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IFGS 2022: Are fintechs biting off more than they can chew?

IFGS 2022: Are fintechs biting off more than they can chew?

Molten VC’s and moderator for IFGS session ‘Chomping on the (uni)(deca)corn’ Bindi Karia set the scene with some striking statistics around investment in the UK and global fintech industry.

Given the dramatic growth and eye watering funding rounds raised during 2021, Karia explains that it is easy to see why the sector is demanding such attention and power at present but asks the panel to fill in the detail around what is going on across various stages of investment.

Kevin Chong, co-founder, Outward VC, notes that there is significant capital in the system, and a lot of this comes down to the fact that international investors see the value of UK fintech. “We’re also seeing a lot of non-conventional VCs such as hedge funds which are now taking a liking to private companies enter the scene. The gap between seed and later stage investment is going to get deeper and wider.”

Regarding early-stage investment, Yvonne Bajela, founding member and investor, Impact X Capital, furthers that there has a significant change in dynamic in the industry, largely because there has never been more capital in the UK. “The cost of hiring is very competitive which is contributing to the size of rounds – if firms want the best of talent, we are seeing up to 40% premiums being paid.” On top of this, this has also become a function of fund strategy which is targeting downstream investments to lock in pre-emptive rights.

Alix Brunet Nazir, vice president, Citi Ventures, echoes the observations, stating that rounds have greatly increased in size compared to what they used to be, with due diligence processes happening much faster so that VCs can get their allocations finalised quickly.

Elaborating on the point, Tom Bussey, investment director, HSBC, observes that the behaviours that are driving these large rounds and high valuations are very interesting. Specifically, Bussey points to situations where a fintech happens to raise two or three times what it initially intended to raise in a single round, and then proceed to try and pack “10 new projects into the next three years.” He states that there are lots of conversations going on in boardrooms at present where boards are warning about “biting off more than we can chew.”

On top of this, Bussey has been approached by three founders in the past few months who argue that they need to be able to attract talent who are only interested in working for companies with high valuations, this is driving a new hiring dynamic.

Noting the huge disconnect between public and private markets, Karia askes Tim Levene, CEO, Augmentum Fintech plc, to expand on whether these differences are likely to continue.

Levene states that “we have seen an extraordinary 2021, we’re not going to see the same level of investment in 2022. There are a lot of cross over funds looking to come into the private markets […] but what we ultimately saw were unsustainable multiples of revenue being paid both in private markets and fuelled in the public markets. There were a number of direct fintech listings and SPACs, and if you look at the data today, almost every single SPAC from 2021 is now trading below the S&P 500. It’s been a disastrous experiment and I think they will really pull back and look hard at how they can optimise that structure going forward.”

Christine Hockley, managing director, Funds of British Patient Capital, states: “the question is, given all the capital that has come into the market since 2021, it’s interesting to know where it came from an institutional point of view. The success of the UK fintech industry is brought in a lot of US and a lot of Middle Eastern capital, but as the economy starts to change, it would be interesting to understand where the UK capital going to come in to the industry in the future.”

Key observations from IFGS attendees and speakers:

Speaking to Finextra ahead of IFGS, Prakash Pattni, managing director financial services digital transformation, EMEA, IBM stated:

“The direction of travel for many financial institutions is towards a more agile, digital business model that’s more in tune with the preferences of today’s tech-savvy consumers […] For banks to adopt the digital business model many of them are working towards, they need to be able to easily consume innovation from the booming fintech community. The trouble is that those fintechs need to meet the same strict regulatory requirements as banks in order for the banks to work with them. This innovation bottleneck is partly what is driving the trend we’re seeing towards platforms that are custom designed to meet the financial services industry’s complex security and compliance needs.”

Speaking to Finextra ahead of IFGS, Marieke Flament, CEO of the non-profit NEAR Foundation, stated: "Fintech innovation has been instrumental in laying down the foundation for Web3 - and now we are at the cusp of a revolution where Web3's will radically transform financial services in a way that was not possible before. Web 3.0 is going to offer new methods of working, learning, transacting and interacting with others. Thanks to the use of blockchain, there will be no central authority or central points of control. Web 3.0 will be open, trustless and permissionless.

“However, like any radical shift, there will be challenges, and among them is finding and nurturing talent to grow Web3.0. We are seeing a lot of fintech talent moving into our space - talent which is hungry for new challenges and opportunities and that is exciting for us. But we also need to do more to maintain a steady pipeline of talent. This is why we are working on strategic partnerships - such as the recent agreement with Orange DAO - the crypto collective created by Y Combinator(“YC”) alumni backing web3 startups.”

In conversation with Finextra ahead of IFGS, Jane Loginova from payments solution provider BPC noted: "The defining idea behind contextual commerce is giving your customers the ability to buy something within the flow of another activity that they’re engaged in. It’s presenting a product or service right at the moment when the buyer might naturally want it, without making them go through a separate commerce or payment experience," she explained. "When it comes to payments, we previously had few options available: PayPal or manually entering credit or debit card information. Today, easy payments are critical and buyers look for a secure checkout experience. The transaction must occur in the background, relying on stored payment methods rather than making a buyer key in card details.

She added "Getting contextual in commerce has pushed payment players to avail contextual payments and these took many forms with one trending: the Buy it Now button – a shortcut from purchase to payment, a little button that contains tokenized information, preferences set by the customer. The buttons are navigating through e-commerce platforms and now entering the world of social media."

"As people are embracing social platforms not only for connection, but for commerce, payment tools are also expanding for merchants to accept payments at the click of a button from Facebook, Instagram or Tiktok. A great example is WeChat, the Chinese platform has gone beyond being just a social app to allow seamless payments. Innovations will expand out of growth markets, and the western world is learning from and will pick up these innovations."

Brad Goodall, CEO of payments firm Banked told Finextra: “IFGS is an important event for fintech. It allows us to meet with potential partners and collaborators to scale up and grow our business. At Banked we are at a turning point. We recently attracted a major round of funding from Bank of America - a partner we met through Innovate Finance channels. This partnership will support our plans for rapid US expansion and beyond. Harnessing the power of open data, the investment is helping Banked to deepen our product capabilities for e-commerce and enabling payments beyond checkout. Without a doubt, we are uniquely positioned to be a market leader in the global payments industry with our world-class payments platform and consumer-centric approach. But without a strong ecosystem behind us this would not be possible."

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