Issue #10: Why Payments Companies Are Hot Right Now, Marqeta Raises $150m And VCs Weigh In On Which Companies Will Thrive Post-Lockdown
👋 Hi, FR peeps. I hope you’ve all had a safe start to the week.
Let’s kick this issue off by answering one of the most hotly debated questions in the fintech industry… to capitalise or not to capitalise.
Thank you for clearing up the confusion AP👍
💳 🔥 Why Payments Companies Are Hot Right Now
Funding activity in the payments sector went on an absolute tear last week. Marqeta announced a monster $150m raise at a ~2.5x valuation uplift to their previous round, Vesta (a card not present fraud prevention company) announced a $125m ‘growth round’/acquisition and Shift4 announced they’d filed to go public on the NYSE.
This upward trend isn’t exactly a new one. In fact, we’ve also seen a wave of M&A activity in the sector over the last 12 months. The most prominent being the merger of World Pay and FIS last year, which was also the biggest M&A deal in fintech land for 2019.
Last year, the payments sector dominated the overall M&A transactions table with $127.4b in acquisitions clocked up. Payments sector M&A also took up 8 of the top 10 fintech deals done in 2019.
So what’s going on?
Part of the answer is that consolidation is how the industry works. You only need to look at the history of Fiserv to see that M&A is a core part of how they’ve built their $17b empire. However, the other part of the story is the exponential rise of fintech and the impact that it’s having on the velocity of payments.
Take, for example, Square’s Cash App. What started life as a side project, is growing at a pace that will likely result in it hitting $1b in annualised revenue in Q2 of this year. For comparison, Square’s core PoS product took twice as long to go from $100m to $1b.
This increase in the scale of fintech startups, combined with the ever-rising demand for digital payments (which has only been accelerated by COVID-19) and the growth of embedded fintech, has created fertile ground for new payments players - which in turn has lured investors looking to back the next Adyen.
There is also a sometimes under-discussed regional angle to this. Specifically, in many parts of the world, there are localised solutions that have a high degree of penetration and sit alongside the major payment schemes. Take, for example, African payments unicorn Interswitch that started life as a transaction switching and electronic payments processing company but moved further upstream into kiosks. Eventually, they were able to start their own African based card network, Verve. These types of companies have become hot property and haven’t escaped the attention of the schemes. According to reports, Visa invested $200m last year into Interswitch to give it exposure to the growing African market.
With more room to grow for the industry, 2020 promises to be another headline year for payments companies. Watch out for more consolidation and new entrants as the pie continues to grow on the back of expanding demand for new ways for people to swipe their cards.
💰 Notable Funding Announcements
Globally fintech financing experienced another solid week, with 29 funding announcements totaling $655m.
🤓 My Take: For those who haven’t heard of Marqeta, they’re an issuer processor and power the card issuance for several big-name startups, including Instacart, Doordash, Square and Kabbage.
After the Galileo acquisition by SoFi earlier this year, Marqeta was high on the list of companies I thought would get gobbled up by another player looking to acquire a modern card issuer. I’m sure a few have tried, but it seems they’re finding it easy to get money in the market - and at a significant valuation. In a different macroclimate, this might have been one of the hottest fintech IPOs of 2020.
🤓 My Take: Like most challenger banks Starling also raised what can only be assumed to be a buffer round from their existing investors. The round was unsurprising, but the data they released shed a little more light on their business banking division.
According to the press release:
Starling now has… 155,000 business accounts, since launching its banking app in May 2017… Starling is the fastest-growing bank for small and medium-sized enterprises (SMEs) in Europe and now holds a 2.6% share of the UK’s SME banking market. It has almost £500 million of SME lending on its balance sheet, with further commitments raising the total to almost £1 billion.
🤓 My Take: This raise has gone slightly under the radar this week. By way of background, Vesta is best known for its fully guaranteed card not present payment processing product and broader real-time decision platform used for transaction monitoring. Their core market is the telecommunications industry, where they serve customers like AT&T, T-Mobile, and Vodafone.
Deals like this are always worth paying attention to, as they highlight how deep the payments space is and how even small corners of the sector can produce sizeable companies.
📈 Don’t forget to check out Radar, an open database of Australia's fintech ecosystem. You can find it here → 📡 SideFund Radar
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📰 Articles Worth Reading
Warning, this actually reads like a puff piece for HSBC and Citi. Regardless, it highlights what I’m hearing from people working at incumbent banks - they’re all scrambling to ‘go digital’.
The change in the working environment has made FSIs realise that PDFs, faxes, and branches just don’t work in the current context and won’t be what many expect when we all go back to the ‘new normal’.
This has resulted in the acceleration of many digital transformation projects. I’ve actually had a few startups mention to me that this has moved their conversations with incumbents along by months. Let's hope this continues post-lockdown.
⚠️ This is a highly recommended piece.
One of the most underrated advancements in fintech over the last decade has been the build-out of the plumbing you need to stand up a fintech product. However, what this has led to is a litany of integrations that need to be done (and therefore managed) for nearly every function a startup has. For example, if you’re a Challenger Bank for your KYC/AML checks, you’ll likely be using several vendors in the event you have one fall down, or you might have a more sophisticated orchestration mechanism to avoid false negatives. The same will likely apply for your payment processing and so forth, and so on. Standing up all these integrations and maintaining them is a sizable line item on most startup P&Ls.
In the article, Ayo notes that what we’re starting to see the emergence of ‘Segment for X’ in financial services - a single API that allows you to access many vendors. For example, Frankie Finacial (#ProudInvestor) does this for KYC/AML but adds on an orchestration layer to allow for a sophisticated decisioning - e.g., cascading KYC/AML. This means you don’t need to do multiple integrations to do your check but can make one API call instead.
The article does a great job of pointing out areas where the ‘Segment for x’ analogy could apply (scroll to the bottom of the article to see them).
As an investor, I always love reading other investor takes on what’s hot. In articles like this one, most investors play things safe and call out all the usual consensus views. No need to be a heretic when other investors might read it.
To be fair, this piece does have some interesting takes on emergent areas that lockdown has created an opportunity around. Obviously, I’m drawn to the infrastructure plays, and there are some great call-outs on that front in this piece.
🥶 From Cold Storage
Building consumer-facing financial services products has a tone of unique quirks. This is an excellent piece from a former Credit Karma PM turned VC about some of the unique challenges building a product in the sector poses and ways to think about overcoming these challenges.
Well worth a read if you’re involved in building products at a fintech startup.