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 magazine, 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.
Breaking down fintech into more specific areas, are there any fintech verticals that you believe will or should be of particular attention to investors?
Alternative lending is a key focus of ours right now. We believe that although there has certainly been a bit of a shock to the system in 2016, a tremendous opportunity remains for those who can pinpoint the right investment. That is because the consumer demand for these offerings remains robust, and traditional banks are continuing to underservice this segment, whether by choice or simply because they are handicapped by their infrastructure.
Additionally, the market will see increasing investment by asset allocators and other investors who are hungry for yield in the current low rate environment. We have already seen recent, significant commitments by high quality investors such as Fortress, Soros, Guggenheim,
among others, supporting the funding needs in the alternative lending market.
Fraud and risk management is another key area of focus for us. Whether it is securing the front end of transactions with innovative data-based solutions, software or hardware-based security; working with financial institutions to mitigate the costs and process of dealing with fraud on the back end; or preventing and addressing the theft of personal information (ID theft) so that stolen credentials never make
it into the financial systems in the first place; there will be continued investment in trying to secure transactions against criminal activity as this is an essential area of fintech growth in payments.
The expansion of the cross-border commerce market also creates tremendous opportunity, but simultaneously introduces a myriad of other considerations that need addressing (e.g. FX transactions, payments logistics, global fraud prevention, and the harnessing of local payment methods). This encompasses C2C payments as well as B2B and C2B.
Historically, there has been significant consolidation in the consumer-toconsumer remittance market, with many payment processors and investors looking to add capabilities that compete with the traditional Western Union business. Corporations are also facing issues
with payments as their businesses are increasingly global. In order for businesses to truly maximise their global presence, international payments must do a better job of addressing the speed, transparency, ease, and reliability of international payments. Employees, agents, business partners and other stakeholders of businesses now reside all over the globe and the speed of commerce has outgrown the legacy solutions of wire transfers and correspondent banking networks.
Additionally, in this environment where counter-parties are further and further away from each other, risk management systems must be that much more sophisticated to prevent fraud and comply with local regulations, such as AML and KYC. Retailers are also starting to realise
the “promise of the internet” which is to truly sell goods and services to anyone, anywhere in the world. However, to facilitate these transactions, local forms of consumer payments must be compatible with a retailer’s system, and potential fraud must be contained, so there is much room for fintech growth in e-commerce.
Geographically, do you think we’ll see a shift in where money is going to be invested in fintech moving forward?
Different regions will see different investment focuses, given each region’s specific market needs. Mobile payments will continue to garner a lot of attention in the US but given the entrenched systems of card-based payments, physical POS technologies such as NFC will face a tough consumer adoption test. Mobile payments in terms of in-app purchases or e-commerce transactions initiated from a mobile tablet
smartphone, however, will continue to see strong growth.
Europe and Asia, where infrastructure and consumer behaviours are different, will experience other trends. For example, in Japan, using NFC payments for in-store purchases is a commonly accepted practice.In areas where the financial
services infrastructure is relatively underdeveloped (e.g. emerging markets such as Africa, India etc.) the smartphone becomes the only means for financial inclusion for a vast majority of the population and you will see investments in technologies that address this dynamic.
What are the trends do you think we’ll see fintech market M&A in 2017?
M&A markets have been robust for a number of years since the credit crisis. This has been driven by strong fundamental performance, a strong capital markets environment, low interest rates and strong trends within fintech themes. We believe that the markets will
remain healthy and conducive to fintech companies looking to raise capital or seek exits for the near-to-medium term.
Recent PE and VC fund raising efforts have been buoyed by the persistent low rate environment which have pushed some asset allocators to increase their exposure to the private equity asset class that have demonstrated superior returns. According to Prequin, at the end of 2016
private equity firms had $860bn of capital to deploy.
A low rate environment also supports increased M&A activity as investors/buyers are able to finance transactions with less equity. While the US Federal Reserve and the European Central Bank have both increased their hawkish rhetoric of late, we believe any increases will be gradual and modest in the near-tomedium term. Strategic buyers will also be actively looking to grow via acquisition supported by strong cash balances and stocks prices near all-time highs. We therefore anticipate deal flow from quality companies to remain healthy in the nearto-medium term.That said, with rates rising, the new US Administration starting to enact controversial policies, and the undercurrent of global geopolitical uncertainty, longer term risks certainly remain in the US and global economy.
Read part one of the interview here, or alternatively you can download your complimentary copy Payments [R]Evolution magazine here.
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