These will be the next fintech companies to be acquired during next 2 years: check out the reason

By Vladislav Solodkiy, Managing partner at Life.SREDA VC

Right now, Chinese e-wallets (like AliPay and WeChat Pay) are expanding mostly through Chinese tourists going abroad – as they travel and spend more year by year, and local sellers (and banks) are gradually opening for Chinese payment systems and e-wallets. There is no value for non-Chinese clients so far in using AliPay and WeChat Pay.Thus, there is an opportunity for foreign-born mobile banks (with better local market sense and adaptation to it) to be acquired by Chinese giants in the mid-term perspective. All Indian projects (like Paytm) share the Chinese companies’ main problem – it is hard for them to expand abroad (foreign agents arrive in India as well as in China, meanwhile, new competitors spring-up). The only crucial point of competition among other players (like ApplePay, Android Pay, Google Wallet, Samsung Pay, etc) is their geographical coverage (and number of connections with local banks). Sooner or later the question will rise: what value do these wallets bring to their users? And if they are not able to develop new functions in a manner similar to that of PayPal, they will only be able to evolve by purchasing mobile banks (which have worse figures, but better solutions), remittance services, mPOS-acquiring startups, etc. Also, new players appear on the field – smartphone makers like Xiaomi and Huawei. As the client base of every player will dwindle, the issue of differentiation from competitors will soon become the most important one (and this event will mark the beginning of a long M&A period for start-ups, which test their products on local markets).

Neobanks complement many other fintech verticals, creating many opportunities for M&A deals and partnerships with high level of synergy. E-wallets have either a weak functionality (Apple Pay, Samsung Pay and Android Pay) and low level of customer retention or poor scalability (AliPay, Paytm). Direct banks are little outdated technologically now (and they need some shake-up) and have a weak geographical coverage. P2P/online-lending platforms show high marginality and growth rates, but their customer acquisition cost grows day by day and they need to obtain information about new clients in advance to lower credit risks, while offering new service for current clients, increasing customer retention. PFM/PFP services don’t attract the same attention as neobanks, but they could give the latter better differentiation and better understanding of clients’ long-term plans. As concerns mPOS-acquiring companies (Square, SumUp, iZettle), they own such a huge amount of data, not only about their merchants, but also about their merchants’ clients (purchases, card availability, contact details), that doesn’t influence their business and capitalization because they don’t serve clients of their clients in any way (except for a raw solution from Square.Cash). Almost all new neobanks (Tandem, Monzo, Starling, N26) have announced that they are going to build a product with open architecture and APIs in order to be able to integrate freely with external services and allow their clients to interact with these services, using already familiar interface. German mPOS-acquiring service SumUp integrated with Finnish Holvi. Youth American Moven – with online lending service for students Commonbond. Neobanks N26 from Germany and Monese from Great Britain – with British online remittance services TransferWise and CurrencyCloud, accordingly.

Asian messengers, such as WeChat, KakaoTalk, and Line, are much better monetized than their American counterparts are, due to their high diversification of the product range: an application enables you to order a taxi, shop online, pay bills, play games, make payments and transfer money. WeChat has 846M users, 300M of which use WeChat Pay. In the American and European countries, startups like TransferWise, Azimo, CurrencyCloud and WorldRemit are more active in remittances via messengers than messengers themselves are. Most likely, they will be finally acquired, as it was predicted by the market two years back. This would make the most sense for the messengers, which haven’t succeeded in this area. As in many other fintech sectors, the majority of the leading online remittances companies are based in the US and UK. There are some strong remittance services localized in several other countries, but in fact, they are just growing their assets to be acquired by bigger players (like Israeli Xoom was acquired by American PayPal), and can barely change the market landscape. Otherwise, the local players will have to expand their product line horizontally, rather than compete with international single-product companies for a market share. Remittances are at their core very low margin businesses and as a result, must have exponential growth of their client base or have to increase margins by offering new complimentary products. Competing by offering just quality is not enough. The move from pure remittances towards offline and payments should allow companies to increase revenue from the client base. Surprisingly, we have not seen major partnerships (or M&A) between remittance services and mPOS-acquiring players. However, there are a few examples: Ezetap has integrated with Paytm and Mobikwik in India, while Square develops Square.Cash following the same logic. South Korean Toss has announced a micro lending and PFM service for its 4 million young customers.

Large online-acquiring companies grow faster than the smaller ones. This raises a question of what sort of future awaits smaller companies. Will they be bought by traditional payment processing giants in order to strengthen their technology stack and increase competitiveness (perhaps, but at lesser valuation), acquired by leaders, such as Stripe, Klarna and Adyen, to provide them access to new markets and niches (hardly), or merged with other fintech startups to add to the ecosystem of services in respective countries (most probably)? Klarna, which has acquired the European license for banking activities, considers getting it in the USA and is developing its SME lending (in partnership for now) and offline acquiring solutions. Turnover-based lending for SMEs (PayPal Working Capital and Square Capital come to mind) and mPOS-acquiring are complementary segments for online acquiring (and vice versa – Square again).

Square is still unprofitable (with its competitor SumUp reporting profitability just recently) – as well as the majority of mPOS players. However, the success of Square.Capital (which demonstrates high level of profit margin coupled with low level of risk – just as a structurally similar PayPal Working Capital) prevents one from concerns about its profitability potential. mPOS acquiring may turn into a channel of client acquisition, a way of differentiation and a source of data for credit risk tackling for Square, while the company will make money on SME lending and complementary products. The question is rather – if, and when other players are going to scale to this segment (and iZettle has already launched its service). List of directions for “migration” of mPOS services includes not only analytics and lending, but also online transfers (including transfers for SMEs, a market with high potential, by the way), online acquiring (as is the case with Square after the latest updates of its APIs). Another complementary direction is the production of new cash registers (usually tablet-based), coupled with the development of business management software (usually cloud-based), including payments, CRM, marketing, HR and purchase management tools. So far, nobody has ventured into this direction; however, establishment of new mobile neobanks for SMEs could be a very perspective move. Geographically, mPOS projects are located mostly in the USA, UK, Germany, Brazil, India, and Australia: there are some small players in Southeast Asia, Africa, China, Japan, South Korea and West Asia; however, if they don’t consolidate in the following year, they will most probably die.

The segment of tablet-based cash-registers and cloud-based POS-management systems is highly integrated with mPOS acquiring only, whereas immense opportunities offer partnerships with such sectors as P2B- and SME-lending and online factoring. Yet again, such services don’t capitalize their client data (big data and online scoring), while they have it in quantity and quality good enough to facilitate targeted offers of other fintech services (mobile wallets, remittances, micro-lending etc.)

Talking about online SME lending services, it is worth to mention that three of the largest U.S. players, – OnDeck, Kabbage and CAN Capital, – have formed ILPA alliance to standardizes the processes and rules of the industry, the rules for companies willing to distribute debt capital. They have also launched the SMART Box, which compares prices and conditions of such websites. Industry consolidation is a vital issue, and we must give credit to these three players for their proactive role.

Online factoring is very complementary to companies involved in supplier relations automation (accounting, expenses, e-invoicing) such as: Taulia, Tradeshift, and even older business networks like Ariba and The Interface Financial Group. Automation business marginality is rather low, but the customer base is very large. It holds great promise not only for partnership but also to mergers and acquisitions. Not to mention the online accounting services like XERO and QuickBooks by Intuit (most of the new services have their decision-making process based on data from these companies). These giants are facing a challenge, which can be described by a motto “Disrupt yourself”. It feels as if they soon begin to “stall” under the weight of their past. Blockchain has got enormous application opportunities: not only in terms of transactions, but also for storage, verification, deals signature, compliance and verification of contractors, and many other related processes. As well as online insurance for this kind of transactions, suppliers and contractors, and their debt.

The past year put forward the question of all lending startups’ refinancing (so they would be able to lend money to ever-increasing client base) as the number of these startups and growth rates of these businesses make them seek for sources of external financing such as credit lines from pension, insurance and hedge funds (which are not able to invest in lending startups directly due to inherently high risks of the latter) and loans from banks with cheap money. In certain cases they also turn to portfolio securitization (when the debt of similar maturity structure and liquidity risk is assessed by external auditors, pooled and sold to investors wholesale as security) since venture financing can’t provide enough money for them. Specialized platforms offering such securities appear and facilitate trading. Just as in the case with other segments related to online lending, advices on personal finance management and planning, credit history and its improvement are complementary services. The same holds true for online lending. Affirm bought PFM app Sweep, while Payoff and Commonbond integrated with mobile bank Moven with inbuilt PFM functionality. Partnerships among services become more common. Avant has integrated with LoanDepot via API, while student-targeting Credible issues retail loans in partnership with leading online lending platforms such as LendingClub, Prosper, Avant, Upstart and Pave. Integration with online trading and investment management services is another complementary segment. Such services allow their clients not only to invest money in stocks, but also to lend it on online lending platforms. As an example, Canadian lending service Borrowell has integrated with Wealthsimple investment platform, while American online trading players think about integration with p2p-platforms.

As described above, almost all startups in this field work within the borders of one country, while the necessity to unite lenders and borrowers from different countries is becoming more and more audible. The developed markets (Japan, Korea, Singapore, Hong Kong) are well endowed with money and have low interest rates. The developing economies like India, Brazil and Indonesia are in need of capital (preferably at lower interest rates, which are still high enough for investors from the developed markets). In order to make the movement of capital possible, platforms need to work their way to international expansion and have a sufficient level of trust (brand awareness, sufficiency of the present audience and experience in risk management). Most probably, in the near future we will see the services, which will give people an opportunity to lend and borrow money across borders, leveraging advantages of the best-in-class services in each country.

The only way for price-comparison startups (aggregators of banking and insurance services) to counter this unwanted tendency is to play with forecasts: to migrate in new segments and come up with new services for their customers. Neobanks, PFM/PFP, and online scoring (credit history assessment) solutions, p2p lending platforms are the most obvious choices. These players accumulate at some point a large number of customers and a large amount of their data, but if they don’t evolve, they eventually fail after about three years of growth in average.

It is noteworthy that PFM rarely works as a stand-alone solution, but it effectively complements many other services like mobile banks (Moven’s partnership with MoneyDesktop, American Trim and Swedish Tink eager to develop their virtual banking solutions), p2p (acquisition of BillGuard by Prosper), student lending (NextGenVest, acquisition of SmartyPig by Sallie Mae), insurance (Northwestern Mutual deal with LearnVest) and wealth management (Envestnet’s acquisition of Yodlee) solutions. What is important for online-trading startups is to understand that for the majority of their clients investment is not a goal, it is a way – a way to reach their financial targets. And it is more important to help clients to define their goals – for example, with a help from PFM/PFP solutions.

The partnership of crowdinvesting platforms with stock exchanges is also worth paying attention to: it is a pre-IPO tool or trading tool for tech companies with low capitalization in comparison with the main stock exchange board (like SharesPost with NASDAQ, and SyndicateRoom with LSE). The cooperation of crowdfunding platforms with large companies is gaining scale: Amazon has launched a separate marketplace for products developed as a result of crowdfunding campaigns, while IndieGoGo has established a partnership with General Electric, Harman International Industries, Hasbro and Shock Top. Giants can now test their new ideas and technologies in a more interactive manner and using the services that contact with the most open to novelties users. Platforms also receive new major customers and engage their audience. Platforms are building an ecosystem of complementary services: IndieGoGo launches equity crowdfunding (crowdinvesting); Tilt – online remittances; KickStarter has acquired a crowdfunding startup for musicians and artists called Drip (with Patreon and Show4me present in the niche). But the scaling ability and plans of the majority of crowdfunding services generate questions and doubts. This would be a logically sound stage of development judging by the number of startups in this sector, many of those cannibalize each other in their fight over the same customers. Many countries are currently concerned with how to support and accelerate the development of their startup ecosystems (including focus on fintech) and it would be logical to provide their financial market support not directly, but through this type of platforms. For example, Indonesia is currently considering such a partnership interaction; iAngels is being implemented in Israel, while Santander Bank provides 5050 co-financing through CrowdFunder platform.

So, the demand for creation of ecosystems (or well-tailored bundles) of services around your core product and customer base is opening an unique opportunity for M&A deals for the next two years. The advantages of artificial consolidation (as opposed to organic growth):

  • The presence in three or more markets shows that the company is international. If it succeeds to supplement new services in the process of merger, the company will be diversified not only geographically, but also in terms of its product range.
  • The point is not only in “internationality”, but also in the “premium for leadership” – you greatly differentiate from your competitors by size. As a result, you find yourself in a situation where by reducing the number of market participants you create a reverse disproportion: there are more potential acquirers than objects for acquisition. Now you are setting the price. The number of those interested in your company is also growing.
  • Since everyone is developing roughly the same products, after the merger you can choose either to spend the same amount of money to develop more products, or to reduce the cost of R&D by several times.
  • The number of brands on the market is decreasing, you are becoming international and your brand becomes top-of-mind. As a result, you can spend less on advertising, as well as on HR: potential candidates are tired of large, faceless corporations, but they are also afraid of joining very small companies, and this kind of medium-size player will attract them faster.
  • You do not multiply the expansion costs for each new market (because these costs have already been incurred). And against the background of the reduction in marketing and R&D costs and growth of turnover, you become profitable (or you get much closer to the breakeven point).
  • Your potential buyers or strategic investors will spend as much time and effort on a decision to acquire a company for $50M, as on a $500M deal. Since this is not the last $50M or $500M for them, they will choose to consider the deal which will allow them to achieve a greater synergy.









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Ukraine Utilizing Blockchain in Land Transfers

The Ukrainian government is the latest in a string of governments and international groups around the world to implement Blockchain solutions to solve problems they’re facing in financial markets.

At this time, approximately 71 percent of the country is categorized as agricultural land, of which 25 percent is owned by the state. The land market, however, is very depressed, according to a recent report by the state agricultural department. The reason for this market depression is the lack of suitable financial instruments for leases and land transfers.

At this time, the lease market is being tarnished with a profound black market. This has led to dramatic lease price reductions (the lowest in Europe). The application of a Blockchain system that will protect the auctions from black market controls would provide a way to stabilize the land price slide and increase income for farmers.

The deputy director said: “In today’s resolution, we have written two things: the transfer of the State Land Cadastre to blockchain technology. It is the most advanced technology in the world to protect information. This is a pilot project that we will launch this October.”


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Cambodia, Soramitsu Planning Distributed Ledger System

Soramitsu Co., the Japanese Blockchain identity company, has indicated that they are partnering with the National Bank of Cambodia to test distributed ledger technology in creating new and innovative payment methodologies.

Soramitsu is a Fintech company and the initial creator and co-maintainer of Hyperledger Iroha, the distributed ledger platform.

The joint venture is focused on applying the Linux Foundation’s Hyperledger Iroha in giving currencies logic through smart contracts to create “smart money,” providing secure settlement infrastructure for the National Bank.

Kazumasa Miyazawa, COO of Soramitsu, said: “Through our work with the National Bank of Cambodia, we will be able to take the first step toward creating a more efficient payment infrastructure, which we hope to expand globally in the future.”

The National Bank of Cambodia is following closely on the heels of other national and state banks seeking to create a hybridized system of fiat and digital Blockchain currencies. While the principle is sound, many in the industry claim that the very nature of decentralized currencies prohibits this union.


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China Quietly Tests Digital Hybrid Currency

In a move that is no surprise to industry experts, China has begun testing its own digital currency for interbank transfers. Recent speeches by national bank insiders along with some publications have indicated the direction the Chinese would like to take. 

Presently, it seems that the goal would be to provide a second digital currency that would function alongside the yuan. While the technology is likely still a distant potential, the government has begun running tests with the cryptocurrency and even testing its functionality with national banks.


The government would likely reap almost immediate benefits.

First, in a country with so many people and little infrastructure, a digital currency would make funds available in areas without conventional banks.

Second, a digital fiat currency would provide the government with more hands-on traceability of digital transactions which are already a massive industry in China (note the recent potential acceptance of Bitcoin by Alibaba).

Finally, such a currency would provide reduced costs and increased transactions which would spur economic growth.

While cryptocurrencies have traditionally spurned fiat currencies, a Chinese hybrid currency would open a new world of currency choices for the government, its citizens and businesses as well.

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PSD2 and Instant Payments to drive a 37% decline in online card volumes

A new study from Ovum, has attempted for the first time to quantify the detrimental effect Instant Payments and PSD2 will have on traditional credit and debit card payments. Instant Payments, PSD2, frictionless payment,e-commerce,

The research “Instant payments and the post-PSD2 landscape”, commissioned by Icon Solutions, publishes the only quantitative insights into how PSD2 will be the catalyst for both the decline in card transactions and the uptake in direct and frictionless payment methods such as Instant Payments in Europe. It also shows how Instant Payments under PSD2 will change the way consumers pay for goods and services, revolutionising e-commerce.

Instant Payments expected to overtake cards around 2024 for e-commerce purchasesThe research is in response to feedback from European banking clients who expressed a need to more fully understand the likely implications of PSD2 and instant payments on consumer behaviours, and the resulting change to their business model and revenue streams.

The research predicts that PSD2 will significantly disrupt the European retail payments landscape, unlocking new revenue opportunities for those nimble enough and adequately prepared.

E-commerce card usage will stagnate at current levels of around €260bn annually and by 2025, boosted by increased consumer convenience and the lower charges that PSD2 facilitates, Instant Payments will overtake cards. Card volumes are expected to stagnate at €260bn post-PSD2, rather than reach the €411bn predicted without PSD2, representing a 37% decrease in expected volumes.

The research indicates that the shift away from cards is likely to gather pace, and by 2027, single-transaction e-commerce card payments will drop from the top spot declining from 40% market share to just 11%. This will leave Instant Payments and digital wallets (such as PayPal) as the two dominant payment methods across Europe as early as 2024.

After the introduction of PSD2, Instant Payments are expected to absorb much of the rapid growth expected in European e-commerce over the next decade – which will gradually see a market share increase against established payment methods, to an average of 29% of expenditure across Europe. This figure is expected to range from 72% in the Netherlands, to just under 20% in Italy.

This shift of European commerce to digital channels will continue to apply pressure to merchants to increasingly take an omni-channel approach, bringing a focus on new payment methods to the forefront of merchants’ agendas. This, combined with potentially declining card revenues, is expected to place pressure on banks to provide the services that merchants need to become truly omni-channel.

“PSD2 and other open banking initiatives are a golden opportunity for retail banks to re-imagine their products and services, and ensure they are fit for purpose in tomorrow’s digital ecosystem” explains Kieran Hines, Head of Industries, Ovum.

“In particular, those banks that combine early adoption of Instant Payments infrastructure with a proactive approach to PSD2 compliance and a focus on the payment needs of both merchants and consumers will be the ones that enjoy the most rapid growth over the coming years.”

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Why Amazon’s Acquisition Of Whole Foods Matters For Startupland

By Tomasz Tunguz from Redpoint Ventures for his blog

Amazon’s acquisition of Whole Foods is notable for many reasons. Of course, there’s the magnitude $13.7B. The second is the shockwaves reverberating through the grocery industry. Costco fell 10% and Kroger almost 25% on the news. Third, the acquisition underscores the importance of physical retail even to the largest American ecommerce giant. Those are all remarkable in their own right.

However, the most interesting part of this acquisition is that it marks the current apotheosis of technology’s impact in the broader economy. In the last 18 months, non-traditional tech acquirers changed the M&A landscape for startups. Walmart, Unilever, GM, Ford spent billions of dollars collectively to acquire Jet, Bonobos, Dollar Shave Club, Cruise, and Chariot. That’s all fine and expected.

But, Amazon’s acquisition of Whole Foods is the reverse: a leading technology company buying a leader of a traditional industry. That might not seem like an important distinction, but it is.

Five of the top ten most valuable companies in America are technology companies: Apple, Amazon, Google, Microsoft and Facebook. Exxon, Berkshire Hathaway, GE, JPMC and Johnson & Johnson fill out the list. The more than $250B on their collective balance sheets implies very few acquisition targets are out of their reach. And if the ripples from the Amazon/Whole Foods merger are any indication, technology initiated M&A of traditional industries has the power to upend the status quo.

How would the world change if Apple bought Tesla to pursue the automotive industry? Or if Facebook bought Citibank to create the next generation mobile bank serving a billion people? Tack on a major global mobile phone carrier, and the social network might replicate M-Pesa’s or WeChat’s social success globally. Would Google acquire Salesforce, and in one fell swoop, add another $8B in annual revenue, add an enormous enterprise salesforce, and develop a global leading software business? Salesforce might be less of a traditional business, but the impact to the software world would be just as disruptive.

Amazon’s acquisition of Whole Foods could be the first of several major transactions in which leading technology companies redefine traditional industries by leveraging their near-infinite balance sheets and injecting rapidly advancing technologies or unique distribution that incumbents simply can’t match.

If the trend does continue, these major acquisitions will create quite a bit of volatility and uncertainty – great conditions for fast-moving startups to develop and seize the new opportunities that will inevitably crop up to compete with tech/traditional conglomerates.

First appeared at his blog here

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