Mark Odendahl
Welcome back to the Industries In Motion podcast from RBC Capital Markets, where we'll be exploring what's new and what's next in today's fast moving markets and industries to help you stay ahead of the curve. Please listen to the end of this podcast for important disclaimers. Reminder, my name is Mark Odendahl, and I'm global co-head of research here at RBC Capital Markets. I'm really excited to welcome Dan Perlin back to the podcast. Dan heads up our FinTech and payments research here for RBC, and we're here today to talk about the FinTech and payment space. We're also going to talk about our recent FinTech conference and just some of the topics in this all important area of both the financial and the technology sector. Dan, welcome back.
Dan Perlin
Mark. It's always a pleasure. Thanks for Thanks for having me again.
Mark Odendahl
So let's maybe kick it off, just from a big picture standpoint. What is FinTech right now, Dan? What are the type of companies you're seeing disrupting the payments area?
Dan Perlin
Yeah, so it is interesting, because the you know, the FinTech space has massively evolved. You know, in the 20 plus years that we've been covering it. You know, we used to call it like the Island of Misfit Toys, where all these companies kind of went and they were kind of coupled together, but they never really had a tight thematic and it's been interesting to see how it's evolved. And I would say, if we, if we kind of look at where we are today. It's still, you know, very much heavily weighted towards payments names, whether that be in ecommerce or merchant acquiring or otherwise. And so you still have names like Visa, MasterCard that are kind of top of food chain. But you've got, you've got lots of other payment names like PayPal and Adian and Block and shift for Pfizer, global payments. They're also very large cap type names, which, hold the space kind of in check in many ways. But you've, you've seen it expand into, digital consumer facing credit. So you've got, you've got Affirm, you've got Sofi, you've got rocket, you go over into the capital markets and banking side of the equation. And you've got big companies like Broadridge and SSNC, but you also have companies like Q2 and Encino, very different. Then you've seen, I think, a pretty big expansion really, into this ecommerce and SaaS platform businesses with companies like toast, I'd even include Shopify, quite frankly, in that. And then names like Lightspeed, and then you've got B2B payments, you've got modern issuing processing, and then you've got the whole lending space. So it's, you know, as we always say, this is not a homogeneous group. It's, it's a big landscape now. And I would say domain expertise, you know, kind of cuts across industry verticals, as opposed to just saying kind of quasi fintech. You know, the big names, both public and private, are always out there. So you've got, you've got names like Addian, that are very much disruptive into the big global ecommerce space. They're growing incredibly fast. They are digitally native, and, they've built a mousetrap that's more in line with what a lot of digital companies are looking to partner with. And they've got some serious advantages, but you've also got, you've got private companies like stripe that are also incredibly large, and so the days of just these little kind of ankle biters coming in and taking small bites out of these big, large companies that have scale, I think that's kind of waning a bit, because you've got big publics that have become much more, I would say, disruptive, but you've also got a lot of privates that are becoming much more disruptive. So space is very broad today. Again, the key theme here is that it's just not homogeneous. You kind of have to dive into each one of these verticals. And as with software, there is also a big, you know, thematic moving much more towards some verticalized natures of these businesses.
Mark Odendahl
Thanks, Dan. We're really lucky to have you and your experience, you know, 20 years covering this sector, help us understand the timeline and the sentiment, kind of as the group has come to having many public companies to kind of what the sentiment is now, and where you see sentiment going in this FinTech and payment sector.
Dan Perlin04:56
Yeah, so it's been in it's been really interesting to watch. Prior to covid, this group was thought of as a big secular grower, and most investors were very comfortable with that, with that thematic, because they had so much incremental growth that even if they were cyclical, they were probably growing beyond it, which is to say they're out running the consumer. You go into covid, parts of the world shut down, and you realize that, as it turns out, Fintech is actually quite cyclical. Some parts of it are a lot more than others, but there's a lot of things that really cause people to take a breath and say, maybe this group isn't as secular in nature as we thought. Maybe it does have more cyclical underpinnings than we had kind of been giving the multiples credit for. There’s a lot new names by the way, there was a big, a big IPO boom that brought a lot of new companies into the space. And so we have many areas in which we can invest. So it's no longer kind of the scarcity value of just a handful of names. We have 40-50, names that we could easily invest into today, and now they're viewed as more cyclical. So what's happened, I think, in terms of sentiment, is it turned negative, because over the past better part of year and a half or more, there's just been this constant drum beat that the consumer is going to fall out of bed and completely crack. And so I think investors have been somewhat reluctant to try and jump ahead of that if they're concerned about this group. And the reality is, the fundamentals have held up pretty well, if not much better than people had anticipated. But we're getting to a point now where we are starting to see a couple of things. There is, there's a little bit of a cracking in the consumer. It seems to be more bifurcated. So high end, more affluent consumers seem to be holding up. But as you move downstream into the lower end consumer, that looks like it's fracturing a little bit. And quite frankly, I think what we need to see from the sentiment perspective is we need kind of a reset. We need the consumer to kind of have a little bit of a falter. Once that happens, then I think people will see that the management teams will probably recalibrate numbers a little bit, whether that's the second half or early part of 25 I don't really know yet. It feels more like the second half probably is the area where you've got a little bit of risk, because they mostly have second half tilts. But my guess is, if that occurs, then you have a, you have a, you know, a numbers expectation reset at the same time that I think the investor sentiment around the space is going to get a lot more constructive, because they're not concerned that the next thing to fall is, you know, next quarter's numbers. So I would say the sentiment has been pretty negative over the past couple years, I will say coming out of the conference, it felt more constructive, but still nervous. And I think now we're at a point where the data points are suggesting that volumes are slowing. We've got second half ramps, and the consumer's weakening a little bit, and so that's likely to set up for a little bit of capitulation. And once that happens, then I think investors are going to get right back into this group.
Mark Odendahl
So Dan referenced our conference, so we just hosted our ninth FinTech conference. We've seen tremendous growth. We had 40 companies presenting this this year between public companies and private companies. So all of that that Dan just said about sentiment in the sector, it's very well informed, because we now have a leading FinTech practice and fintech conference, and he's coming off the back of that on this podcast. Talk to us about the companies that were at the conference and maybe one or two themes that you heard.
Dan Perlin
We had over 40 companies kind of split between publics and privates. And that's very intentional, because obviously the public talk track is quite different than the private talk track. So we had a mix of public companies that were very much, payment centric, software integrated, kind of point of sale providers, large e commerce, payment companies. Our keynote was, was with Jamie Miller from PayPal, the CFO. But then we also had several capital markets names like Broadridge and so what was interesting about that is here again, like the fundamental conversations that we were having with the company management teams were far better than what you were seeing in the market in terms of the company. So stability in macro, plus or minus payments companies were suggesting mostly resilient consumers. So as we fast forward today, that's probably slowing a little bit. And on the FinTech side, there's still really strong demand for digital offerings, in particular within financial services. And that's actually, I think, gotten better, not worse, quite frankly. So the underlying tone of the event was, ‘Hey guys, things aren't as bad as you think. Just because the stocks aren't working right now doesn't mean that the fundamentals are falling apart,’ and I think that that is very much still true today. So I would say that's a high level theme. The other thing I would say, you know, is just the integration, again, of software, and the importance of software into payments, into FinTech like that. Crossover has happened for several years now, but it's never more prominent than it's been in the current environment. I mean, it's pretty amazing. And the other thing I would say is the idea of being kind of a horizontal business model is just no longer the case. It truly is driven by verticalization at some point you're going to see more and more of that stuff as it relates to international growth in M&A and things of that nature. But, you know, I would say those are, those were a couple of just ones that I thought were really big standouts.
Mark Odendahl
I hear you mentioning the capital markets side of FinTech quite a bit, and you've mentioned a few names there. How is FinTech disrupting the capital market sector?
Dan Perlin
It's still a pretty scalable game. So on the margin, what you're seeing is just more and more of these companies that are going into capital markets, creating just enormous efficiencies for organizations like ourselves, or even in financial services and banks or in insurance companies.They service lots of stuff going on in the wealth management space. You've got lots of stuff going on as you think about the alternative investment space, in particular, around private credit, so the ability to put technology in and around those providers today changes the dynamic massively. I think actually Wealth Management is an area where you're seeing just an enormous amount of innovation in that regard. And you see companies like Broadridge that are doing these big deals with large broker dealers. I think at the end of the day, it's, it's all about, you know, the ability to have better insights and better outcomes for the clients, speed the market onboarding, and then ultimately, as we move forward, a lot of these technologies are going to be utilized, you know, with an AI, and what that ultimately means for the space. Now, that's, that's a very broad topic. But I think you have to use some of these companies, quite frankly, to get your business, you know, put into the cloud and have data that's organized before you can ever even be, you know, meaningfully thinking you're going to be able to drive any efficiencies out of out of AI or generative AI.
Mark Odendahl
So let's, let's talk about that a little bit. Are, are there any companies in your sector that are seeing tangible results from generative AI, or is it still a concept and people spending for that opportunity? Or are companies seizing that opportunity?
Dan Perlin
The early winners, I think right now, they're probably going to parallel some of my other names in the IT services space that we cover. And the reason for that is because we talk about these technology prerequisites that are required. And these prerequisites are pretty simple at a high level, but obviously enormously complex. And that is, your business has to be in a modern cloud. You might have been in a cloud 1520, years ago, but like you need to be in a modern cloud architecture today. And you need to be working with someone to help, at an enterprise level, manage the data platform such that it's organized. It's not all over the organization. So in that example, you know, we always point to Accenture, and that is because Accenture is probably the best positioned company in our universe, but in probably a lot of different universes to enable this, you know, Global Group of companies to make this migration before they can even actually put AI to work. Now, what's interesting about Accenture in particular is they, you know, they've pledged $3 billion dedicated to data and AI investments, and they're early, you know, in this process. And if we look at what they did in cloud, and we go back to, you know, let's say 2020 when they made a similar commitment to put $3 billion to work in cloud, they were late to the game. You only had 20% of the workloads in cloud at that point in time. But after they made that investment, and they had about a $12 billion practice, then, you know, workloads doubled in three years, and you had 40 plus percent in the cloud, and their practice went from 12 billion to 32 billion. So my sense is, you know, Accenture's gonna be one of those names we're gonna really need to be paying attention to, not just as, like the industry index way to understand what's going on, but as a way in which to play it. It's a little indirect initially, but I think they're going to gain a lot of momentum now, the other names you know, not necessarily taking away from FinTech, but we had visa CEO right at our financial services Conference this past year, and one of the things Ryan talked about was a visa building large language models and the ability for them to work with really their merchant constituencies, which is not something you think about necessarily with Visa, but the idea there is they have an enormous data set, and they should be able to create better outcomes that may be in the form of driving incremental sales, it's certainly already showing up in the ability to combat fraud. So I would say the early stage stuff in FinTech and payments is about efficiencies and security, and obviously cybersecurity more broadly, especially as payments becomes increasingly global, and the nodes of payments go further and further and further in emerging economies, you are going to have to have large, large data sets that are going to help to prevent those kind of cyber attacks. And so I think companies like Visa and MasterCard are probably going to be an enormously well positioned, I guess, is what I would say, to take advantage of that, and then the derivative of doing that kind of work is to also expand their constituencies to these large retailers that they deal with and help them drive incremental sales.
Mark Odendahl
The other big theme in your sector is M&A. We are seeing companies on your coverage list disappear. It seems to be both financial buyers and strategic buyers. But you tell me, Dan, talk to us about M&A in the sector.
Dan Perlin
Yeah. Well, they're all looking to put money to work. They have clean balance sheets, for the most part, which they've been cleaning up over the past couple of years. Capital redeployment now they want to pivot more towards growth, as opposed to just trying to cut costs to expand EBITDA in a more challenging environment. So that pivot back to growth is not just internal growth investments. It's also putting dollars to work on the M&A side, I do agree with you. I think there's lots of financial buyers out there, sponsors that are, you know, interested in the space. And quite frankly, a lot of the public companies that did those IPOs over the past couple of years have been punished to a level now where they could go back and become private companies again, or you might end up seeing them being absorbed from some of more of the strategic side of the equation, so some of the public's acquiring other publics, my sense is the tone from where we sit, most companies want to probably not do transformational deals right now, at least that's our sense. They want to figure out ways to expand internationally, because that is a big theme right now for a lot of these companies, is to take what they've created in these more mature domestic markets and take them into Europe and take them into Asia. Then you want to go into new verticals, which is definitely another big area of focus, and that tends to lend itself to a lot of private companies. So I suspect what you're going to see more of is public companies doing a lot of maybe sizable tuck ins that are going to get them into some new GEOS, and they're going to get them into new verticals. And if you do see some bigger deals, it's probably, you know, I think a lot of these sponsors, quite frankly, that are taking some of the public companies out, that are just not getting the credit that they believe they need to have, and have portfolio companies that, when they wrap those around, they can bring this back out, you know, 3-4-5, years from now. So I think we're going to see a lot of M&A, especially in an environment where, if rates start to go down, you know, that's clearly going to be an accelerant. But I can definitely say that the attitudes of the management teams that we talk with from the public and private side, they clearly want to do more M&A.
Mark Odendahl
You talked on the sponsors, or the private equity side of the M&A theme, talk to us about that a little bit more that they're taking companies private out of the public markets. And what are they… what are they doing to improve those businesses, or reposition those businesses, or combine those businesses with other portfolio companies. Just give us a little bit of more color on that strategy, the financial buyer of the company.
Dan Perlin
Yeah, so it's always interesting, because what ends up happening more often than not, is you have, you have these public companies that have great assets, maybe internally, they have ambitions to want to grow, but in many instances, maybe they have to do some, self-cannibalization of their business in order to kind of crossover to get back to a certain level of growth, or they are not really in a position to do the kind of M&A that's necessary. And so I think what we've seen in many instances is pretty good companies that are not being rewarded for the types of growth that they're delivering for one reason or another, and then they're taken private, and now the types of investments that are necessary to probably re accelerate, or maybe even said differently, build a longer term, durable model that people can kind of underwrite when it comes back into the public market, as opposed to having these doubts, is now being done, I would say, you know, in the private market, so in a shroud of secrecy. So you can make those kinds of investments, you can lever up those balance sheets, and, you know, the private company or the private investors can just tolerate that. In many instances, the public market doesn't. I don't think there's any kind of magic that's happening right now, in particular around these, these take privates. I think what we've seen very specifically is good companies that just aren't getting the credit, but have some really interesting assets, but in order to kind of gain incremental confidence and or respect from investors, there are some maybe heavy investments that need to be done or undertaken. The other thing that happens is the private companies, obviously, they have other companies that are in their portfolio, and so what we have seen is the, you know, the pairing of those type of assets over time, getting put back together, or I should say, just getting put together, and then when they bring in the market, it might have filled the gap that they didn't otherwise have as a public company. So I suspect we're going to see, we're going to see more of that as well.
Mark Odendahl
Well, this has been fantastic. Dan, thank you for coming back on the podcast to talk about some of the themes in your area, the conference and some of the sentiment check that you provided the listeners today has been fantastic. So thank you very much for coming back on and it's real, true testament to our FinTech practice here at RBC Capital Markets. Thanks. Dan,
Dan Perlin
Thanks, Mark, it's always a pleasure.
Mark Odendahl
What else lies ahead in today's ever evolving markets and industries? We'll be keeping track right here on industries in motion until then. Thank you for joining us on this episode recorded July. 29th 2024
Mark Odendahl
Make sure you subscribe to Industries In Motion, wherever you listen to your podcasts. If you'd like to continue this conversation, or you're interested in more information, please contact your RBC representative directly, or visit our website, www.rbccm.com/industriesinmotion for further insights. Thank you very much.