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Hey hey whatsssss good everyone

Hope everyone’s had a wonderful few weeks. After the Workweek acquisition announcement my friends keep telling me to “take time off” or “chill and find some hobbies.”

I really tried. I bought one of Kanye West’s Stem Player’s—it’s pretty sick, though I have the sneaking suspicion no one around me agrees. It’s essentially a little speaker (which admittedly isn’t great) that you can use to remix songs, and comes preloaded with Donda 2.

But unfortunately it looks like becoming the world’s first Stem Player DJ isn’t in my cards. With all this spare time I have now, I’ve been spending a lot more time honing a few different thesis’s for my fund (which I’ll write more about in the coming weeks) and just catching up on what’s been going on in the fintech world. The last few weeks have been so busy that I haven’t really had time to keep track of what’s going on in fintech and crypto.

Announcement: Expanding FTT Experts

One of the most fun parts about building Fintech Today was getting the FTT Expert program off the ground.

From the start it was obvious that the FTT Community was filled with talented operators. Tons of people I was meeting had fascinating stories to tell too, whether it’s their own personal story, professional experience around building and scaling products, or their opinions and theories around whether the industry is going.

And when Adam and I were chatting about how things could look post-acquisition, Adam was just as excited as I was to expand the program too.

So one of the first things we’re doing is opening up applications to the FTT Expert network! Feel free to sign up using the form here.

If you’re new to Fintech Today, FTT Experts are experienced fintech and crypto operators who share their thoughts on the sector 1-2 times a month. We already have great experts lined up and are looking to add a few more. While there aren’t any hard requirements, we’re prioritizing underrepresented minorities and operators with a minimum of 2 years of experience.

If you have any questions feel free to hit me up at ian@fintechtoday.co!

Like I said, I’ve been spending a lot of time doing research, which has been really fun. I came across this fantastic American Banker article about M&A activity in the fintech sector and the reasons behind it. I’ve been super interested in this topic for awhile: 2021 was the most active year for fintech M&A according to the piece, and FT Partners says acquisitions totaled $348.5 million last year.

Honestly, what I care about more is if there are more acquisitions in the space coming. Are these one off trends because of the weird post-COVID macro economy, or are these secular industry trends that are indicators of potential opportunities? Below are some of my thoughts:

BNPL Seeks Market Share:

Don’t wanna brag in my first post but I already wrote about this in early August 2021. I’ve always thought there was going to be more consolidation in the BNPL landscape: large players like Affirm ended up getting bigger with larger corporate partnerships while smaller, but still large, players got acquired by each other or other financial platforms that viewed BNPL as a value-add feature to their existing ecosystem (Square-AfterPay.)

There’s no reason this won’t continue—it’s going to get harder for standalone BNPL companies. Not only are merchants now getting this service baked into platforms they use like Square, but payment processors like Stripe and Visa are launching BNPL features through partnerships or in-house development. Building a network is hard—and getting merchants in your ecosystem, while capturing consumer attention is an increasingly difficult and expensive battle.

Neobanks Look To Differentiate:

American Banker cited Walmart buying One and Even as an example here, which definitely fits.

But its hard to imagine a large neobank acquiring a smaller fintech company that does things slightly different in 2022. Unless there are other benefits to the acquisition—technology, talent, or an audience—it’s hard to pick buy versus build as the acquirer, given how easy it is to build fintech products nowadays.

But, on the flip side, a lot of money went into consumer fintech companies that might have trouble raising as the private markets follow the public markets and come back down to reality. If it gets harder to raise, I can see companies selling to larger firms too.

Geographical Expansion:

An important but under-the-radar acquisition was Sofi’s $1.1 billion deal for Technisys. When this first came across my radar, I was a bit puzzled: didn’t Sofi spend a billion on Galileo awhile ago? Why’d they need another banking infra platform?

Part of the reason was the technological efficiencies it would offer Sofi. Another major reason was to help Galileo aggressively expand its global reach. Here’s what Sofi CEO Anthony Noto said in the investor call announcing the deal:

“The combined company will add 12 markets of operation for a total of 16 countries. Technisys' revenue is largely derived from LatAm markets, with a recent number of US based companies adopting its technology.”

Expanding from 4 to 16 countries is a huge deal, especially in a rapidly growing, digital-first, ecosystem. The added product and revenue synergies between the two made the deal make more sense—while Galileo & Technisys were already working together, a combined asset makes sense.

The focus on international fintech has been in the making for years now: 2-3 years ago, European consumer fintech companies expanded to the US, to little success, proving how hard international expansion is to build. As more companies grow and saturate their existing markets (particularly later stage US fintech companies), some might look to expand internationally and buy versus build. PayPal is a great example, having expanded internationally for the last 5 years mainly through M&A. If anything, I think international expansion is going to be one of the most important trends to understand in fintech and crypto over the next 5 years.

Challenger Banks Buy Trad Banks:

I fully expect this to happen—lot of challenger banks are already exploring this route. And while it depends on what kind of fintech company you are, and your strategy for leveraging a bank charter, signs are showing that its proving to be invaluable for fintech companies.

Sofi’s a great example of how fintech companies are thinking about leveraging charters: to lower their cost of capital for lending products and to increase their profit margins on the B2B side too.

With SoFi’s revenue so lending heavy, leveraging a bank to collect consumer deposits to lend off of can lower the firm’s cost of capital on personal and home loans (thus, increasing margins.)

But Sofi also has a B2B infrastructure business through its Galileo subsidiary, which is growing rapidly (signing 40+ customers in 2021.) Galileo and Technisys focus on slightly different things now: Galileo enables partners to add banking services easily, while Technisys is largely a core banking processor to help clients build and scale their digital solutions. The combination of charter + core processor + third-party API’s will allow Sofi to create what they call is the “only end-to-end vertically integrated banking technology stack” that does everything from UI to core support and card issuing.

I definitely expect this to continue but it’s not a widespread strategy: only a few companies have the capital, team, strategy, and execution ability to pull this off. And it depends how regulation shakes out too: it could get easier or harder over time to get a charter, depending on the whims of the government.

Crypto Companies Looking To Expand:

Crypto companies have always been acquisitive, and tbh I have a bit of a problem lumping in crypto with fintech but that’s a debate for another day.

Saying crypto companies are looking to be acquisitive is like saying crypto companies are eager to buy naming rights to stadiums: both are pretty obvious. Crypto as an asset class is growing aggressively and the needs for users in the crypto space are expanding too.

One thing that some folks in fintech have openly hypothesized about is why crypto companies haven’t started buying fintech firms yet, and if they ever will. Strategically you can craft an argument for why it makes sense: wallets functionally operate a lot like a neobank, providing you a place to store your money (wallet & a checking account) and tool to send & receive money (wallet address & account and routing numbers.) A wallet buying a consumer fintech company to expand aggressively into consumer finance almost seems like a no brainer?

Consumer fintech companies have gotten expensive from an M&A perspective, but crypto companies have a lot of cash and even more in highly valued stock (which is potentially more liquid than traditional software companies thanks to tokens.) But if consumer crypto gets more competitive, and users are eagerly looking to continue bridging physical and digital assets through things like NFT’s, smart and capitalized crypto firms like FTX could be bigger players in fintech too.

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