incumbent banks in the US and Europe, especially compared with their Big Tech counterparts. JPMorgan’s stock trades at a price-to-earnings ratio of about 13, which is about half of Google’s. This suggests that the more fintechs like Nubank move towards becoming regular old banks (financial manufacturing) instead of tech companies (financial distribution), the less investors may think they are worth in the long run.

Nonetheless, some challenger banks are already profitable, according to consultancy Fincog:

But others aren’t:

“You can question the high valuations for some of these players, especially given the large losses,” says Jeroen de Bel, founder of Fincog consulting. “If I look at the successful players, the thing they often have in common is market opportunity. Their core product is profitable.”

The unicorn herders

Many of the most valuable startups have a handful of big venture capital funds in common for late-stage rounds—investors like SoftBank, Tencent, Sequoia, T. Rowe Price, and Thrive Capital. This suggests that a small number of companies have, in some cases, the power to determine winners and losers.

In some cases, big investors are pouring cash into companies that compete with each other. In Latin America, for example, Tencent has invested in Nubank, N26 (which has plans to expand in Brazil), as well as Konfio in Mexico and Uala in Argentina, countries where Nubank is expanding its operations.

Asia in particular has “concentration risk,” as a few deep pocketed investors dominate parts of the region, according to Fitch Solutions. Funding rounds led by Ant Financial, WeChat Pay operator Tencent, SoftBank, and Sequoia are driving up valuations.

“There isn’t any ‘cross-boundary’ antitrust regulation that prevents one particular player from acquiring too much market share,” Kenny Liew, ICT analyst in Singapore for Fitch Solutions, wrote in an email. “This is also because the fintech sector isn’t regulated as tightly as the banking sector, so there isn’t much regulatory scrutiny concerning acquisitions, apart from the occasional geopolitical considerations.”

What’s SoftBank up to?

During SoftBank founder Masayoshi Son’s latest earnings call, the word “fail” came up 10 times. This follows a global spending spree by the company’s cash-rich venture funds.

The company is likely the leader in terms of volume of investments in global unicorns. SoftBank and its Vision Fund are the biggest investors in private European startups, having poured more than $4 billion into late-stage companies between 2015 and the third quarter of this year, according to a report by Stripe and Tech.eu. SoftBank also reportedly plans to invest $500 million in venture capital funds in Latin America, as part of $5 billion it has earmarked for the region.

As the company’s WeWork debacle drags on—SoftBank bailed out the real estate company after an aborted IPO, and is now facing the wrath of investors—it’s worth asking whether there any landmines tucked away in its fintech portfolio:

A few of investments stand out. SoftBank has put around $3 billion into Singaporean super app Grab, which has services for things like ride-hailing, food delivery, and payments. It sounds a lot like Ant Financial (Alibaba, which owns 33% of Ant, is an investor, while SoftBank is also an investor in Alibaba). Grab is seen as the Uber of Southeast Asia, and it burns up cash just like the US ride-hailing company.

Paytm is in a fight for its life against the likes of Walmart (which owns Phonepe) and Google Pay, which has forced the company to raise fresh capital for its marketing battle. The upstart used to be the frontrunner in Indian digital payments, but now it has to contend with deep-pocketed American giants. Facebook is also considering taking a crack at the country’s payments market. An expensive battle for marketshare is well underway.

San Francisco-based SoFi’s valuation has plateaued, as investor confidence in the peer-to-peer financing model fades. One way forward could be a banking charter, which would provide access to lower cost funding, but US regulators haven’t made that option available to fintechs.

Whereas some funding rounds for mega unicorns have almost a dozen investors, UK working capital company Greensill’s latest valuation is solely based on SoftBank money, according to PitchBook data. Greensill also received an additional $655 million from SoftBank in October through convertible debt.

Lemonade, a money-losing insurance startup in New York, postponed its IPO, according to a Business Insider report. Its founders include Shai Wininger, who also founded freelancer app Fiverr. Shares of Fiverr have declined since it went public this summer.

Final thoughts

Perhaps the most surprising thing about the most highly valued fintechs is how ordinary some of them are. They usually rely on software that’s hosted in the cloud, and their apps have whizzy interfaces. Otherwise, many of them act a lot like regular financial companies. They process payments, take deposits, make loans, and, in one case, provide brokerage for stock and options trading.

Most of these business models aren’t particularly new. Still, if public markets are any guide, a global leader in payments could worth triple-digit billions. A successful bank in a big economy could be worth double digit billions. But it took the incumbents in these categories decades or more to reach these heights, and most companies fizzle while trying to get there.

There are nuances, of course. Ant Financial is a financial conglomerate in China, the world’s biggest consumer market. It was an early mover in financial services in a country that had few of those services: It is a force in payments, insurance, wealth management, and it has invested heavily in payment companies and digital-wallet providers throughout Asia. In addition, it sells its technology to other financial companies, which could be a higher-margin business line. It’s less clear that digital banks will prove as successful in developed markets.

Another outlier that almost made the top 10—it was knocked out at the last minute when Chime’s valuation soared—is Credit Karma. The company offers free services like credit score information and tax preparation for consumers, and makes money from lenders who pay it for referrals. As it collects more and more user data, the company’s aim is to become a highly automated platform for financial advice.

Public markets have rewarded platforms in recent years. Across the economy, investors prefer distribution over manufacturing—think Gap vs. Amazon in retail or News Corp. vs. Google in news. The same thing is true in finance, with distributors like Visa outperforming banks like JPMorgan, and it may well apply to the fintech unicorns, too.

“We started to connect the ‘fin’ with the ‘tech,'” Nichole Mustard, co-founder of Credit Karma said at a conference in London this month. She points out that loan ads were available in magazines and newspapers, for example, before online price-comparison platforms sprung up. The offline system, however, was unable to make use of customer data and provide recommendations—a digital tap on the shoulder.

“You have all of these connections now that are happening through technology,” she said.

Seth Pierrepont, a partner at Accel Partners, admits that fintech has gotten “very frothy,” and it’s not just late-stage funding from the likes of SoftBank. Even seed rounds have gotten bloated with cash. Accel is one of the most prolific venture capital investors in fintech, according to PitchBook data, having been involved in more than 100 deals since 2009.

The firm is still bullish on things like like digital banks, salary-advance companies, and financiers for smaller businesses. Pierrepont doesn’t think cash will dry up anytime soon.

“Is there going to be a shortage of capital for these companies at high prices? My gut is not in the short term,” Pierrepont said. “Maybe in a couple of years people will stop believing in the dream.”

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