Hello fellow monkeys. A question to fintech people out there. How do you value a BNPL company where majority of the revenue is interest income and fees charged to merchants? Loans are originated from own balance sheet.
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Bump, curious myself
Based on the most helpful WSO content, valuing a late-stage BNPL (Buy Now, Pay Later) company where the majority of revenue comes from interest income and merchant fees would likely involve methodologies similar to those used for financial institutions or fintech companies with lending models. Here are some key considerations:
Balance Sheet Focus: Since loans are originated from the company's own balance sheet, the valuation would heavily depend on the quality of the loan book, interest income, and fee structures. Metrics like Net Interest Margin (NIM) and non-interest income ratios would be critical.
Earnings Analysis: As with banks, a significant portion of earnings would come from interest income. Non-interest income (merchant fees) would also play a role. Stability and growth of these income streams are important.
Credit Risk Assessment: Evaluate the credit quality of the loan portfolio. Default rates, loss provisions, and underwriting standards will impact the valuation.
Comparable Companies: Identify public fintech or BNPL companies with similar business models. Spread their capital structures and calculate leverage ratios based on Adjusted EBITDA or other relevant metrics.
Cash Flow Analysis: While traditional DCF models may not be as applicable due to the nature of the business, you could focus on cash flow generation from operations, factoring in loan origination, repayments, and fee income.
Growth Potential: Assess the scalability of the business model, customer acquisition costs, and the ability to expand merchant partnerships. Metrics like LTV/CAC (Lifetime Value to Customer Acquisition Cost) and payback periods are useful here.
Regulatory Environment: Consider the impact of regulations on interest rates, fees, and lending practices, as these can significantly affect profitability.
Market Position: Evaluate the company's competitive position in the BNPL space, including market share, customer retention, and product differentiation.
For a more detailed approach, you might also look into how Lending Club or similar fintech companies are valued, as discussed in WSO threads like "Thoughts on Goldman vs Lending Club." Their models often emphasize origination volume, credit quality, and upfront revenue generation.
Sources: Working in FIG (Financial Institutions Group) - An Overview., A Banking Primer, Working in FIG (Financial Institutions Group) - An Overview., SaaS LBO, Specialty Lending (GS/TPG) - Any insights?
Bump, anyone?
Doubt it's late stage if originating from the B/S
There is no other way for a BNPL company to finance loans unless it takes customers' deposit. This one doesn't. Therefore, it funds loans by relying on merchants (the fees charged to merchants) and debt providers (the interest income).
https://www.ft.com/content/2aaee222-f396-4155-b90d-67d2a371a78c
Late stage BNPLs offload most of the debt from their B/S by setting up ABS SPVs and forward flow agreements.
If profitable, Pre-Tax Income and Tangible Book Value multiples. If not profitable, can substitute EV/rev multiples
Thanks for response! I know I can use EV/rev or EV/GP but what about intrinsic valuation? Brokers seem to be using DCF to value BNPL stocks, I can't figure out how exactly they arrive at cash flows though given there is interest expense in cost of sales.
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