“The markets will remain healthy and conducive to fintech companies”: Tony Seto, Freeman & Co. ED Pt.1

Tony Seto has recently joined Freeman & Co., a US investment bank specialising in M&A and capital raising advisory services for the financial services industry, to lead its Payments and Banking fintech operations.

In an exclusive interview with Payments {R}Evolution, Tony gives his perspective on the state of the fintech M&A market in the US, and looks ahead at where the payments industry can expect growth in the future.

What is Freeman & Co.’s position in the investment banking space, and what is your role at Freeman & Co?

F&Co. is a leading advisor to companies in the financial services space. Our transactions range from as low as $50m to over a $1bn, so we have the flexibility to service companies across the size spectrum. The firm provides mergers and acquisitions (both buy side and sell side) and private capital raising advisory services (traditional VC, PE, and debt financings for companies and capital placement services for funds); it has a strong heritage, successfully completing over 100 deals in its history.

Traditionally, F&Co. has focused on providers of financial services such as asset managers, broker dealers, insurance, and specialty finance companies. However, as digital technology has developed and is now an increasingly important facet of the industry, fintech has also become an increasingly important area of focus for F&Co, where Gagan Sawhney and Chris Pedone have led numerous transactions in securities processing tech, asset/wealth tech, capital markets/trading tech, and other areas of “Wall Street Tech”.

I joined F&Co. as an executive director and will lead our efforts with companies in the Payments and Banking Fintech/Data sectors. Gagan and Chris will continue to focus on advising companies in the “Wall Street Tech” sectors.

Talk us through some of the recent fintech deals that you have been involved in advising on.

A couple of recent transactions that stand out are engagements with Kount and Transaction Wireless, both of which resulted in marquee announcements in their respective spaces that represented important trends in the evolving payments market.

The Kount deal resulted in an $80m recapitalisation by CVC Growth Equity. CVC is one of the largest private equity firms in the world and Kount was one of the first investments made out of the CVC’s new Growth Equity Fund.CVC recognised Kount as a leader in the card-not-present (CNP) payment fraud prevention space, which is where the motivation to make the deal came from on their side. Gartner recently concluded in a report that companies will begin to incorporate more data-driven detection and response solutions to combat cyber
criminals in addition to prevention-only software. This trend will drive growth in the market for years to come.

As consumers and businesses continue to accelerate their level of commerce via digital channels, criminals are similarly leveraging these channels to commit fraud, meaning that improved security technology has to be implemented at the same rate as omni-channel payments technology is rolled out.

Transaction Wireless, a leading provider of digital gift card solutions, was a client I advised during its sale to First Data. This represented a key deal for First Data’s strategy of adding more innovative digital technology solutions. It was the largest acquisition by First Data since
the KKR & Co. buyout. Transaction Wireless has since become an important platform within the First Data organisation, leveraging First Data’s leadership position in gift card processing.

How has investment in the fintech industry evolved over the past five years?

In general, the investment appetite for fintech has grown considerably. Payments have historically been a less sexy sector of technology, because the focus has been on providing the “plumbing” of commerce, which is often invisible to consumers and seen as a commodity. Despite this, the market is still an attractive investment area supported by strong macro trends (e.g. migration from paper to digital forms of payment, increasing demand of real-time and frictionless transactions by both businesses and consumers, and regulatory changes (like in lending) that force the market to adopt new solutions to enhance existing methods). The recurring nature of payments and relatively high incremental gross margins makes for business models that are both relatively predictable and potentially very profitable, at scale.

Major drivers of fintech’s recent momentum include changes in consumer preferences and technological advancements. New consumer-facing fintech companies are having a profound impact on the way people manage their finances and payments. This is attracting new investors who historically have been more focused on more consumer-oriented sectors. There is also an increasing need for financial services to collaborate or acquire fintech companies to stay competitive; making these companies valuable investment opportunities.

The specific factors that we have seen driving the innovation in payments that has sparked investor interest are:

1.) Consumer technology behaviour

Consumers have increasingly gravitated towards remote methods of commerce in replacement of human interaction in all aspects of their lives (e.g. transportation – Uber, food industry – Seamless, travel – Expedia, ticketing – StubHub, commerce – Amazon). Proliferation of personal devices such as smartphones and tablets have fuelled this growth and enabled on-demand commerce; consumers can bank or buy anything, at any time, from anywhere, thanks to the hardware they keep in their possession at all times.

Because consumer habits and available hardware dictate that payments technology is required to fulfil a market need, fintech has responded to the market forces, developing major advancements in enabling safer, more efficient, and more cost-effective commerce environments across digital channels, for both businesses and consumers.

In the banking sector, whilst the death of the retail branch has been greatly exaggerated, innovations such as multi-function ATMs and stand-alone kiosks have become necessary to make the in-store banking experience more appealing to today’s consumers. Another
example is in the lending space, where online platforms have revolutionised the borrowing experience for the consumer.

While the industry certainly has gone through its share of growing pains, there are tremendous opportunities to digitise the entire lending process which will benefit both consumers and lenders.

2.) Data analytics and processing power

Consumers’ digital footprints are more extensive than ever, and growing at an accelerating rate. The expansion of data sources for analysts to record and measure activity creates an opportunity for a better consumer experience and more efficient systems. Data analytics are also becoming more advanced to address applications such as marketing, loyalty and fraud prevention.

The flipside of increased data collection, however, is that the valuable data provides an opportunity for criminals as well. Fintech solutions are needed to protect against activities such as fraud and ID theft.

3.) Regulations

A changing legislation landscape has always been, and will continue to be, a driving force of innovation in financial services, and with such a proliferation of regulatory changes or uncertainty on the horizon, the market is ideal for fintech to thrive. Past administrations have greatly expanded the power of regulatory institutions through legislation such as Dodd-Frank, with the aim of adding more stringent oversight to the financial sector.

Tech has been called upon to monitor and report in this area. The Trump administration certainly seems to be taking softer stance on regulation, with a rolling back of Dodd-Frank certainly not out of the question, but time will tell what kinds of changes we will actually see and how long it will take to make an impact.

Other key regulations such as the OCC’s push for national fintech charters in the United States and the PSD2 in Europe promises to support even more innovation in fintech.

This article was originally published in Payments [R]Evolution magazine, which is available for download here

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