FinTech Has Arrived

Last week, I had the pleasure of joining Peel Hunt 's first #FinTech Conference which was perfectly timed during UK FinTech Week #UKFW.

Peel Hunt's CEO Steven Fine , reminded us of the significant investment they have made in the sector including the apppointment of dedicated sector analyst Gautam Pillai , CFA who brings 13 years experience from Goldman Sachs to Peel Hunt which has historically had a good reputation in small & mid-cap UK investment banking. As a tech guy who's still navigating my way around FinTech, it's been great getting to know Gautam. His 174 page initation note on the UK FinTech landscape: FinTech is the new Internet (Video: link) has had 800+ downloads by 100+ institutions across the UK, US, Canada and Europe.

Steven reminded us of the opportunity: 2,500 FinTechs in the UK which even ChatGPT has recognised, interpreting the sector as a "rapidly evolving field"! FinTech is embedded in our daily lives from using our Monzo Bank account via ApplePay to get around London to getting a mortgage, consolidating our pensions, sponsoring a friend running the London Marathon, you name it! Beyond #NeoBanks and #InsureTechs there's #RegTech and #Infrastructure, enabled by the UK's forward thinking on #OpenBanking. Yet, we're still getting started especially if you look at market penetration rates. Listed #FinTech companies have been sold off heavily globally but Steven said that with dsyfunction and dislocation comes action; current share prices represent a very attractive entry point into the sector in you believe in its potential.

But #FinTech remains a nascent sector with relatively few listed companies at least compared to more traditional areas of Tech like software. The vast majority remain private which is where listed venture capital firms (a bit of a UK/European phenomenon) like Augmentum Fintech can help.

Augmentum Fintech co-founder & CEO, Tim Levene , could not have been more positive is his outlook. Everytime I see Tim - whether its at Portage and BREEGA 's Christmas drinks or Lord Mayor Sir Nicholas Lyons ' receptions, he always brightens up my day. He's on the boards Zopa Bank , Tide , iwoca and Monese and understands both public and private markets well. If you've bought a jalepeno & cheese sandwich with your juice from Crussh - Fit Food & Juice Bars , Tim might have even had a helping hand in creating that winning combo. He "lives and breathes" FinTech and not just in the #UK but across #Europe and #Israel also.

Tim reminded us that the UK remains the centre of gravity as far as FinTech is concerned with $11bn of financing in 2022 and ~13% of the global market. Unsurpringly, investors often ask for his views on where we are in the cycle and how much is real vs. hype. We agree on the fact that in FinTech, the opportunity is "very much ahead of us" and some of the winners have yet to be built. The thing that reasonated with me the most is just how relatively established areas such as #Payments are still massively underpenetrated - Payments - 6.3%, #Broking 4.8%, #Lending 1%.

And you know what, we're at a point in the cycle where FinTechs no longer need to be 10x better than incumbent solutions, 2.5x will do. As awareness increases, sales cycles are shortening adding to the secular tailwinds lifting FinTech's sail.

I started my career in mergers and acquisitions which is arguably driven by two forces: greed and fear. Incumbents are paying attention to the threat posed by FinTech and where they can't compete or partner or aquahire, they're forced to make acquisitions, sometimes to justify their own analysts' growth expectations and to out-compete their competitors. But M&A activity could be much greater than it has been in the past; Tim pointed out that Financial Services firms had invested $1tn globally, 70% into legacy infrastructure. As trade buyers get smarter, deal activity will migrate from life-support to rip & replace.

Historically, founders short of funding were often forced to sell out or give away control prematurely. If they really believe in their business, they can now stay independent for longer, potentially raising some capital with a platform like Floww , and at least plan to IPO which Reid Hoffman will tell you is a far more natural way to build a business than to build for a sale (see: M&A or IPO? | Greylock). This is the path that UK FinTechs such as PensionBee UK (Pre-IPO LFY sales of ￡6.3m), LendInvest (LSE: LINV) and Fonix took. As the world's most international stock exchange, at the London Stock Exchange , we also pride ourselves on being a good second home for the likes of Kaspi.kz and EUROWAG too. We also recognise that in this nascent sector, some companies may not remain public for very long but being listed facilitates consolidation and recycles capital to flow into new ideas. Part of the reason that fund managers LOVE the payments space is because they've made money on Datacash, PaySafe, Safecharge, Earthport, WorldPay and now potentially Network International also.

Augmentum have been particularly fortunate with NatWest Group acquiring NatWest Cushon and Aberdeen buying interactive investor - its great to see UK-listed firms making buyers lists more frequently and jobs remaining in the UK.

The level of funding for FinTech swelled from $45bn in 2019 and $45bn in 2020 to $141bn in 2021 and $88bn in 2022. This did unfortunately include a lot of tourist money where some LPs and alternative funds felt VC was not scaling adequately and opted to invest directly. While Series A round sizes broadly remained the same, this certainly impacted the later-stages and have unsuprisingly seen the biggest drop offs.

The good news however: In 2022, there was $583bn of dry powder - $286bn raised in 2021 and $254bn raised in 2022. Some of this may get clawed back by LPs but its still a very healthy level and its already being deployed initially into existing portfolio companies with new investments beginning to pick up pace; albeit at a more sensible rate with normalised due-diligence periods, and importantly, at more sensible 'new-normal' valuations.

In comparison to major indices, one can argue that FinTech has been heavily oversold, also reflected in Augmentum Fintech 's discount to NAV.

Next up was Jon Prideaux and Daniel Holden :

Jon Prideaux , CEO of Boku , a company that many of you will be familiar with that found its way from the portfolios of Benchmark , Index Ventures , Khosla Ventures , New Enterprise Associates (NEA) , DAG Ventures , HV Capital and Andreessen Horowitz to AIM. Founded in 2009, Boku started life in direct carrier billing (DCB), enabling individuals to purchase digital content via their phones. While this had grown into a nice cash cow business, Boku recognised the huge opportunity in enabling Tier 1 merchants like Spotify and Netflix (as well as 苹果 , 索尼 , 微软 , 谷歌 , 腾讯 , Meta and now 亚马逊 ) to grow in emerging and frontier markets through local payment methods and today is "the largest payment services provider (PSP) that doesn't touch cards". Jon - a former Visa executive, sees card processors take 1/3 of ecommerce volume today down from about 75% in 2010. I saw this first hand in India in November 2022, where there's about 900m adults, 750m have bank accounts but there are only 62m credit cards. Wallets and account-to-account (A2A) payments are facilitated through the universal payment interface (UPI) intrastructure that enables the likes of Paytm . In 2022, Boku had over $60m of revenue and over $20m of EBITDA.

Daniel Holden , Founder & CEO of Trust Payments . A bootstapped open-source full-stack payment provider that's grown to ￡100m of net revenue and is helping merchants with omni-channel commerce, from POS and acquiring through eCommerce storefront creation, mobile payments, fraud detection inventory management, loyalty and other value-added services. His solutions (particularly loyalty) have helped big name UK retailers such as Matalan survive the pandemic. By seeing data across commerce, Daniel's team have also been able to build things like a 'probability of harm' algorithm to help problem gamblers, a topic I know Gillian Wilmot CBE is passionate about.

Daniel reminded us that 20 years ago, banks didn't like payments and sold off assets like Worldpay and Nets but were waking up to the missed opportunity. He and Jon also recognised that the game has shifted - UK SME was tough and US market dynamics are very different but importantly in 2023, digital sovereinty matters and more governments want autonomy and not to be beholden to infrastructure that US administrations can turn off easily.

An interesting takeaway for friends looking at the subscription economy - Jon pointed out that winners (e.g. Apple Music, Spotify) still continue to take most of their markets and there are few prizes for being the #3 or #4 platform in any given geography.

It would have been remiss to have has a #FinTech panel without touching on #neobanking and who better than the CFOs Steve Hulme Zopa Bank and James Davies Monzo Bank . Despite they're different areas of focus, there was a lot of similarities in the messaging from both Zopa and Monzo. Both banks are in a healthy state in 2023 and continuing to innovate and launch new products while continuing to grow and this year, grow profitably. I don't even need to ask when they will IPO, there's always an investor in the room who beats me to it. Soon hopefully!

I missed the start of Ian Strafford-Taylor 's fireside chat but am hoping Gautam Pillai , CFA will send me a link. Like some other people in the room, I am not as familiar with Equals as I should be. Equals is a 16 year-old B2B cross-border payments provider with 10,000 customers, and about ￡70m of revenue and ￡12m of EBITDA. Equals enables its customers to have one true global account with a single IBAN that works for multiple currencies. Ian touched on the problems with SWIFT (e.g. errors/mismatching) and how moving from MT to XML (expected 2025) may alleviate some of these problems. He also felt that DeFi and blockchain had woken up regulators to the fact that if states don't invest in upgrading payments infrastructure, they may get left behind. A fascinating discussion touching on the difficulty of preventing fraud (and I guess bank runs too) when money can be moved in large sums and in real-time and the difficulty of implementing monetary policy in the modern hyperconnected world.

When asked about whether Equals was undervalued, Ian reminded the audience that while it takes years to build trust, it can be lost quickly. The company had a profits warning in 2019 and while it had delivered/beaten expectations ever since, rebuilding trust takes time. I wish more executives where as pragmatic and patient as Ian. One news agency popped up on my Twitter feed yesterdat suggesting that profit warnings had peaked this quarter but after 11 (maybe soon to be 12 rate rises), that's only to be expected and I hope fundmanagers and retail investors take a longer term vs. short-term view when looking at their investments.

Next up was Magdalena Bartos , group CFO of EUROWAG . This business first crossed by radar when Morgan Seigler TA Associates invested. It started life in 1995 when Czech entrepreneur Martin Vohánka saw an opportunity to deliver fuel to transport companies. Like many vertical businesses, Martin saw an opportunity to solve all of the other mission-critical services that truckers need like facilitating toll payments, providing track & trace / navigation, etc. Commercial transportation is the lifeblood of Europe and when it goes wrong, 特易购公司 run out of tomatoes as we all recently witnessed. Magda pointed out that transportation is ~90% SME dominated (average fleet of 7 vehicles) and involves about 30 administrative tasks per journey which is the burden that EUROWAG tries to solve replacing tasks historically executed on paper, spreadsheets and mobiles. Gautam highlighted that while embedded finance has the potential to increase a SaaS business's revenue by 2-5x, Eurowag had a similar opportunity in layering increased software capabilities around its robust FinTech offering.

Advika Jalan hosted the next panel and joined Peel Hunt recently from Goldman Sachs too. Compliance is a mature market but ￡29bn is spent on anti-money landering solutions annually because the "bad guys don't stand still". Imam Hoque , co-founder of Quantexa talked about joining up data points to form a single view of bad actors which he admitted sounds trivial but many have tried and failed. Quantexa applies rules and AI to help large institutions tackle complex AML across FX, trade finance, equities and other markets. Unlike legacy solutions which help businesses review threats periodically, Quantexa looks for changes in behaviour a bit like Darktrace . With cloud-based datasets of billions of transactions across multiple years, financial institutions are also now using Quantexa to help them understand their customers better to drive cross-sales and upsales. Quantexa's been in a fortunate position in #RegTech which saw a 60% increase in funding in 2022 vs. FinTech which was down ~30%. Its Series E was executed at the same multiple as their Series D almost 2 years ago which is a very good place to be in 2023.

Also on the panel was Lev Bass co-founder of transaction monitoring platform Huntli.io , a business I wasn't previously familiar with.

We couldn't be at Peel Hunt without their being a question from the audience as to whether these businesses competed with AIM-quoted identity leader GBG Plc . The fact that they didn't goes to show that like so many areas of software, just how vast the #regtech market is!

The last panel, 'Is embedded finance the next big thing' was chaired by Stuart N. who many investors will remember from Boku . He hosted Mike Chambers Chairman of Answer Pay , Peter Keenan , Founder & CEO of APEXX Global (I had met Peter when he was at Vocalink, a Mastercard company ) and Nick Reid of BankiFi .

Answer Pay are trying to restore trust in eCommerce and tackling payment fraud by removing SMS and email in the process.

APEXX Global sits between merchants and acquiring banks and enables merchants including Ryanair - Europe's Favourite Airline to switch to different payment providers more easier.

BankiFi is helping banks mitigate the risk of being disintermediated from transactions.

Thank you to Peel Hunt and all of the panelists. Please keep this type of content and events coming, I'm sure many investors will find it helpful as I have done.

Source: Peel Hunt FinTech Conference, 20th April 2023