Fintech: Temenos drops $2.4B in market value after short-seller finds accounting problems

Hi Fintech Futurists —?

Today’s agenda below.

1. BANKING: Hindenburg Research takes a short position on Temenos AG, alleging multiple accounting irregularities.
2. LONG TAKE: Can the $35B mega-merger of Capital One and Discover succeed? (link here)
3. PODCAST CONVERSATION: How AI is generating and digitizing documentation across financial services, with Arteria AI CEO Shelby Austin (link here)
4. CURATED UPDATES: Paytech, Neobanks, Lending, Digital Investing

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Digital Investment & Banking Short Takes

Banking: Tumultuous Times for Temenos

Temenos AG, a Swiss core banking vendor, faces an uncertain future following a report by Hindenburg Research disclosing its short position in the company and alleging multiple accounting irregularities, questionable business practices, and failed product launches. While Temenos has countered the allegations as hearsay based on "factual inaccuracies and analytical errors," it has done little to comfort investors, with the stock price dropping as much as ~30% since the report and, in the process, erasing nearly $2.4B in market value.

Why did one report weigh so heavily on investor sentiment? First, it helps to understand who issued the report. Hindenburg Research is a known name. They specialize in forensic financial research, take active short positions in the companies they report on, are thorough in their research, and, most importantly, have a track record of uncovering falsehoods. Second, the report itself. While we won't summarize it all here, highlights (or lowlights, depending on whether you're a Temenos shareholder) include allegations of:

• Round Tripping: Artificial transactions involving simultaneous buying and selling of an asset to increase revenue. In Temenos' case, selling licenses while simultaneously investing the same amount in the company buying the licenses (see Enron);
• Aggressive Revenue Recognition Policies: Pulling forward and backdating of contracts to hit targets and manipulate earnings (see Computer Associates);

• Capitalization and Classification of R&D: taking what should be expenses on the income statement and instead classifying them as assets, leading to an artificially inflated bottom line (see Worldcom);

• Failed Implementations, Vaporware Products, and Non-existent Features: Selling features and functionality without ever building it (see, sadly, many SaaS companies)

Although the first three issues mentioned are significant, they primarily concern accounting practices, while the latter directly questions the quality of Temenos' product suite. Temenos specializes in core banking software, essential for managing a bank's daily operations such as transactions, account management, and customer relations. Many banks still use outdated software with rigid, monolithic structures that are challenging to scale, expensive to maintain, and difficult to integrate with new technologies, all hindering digital transformation.

Given these challenges, banks have tried upgrading their core systems to stay competitive. The core banking software market, expected to grow from $14.5 billion in 2023 to an anticipated $47.4 billion by 2030, reflects this trend. These new "modern cores" are built with integration in mind and are designed to be modular, composable, and scalable. They leverage cloud computing, APIs, and microservices architecture to enable seamless integration with various financial products, third parties and facilitate offerings like Banking as a Service (BaaS). Such products are trying to enter a highly closed oligopoly of Fiserv, FIS, and Jack Henry, and compete on performance and product quality.

And, while modernizing core systems is undoubtedly complex, it is an area where Temenos and its software claim to excel. Yet, Hindenburg's report paints a different picture — according to Hindenburg Research, clients and former employees of Temenos express significant dissatisfaction, citing unmet promises, costly and time-consuming integrations, and in some instances, outright failures in launching projects. All of this brings into question the fundamental value of Temenos’ technology offering.

At the moment, the situation remains fluid. Temenos has stated that, while strongly disagreeing with the report, they take its allegations seriously and are engaging external auditors for a thorough review. Meanwhile, some investors are seizing this moment as a buying opportunity, all while Temenos continues to announce new partnerships. We will all have to stay tuned to see how this one plays out — the last thing Fintech needs is another Worldcom.

?? Related Coverage ??

• Long Take: FDIC consent order vs. $3B banking-as-a-service champion Cross River Bank

Blueprint Deep Dive

Long Take: Can the $35B mega-merger of Capital One and Discover succeed?

In this article, we discuss Capital One's proposed acquisition of Discover for $35 billion. We explore how such mega deals allow us to understand industry economics, revealing that growth often plateaus as companies mature and face increased competition — with a move towards consolidation as companies seek new growth avenues in adjacent markets.

Capital One, with a market cap of around $50 billion and annual net revenues of $37 billion, is a credit card disruptor, while Discover, valued at $31 billion, offers a complementary digital banking and payment services portfolio. The merger promises significant potential for growth and market repositioning, despite the challenges and skepticism surrounding the integration of such large-scale operations.

?? Read Long Take

???Podcast Conversation: How AI is generating and digitizing documentation across financial services, with Arteria AI CEO Shelby Austin

In this conversation, we chat with Shelby Austin - CEO and co-founder of Arteria AI. Prior to this, Shelby was a Global AI Council member with the World Economic Forum, and before that, a partner at Davies Ward Phillips & Vineberg LLP. Shelby has also been Managing Partner of Growth & Investments and Omnia AI at Deloitte Canada.

A well-respected business leader, Shelby has been recognized for her work in driving significant growth through innovation and technology. Arteria AI was named one of Canada’s Hot 50 companies by Profit Magazine and Shelby, one of Canada’s Most Powerful Women: Top 100 from WXN.

?? Listen to Podcast

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Curated Updates

Here are the rest of the updates hitting our radar.

Paytech

• ? Lloyds forms trade digitalisation partnership with WaveBL - Finextra
• EU Makes Instant Payments the Law of the Land - PYMNTS
• Eliminating junk fees and bringing transparency to international remittances - Fintech Nexus

Neobanks

• ? Finnish Neobank Saldo Launches Operations in Sweden - Finance Magnates
• PolicyStreet Partners with Neobank Vircle to Introduce Embedded Insurance Coverage for Children in Malaysia - Crowdfund Insider

Lending

• Bank economists guardedly optimistic on business lending - American Banker
• Chinese Banks Slash a Key Lending Rate as Economy Falters - Wall Street Journal

Digital Investing

• ? Fintech Simetrik Secures US$55m in Series B Funding - FinTech Magazine
• General Atlantic leads $50M investment in Colombia’s fintech Bold - Fintech Nexus

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Read our Disclaimer here — this newsletter does not provide investment advice.

Contributors: Lex, Laurence, Matt, Farhad, Daniel, Danny, Michiel, Michael, Bo