The UK fintech industry is alive and kicking—if Visa’s recent acquisition of Earthport is anything to go by. The £198 million deal which came through 18 months after MasterCard buys Vocalink for £700 million gave Earthport a value that was four times the stock’s closing price at the time of the deal.
With the rapid growth of the Internet and with cross-border e-commerce transactions, customers have come to expect a simple, instant multichannel experience, wherever they are making their purchases from.
Schemes are looking at ways to innovate, diversify and at the same time, strengthen their core payment rails. The Earthport acquisition strengthened Visa’s position in the digital currency ecosystem while MasterCard accelerated its move into ACH-based (Automated Clearing House) real-time payments. The Earthport and Vocalink acquisitions have shown the importance of having a globally connected ecosystem and the value placed on such deal by payment providers.
So, there is a certain curiosity as to why these innovative fintech companies allow themselves to be acquired rather than scaling up.
Fintechs glass ceiling
In order to successfully scale in the payments industry, one needs to have substantial networks and deep pockets to build and fund the business—given the time it takes to achieve this. And while these companies may have impressive technology, creating a global ecosystem fast enough to be profitable in a timeframe to keep traditional investors happy isn’t a reality. MasterCard and Visa’s ecosystems effectively started in the 1950’s and early 60’s, and it’s taken them around 70 years to get to where they are today.
The fintech industry has been around for less than 10 years, but investors can have unrealistic expectations around how quickly an ecosystem can be built. Let’s not forget that banks are notoriously slow to move and implement change: it takes many years for volumes to grow enough before an ecosystem can be fully established in the market.
The demand for globally connected ecosystems
There are a lot of global businesses that want to deal with providers who can handle their entire payment requirements to help with the growth.
It’s not effective to deal with a partner that can only help in one market. There is now a growing trend to have one partner consolidate global payment providers into a single integration point—as well as provide the flexibility to build perfect the system. This provides access to local acquirers, offering solutions better suited to local markets which reduce costs of processing and dramatically boost conversion rates. Businesses are then ready to accept payments from the moment of integration and face no payments related barriers to fast, sustainable growth.
Selling too early?
Looking at the VC market in the US: it’s more mature and a lot of tech companies have been born on the West Coast. But they also benefit from the presence of seasoned VC companies that are not afraid to back them. For example, Uber had a $50-60 billion valuation before the business had even entered into the market. The company has now been told by banks that it could be worth $120 billion when it goes public this year, although ultimately it will be the investors who will decide the company’s valuation.
However, the UK market is very different. As soon as a company gets to unicorn status, or a £1 billion valuation, everyone wants to buy it. Achieving a unicorn status out of London means: if your company is backed by a bigger firm, it is possible to become a £10-£20 billion player in the next five to 10 years.
For founders, it’s hard to resist a deal, after having gone through the ebbs and flows of getting to £1 billion. This means the effort that’s required to get it to the next stage will be less amenable; so a lot of investors will decide to sell or move on.
The next 12 months
As we move toward an increasingly cashless society and more banks disappear from the High Street, we’ll undoubtedly see more acquisitions with the traditional players looking toward the fintech industry for inspiration and innovation. So, the big companies will be asking themselves: Does the value proposition bring something over and above what we can offer? Does the business bring something new and innovative that can be sold to existing customers?
While some could argue it’s a shame that all these innovative companies are being acquired, it’s really a win-win situation for customers and businesses. For fintech businesses the opportunity is enormous: to create an innovative solution that improves customer experience, and big players like Visa, MasterCard, Paypal or Google have no choice but to pay out in the face of pressure from rapidly advancing customer expectations.