Highlights from Money20/20

Trends Shaping the Deal-Making Environment in Financial Technology

Wednesday, November 11, 2015

William Blair’s financial technology investment banking team recently attended the Money20/20 conference in Las Vegas. Based on our conversations throughout the week with corporate development executives, business owners, and investors, we provide an overview of the trends that were generating the most buzz at the conference and discuss how these trends are shaping the M&A and capital-raising environment in financial technology.

Integrated Payments, B2B Payments, International Reach, E-Commerce, and Mobile Are Still Buyers’ Top Priorities
Continuing a trend that has been playing out recently, strategic acquirers and financial sponsors are showing a high degree of interest in companies that offer solutions involving integrated payments, B2B payments, e-commerce payments, and mobile payments, as well as in companies with an established presence in international markets. Companies that have proven capabilities in one or more of these areas continue to be high-priority targets for financial sponsors and large electronic payment processors looking for growth or platform differentiation.

Another area generating a lot of attention at Money20/20 was loyalty programs and services. The interest in loyalty programs has intensified lately, especially in the wake of MasterCard and Cardlytics’ partnership that was announced on October 27.

Proliferation of Technological Innovation Accelerates
The payments and financial services industry’s migration toward technological innovation has significantly accelerated in the past year. The proliferation of disruptive technology-enabled business models and solutions is greater than ever before.

This technology-driven disruption is especially evident in the financial services technology industry. Alternative lending platforms have used technology to disrupt the traditional lending models, and the success of companies such as Lending Club, OnDeck, Prosper, and SoFi has spurred a wave of start-ups offering alternative lending platforms and related technology. The exhibit halls at Money20/20 were full of these types of companies, many of which were more focused on small-business lending rather than consumer lending.

While we remain bullish on these types of business models, we are cautious about the sheer number of new entrants into the market, and we note that these business models have yet to operate through a full economic cycle. Further, many believe that valuations in the space have become over-heated, which may make it increasingly difficult for smaller players to raise the capital they need to reach sufficient scale.

Surge in IPOs Creates a New Set of Platform Consolidators
In the second half of 2015, the financial technology industry has seen an unprecedented surge in equity capital markets activity. In addition to IPOs by PayPal, Worldpay, and First Data, Square and Transfirst recently filed to go public, according to Reuters.

While the pace of activity is notable in and of itself, it also has powerful implications for M&A activity. The public offerings will create a group of next-generation consolidators that will use their sizable balance sheets to pursue aggressive acquisition strategies. These consolidators will be looking to use M&A as a tool for maintaining their technological edge or for evolving from a focus on point products to a platform orientation.

Private Capital Continues Flowing Into Fin Tech
Investors continue to pour massive amounts of private capital at lofty valuations into financial technology companies that are delivering innovative solutions. The following list is representative of some of the companies that have received sizable private capital investments: Adyen, Betterment, Klarna, Square, Stripe, TransferWise, and WorldRemit.

This trend bears watching on two fronts: 1) Is this level of heightened private capital-raising activity sustainable, and 2) will public equity markets continue to be accommodative enough to financial technology to provide adequate exit opportunities for these later-stage private investors?

To learn more about these or other trends that are shaping the deal-making landscape in financial technology, please do not hesitate to contact us.

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