Fintech Grows Up: Charting the Changes in the Sector

By Dan Perlin
Published October 19, 2022 | 22 min listen

Following RBC Capital Markets’ seventh annual Fintech conference, Dan Perlin, Managing Director of Research in Payments, Processing, and IT Services tells the Industries in Motion podcast why industry experts see crypto as the next great opportunity, FX as an evolving concern and how M&A is changing the landscape.

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In New York City, around 40 public and private companies, including experts from Visa and Mastercard leadership, attended RBC Capital Markets Fintech Conference 2022. There’s no doubt that the fintech landscape has changed significantly in recent years, as economic issues cut the opportunities for disruption and a potential global recession requires careful strategic thinking.


Embracing opportunities in crypto

In this fast-evolving atmosphere, many companies are embracing crypto as an opportunity, driver of change and competitive necessity in the year ahead.

Key speakers from both Visa and Mastercard said it was still early in the development cycle for the crypto payments ecosystem and it will remain a prominent theme in the near term. And this holds true despite the recent volatility the market is seeing today, according to Cuy Sheffield, Vice President and Head of Crypto at Visa.

Companies are now creating fiat on-ramps – a service that allows for the exchange of fiat currencies for cryptocurrencies – for consumers in the everyday spend category, and enabling that to be facilitated across their existing and partner networks. At the same time, very large cross-border payment opportunities are beginning to take shape, albeit with key regulatory and interoperability hurdles in play.

Visa and Mastercard have advisory services in place, and are working with their banking partners to manage new types of consumer demands.

“Not only are they facilitating the transaction itself in these on-ramps, but they're also acting as a lead consultant to their 14,000+ financial institutions that are in their network.”

- Dan Perlin, Fintech Analyst, RBC Capital Markets

Visa is looking at potential opportunities ahead for the sector across three key categories: Bitcoin, stablecoin and non-fungible tokens (NFTs). Bitcoin has primarily traded so far as an asset, akin to digital gold, rather than a method of payment, although it has potential in both categories. Stablecoins, which are cryptocurrencies pegged to an asset price such as gold, or fiat currency like US dollar, have obvious potential as on-ramps, which are likely to play more prominently in bringing consumers in and out of the network in the near future.

NFTs arguably have the most disruptive potential. Visa’s Creator Program is one example of the franchise value being created around NFT consumer market growth, and represents an expansion of its ecosystem.


The POS market is shifting

In the point of sale (POS) merchant space, a massive market share shift story is underway. Evolutions in the SMB market have been revolutionary and brought more elegant, cheaper solutions to bear.

But the market has also become very crowded. Legacy players are trying to revamp their products, but there are large parts of the market still being processed through third-party resell offers, which do not typically provide a lot of technology and offer minimal value uplift.

The share gains are coming in many instances because of legacy players in the ISO market, which has manifested as a big secular growth story. This will lead to bifurcations and consolidations over the next five years, as opposed to the land grab among market participants in the prior five.


FX and interest rate near-term trends

FX has emerged as a major near term trend and is a key variable for many of the companies in attendance at our Fintech conference who operate global businesses. While a certain amount of US dollar strength was priced into what companies embedded in their guidance, there was no anticipation of the level of strength we’re seeing today. Right now, swings versus the pound, the Euro, Canadian and Australian dollars are highly correlated and the moves are massive and that’s going to hit FX.

The other place where guidance is perhaps behind the curve is in interest rate hikes. The pace of the Fed move has been faster than what most teams would have guessed. Many would have thought back in the summer that 75 basis points was the right number to embed, not 150 basis points. So those companies that are carrying variable rate debt will need to think about their exposure to those interest rate hikes.

It’s going to be a tough near-term season and then there’s still an open question of whether things are going to get better or worse economically in the coming quarters.


A new investor base

Over the last seven years, the investor base for fintech has continued to build and has skewed from payment-centric investors towards software and internet investors. Another development is increased competition in this space, and the size of the companies involved.

The blurring of the line between what's happening in software, and enablement at point-of-sale and enterprise levels is creating a lot of new crosscurrents within the payment space in particular.

There have been thematic evolutions from prior conference themes, including shifts in the Buy Now Pay Later (BNPL) space, which has become a lot more crowded today than it was a year ago. Nationalistic networks are also becoming less of a threat relative to three or four years ago.

“I think it's evolved into a much more mature industry. In the beginning, I would have called it the island of misfit toys. That's clearly not the case today. This has grown up in its own space,”

- Dan Perlin, Fintech Analyst, RBC Capital Markets


M&A Outlook: A changing competitor landscape

Until recently, the competitive narrative was about disrupting everything that had existed before and dozens of new public companies and fintechs entered the market. Today, the conversation has changed and prior entrants are not able to be as aggressive relative to legacy players because they’re either beholden to customer acquisition models that were heavily funded by VC-backed firms, or have recently raised new capital.   

The cost of funds has gone up dramatically, and it's a tougher environment for growth firms that have yet to reach profitability to operate within. Privates are preparing for significant revaluations and consolidations down the road.

Under a tough macro backdrop where the organic growth environment is a little more challenged, inorganic opportunities will separate the successful companies from the others.

“I suspect in the next six to nine months, it's going to be a pretty, pretty heavy dose of of consolidation in the space,”

- Dan Perlin, Fintech Analyst, RBC Capital Markets

As these companies that need to fuel growth look to be acquired by larger public companies, legacy players are also looking to take this opportunity.

Tune in for even more on the podcast, including: how technology has disrupted point of sale, what happens when competition gets tough, and is recalibration needed in terms of FX exposure?

Dan Perlin

Dan Perlin
Managing Director – Payments, Processors and IT Services Research, RBC Capital Markets

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