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What Recession? There’s No Such Thing in FinTech! Or Is There?

Recession is bitter medicine to sustain the long-term health of capitalism, they say.

The supposedly imminent recession – its timing, magnitude, regional impact, etc. – is becoming a frequent topic of conversation at industry conferences. As we prepare for Money20/20, let’s expect scrutiny of the announcements and presentations to address this question:

How will this recession affect us here in the FinTech ecosystem?

Two additional questions make this topic difficult to understand:

  1. What is FinTech? What’s in scope?
  2. Who is a player in the FinTech space? 

MEDICI answers the first question with its Daily Vitamin, which is published every day. Take a look!

The second answer spans almost 15,000 companies across 66 subsegments in 19 categories – ALL within FinTech++ (including InsurTech, WealthTech, RegTech, BankTech, etc.). And MEDICI is now beginning to cover some of the natural adjacencies in AgriTech, HealthTech, etc., so that everyone has a comprehensive understanding of the ecosystem’s true economic impact. We will come back to this a bit later.

What makes the recession question even more challenging, especially for investors, is that most of the players in this space are privately held venture-backed companies with minimal public financial reporting and opaque secondary markets, if any. And billion-dollar investments from Softbank and sovereign funds in yet another unicorn of the month only make it harder to appreciate the true health of many large FinTech players.

It’s worth contextualizing the recession question by analyzing the history of the handful of publicly-traded companies in the space: Fiserv, Wirecard, FIS, Mastercard, Visa, PayPal, Adyen, Finablr, etc. Note that these companies are listed chronologically according to their IPO dates: from Fiserv in 1986 to Finablr in 2019 – 33 years of existence in itself is quite remarkable for our ‘young’ industry!

There are many resources that allow the diligent analyst to study these companies’ financial performance from publicly available data. There might be some learnings and perhaps some surprises, but in general, it’s well-established that public FinTech has outperformed the S&P 500 for most of the past 33 years (based on a Bloomberg index of 24 public companies). And in the recent past, privately held FinTech unicorns have probably outperformed their public counterparts, but that’s not a fair and transparent comparison. More importantly, such historical and purely quantitative analysis may not tell us the complete story of how the recession might affect FinTech. Instead, a qualitative evaluation of these companies is both timely and telling.

Fiserv & FIS

These processing giants have suddenly become more interesting after their recent acquisitions of First Data and WorldPay. It’s hard to downplay the importance of the seemingly simple functions these processors provide their bank and merchant customers. Whatever the new way to pay might be, or whatever new experience is tied to a bank account, these companies provide the guts of the technology infrastructure that keeps everything in line. Their latest acquisitions now allow them to be really ambitious and go after the duopoly of Mastercard and Visa from the inside out.

These are supposed to be the “boring back-end utilities” of the banking world, yet look at their performance relative to the S&P 500 over the past 10 years!

Mastercard & Visa

If you disagree with me calling Fiserv and FIS “FinTech” companies, you will have a harder time accepting these network brands as such! Even though their strength comes from their consumer brands and onerous operating agreements (making them more of business model innovators rather than tech-driven innovators), we must look carefully at their attempts to focus on technology as drivers of growth, especially in the case of Mastercard. Perhaps their API approach from a few years ago didn’t yield the results they expected; perhaps their move towards tokenization needed Apple Pay as the triggering event; perhaps their P2P offerings are too slow to market. But it’s undeniable that they both see the need to innovate via technology, not just the power of their brands. This is the FinTech within them effecting change, strengthening their propositions in the face of global competition, and taking them into new digital ecosystems.

Again, check out their stock performance – there’s a plethora of financial literature on payment processors and network brands. You will see that $MA and $V have performed in a way that’s almost better compared to the S&P 500 over a decade or so.

Wirecard & PayPal

Everyone knows PayPal – this company is generally considered “the original FinTech,” and it doesn’t look like it’s losing its crown anytime soon! The origins of the company are legendary with the (now) famous founders and the “mafia” of PayPal alumni that has perpetrated the entire industry. As a close observer over the past 15 years, I have seen the company narrative evolve: from anonymous online currency, to enjoying the warmth of the eBay cocoon, to being the most hated by the issuer banks, to most active in embracing social + local + mobile commerce, to strategic repositioning as partner to the incumbents rather than disruptor-in-chief, (and the latest) to a company that cares about democratization of digital payments. Dan Schulman deserves immense credit for the latter part of this journey, yet the most critical asset is probably its data analytics engine that manages risk in the background while enabling easy, seamless, frictionless payment experiences. 

On the other hand, most people outside the industry will not recognize Wirecard as a dissimilar peer that has as much tenure and as much tech depth as PayPal. These are two very different companies on the surface: Wirecard is a behind-the-scenes player, and it also supports good old-fashioned cards. It’s been hiding in Munich and is listed on the German stock exchange – in fact, its first-ever investor roadshow in the US was earlier this month! That’s where I got to meet the company leadership and had a glimpse into how they think.

Of course, both these companies have grown rapidly and contemporaneously (which is also reflected in their stock prices: $PYPL & $WDI), but if we get back to the topic at hand, what’s worth noting here is how much tech these FinTechs have in them. After all, Dr. Markus Braun, CEO of Wirecard, is a computer scientist with a Ph.D. and is also the CTO of the company! 

Adyen & Finablr

These are the newest kids on the block, and by that, I mean in the public markets – $ADYEN.AS & $FIN.L, so, let’s look a little closer at these billion-dollar “startups.”

Both have grown organically – first as privately held companies, and now as listed giants. Finablr has far more depth and breadth in the payments value chain, yet Adyen, with its very visible growth journey even prior to its IPO, has had a chance to be well-appreciated by the ecosystem. Adyen, like Wirecard, has been operating in the background, while Finablr owns some strong consumer brands and has recently announced partnerships with even bigger global brands like Samsung. Did you know that Finablr also owns a digital bank in France?

Finablr’s technology focus and recent strategic repositioning are noteworthy. Their investment in Swych and the onboarding of new senior management sets them up as a tech-driven innovator while also benefiting from its historical strengths. Adyen’s profit margins and overall scale are certainly enviable, but tech is what makes them sustainable.

The overall payments ecosystem is still regionally disjointed, technologically fractured, and generally siloed, and these two companies are gearing up to leverage all their assets and play in the big league!

Let’s also revisit the true impact of FinTech++ – the ‘Tech’ not just for ‘Fin,’ but all its adjacencies. If our collective long-term goal is to alleviate the human condition, then we cannot ignore the growing disparity in the world. Until we completely remove this disparity, FinTech will continue to stay relevant to help normalize the cost of capital (FinServ), to help people access and afford cures for diseases (via HealthTech), and to increase the food output of our planet with fairer prices for those who produce it (via AgriTech).

In the eclectic group of public FinTech companies that have been outlined above, some companies like PayPal have been publicly endorsing financial inclusion, while others like Finablr have it rooted in their DNA. Look at Finablr’s origins and their founder’s work in marrying the needs of healthcare workers and patients in the Middle East.

Global economic impact is FinTech’s true mission, and we all have enough work to do, perhaps for generations to come!

Now, what does all this have to do with the ability to predict the recessionary pressures on FinTech? 

Well, everything you read above tells the innovator in you that the ‘Tech’ has been playing a massive role in making the ‘Fin’ more valuable, and there are no signs of that abating in the foreseeable future. FinTech has been growing, changing, and delivering value throughout economic cycles along with utter disregard for the somewhat orthodox economic notions such as recessions. As long as ‘Fin’ is disruptable, and as long ‘Tech’ enables that disruption, there will be economic demand, buffering the sector from the more mundane cyclicality of traditional demand-and-supply economics.

If are in a rush, you can skip the following four paragraphs, but speaking of the notion of recession, here’s something related (perhaps a tad academic) that came out of a conversation with a new friend in the IR world:

Some macro issues in the global markets are already on people’s minds: the low rates that seem to be low forever, the ultra-long run of the bull market, and of course, the growing chorus about recessionary indicators – my ECON 101 professor’s delineation of leading vs. lagging indicators is still fresh in my memory after 15+ years, but I do wonder how much of that theory is still relevant.

Let’s look at some recent failures of tech listings: $UBER, We.co, etc. Taken together, do they amount to a collapse of the trust that public markets have in Tech? Are we entering a period where scrutiny will be far higher and valuations far tighter? Does that trend – more than other indicators – suggest that we’re nearing, or perhaps already in, a recessionary moment?

And that behooves a look at another significant trend in public markets over the past year or so, which is the size of market consolidation taking place in FinTech (the mega-deals we touched on earlier by $FISV & $FIS), and, ominously, $FB’s lurch (back) into the payments space. Essentially, what one would uncritically characterize as a recession in normal markets has already been taking place in FinTech public markets and will continue to play out, to the benefit of the industry, by focusing on scale and by creating stronger players.

Yes, public markets are becoming less forgiving, but FinTech is clearly benefiting from this as stronger players are emerging more clearly; markets will ultimately reward sustainability, not just rapid growth. The astute investor wants to see better governance, not just profits (and definitely not just “eyeballs”). As clichéd as it sounds, the tangible long-term results from FinTech investments will come from intangible common-sense: early-stage investors with an “all-or-nothing” mindset getting out of their own way; VCs pushing their founders to be more self-aware; the “disruptors” embracing the need for regulatory protections; and finally everyone – innovators and investors alike – respecting the benefits of more transparency and pragmatic collaborations.

Regardless, the long game for FinTech continues to be full of optimism and growth!

Ad maiora semper!

P.S. Do visit all these companies at Money20/20 and share your thoughts about them with me @khurjekar & @goMEDICI. And if you invest your energy in producing a quantitative corollary of this analysis, we will be happy to publish it here as well!

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