Golden Bull, Bear and Piggy Bank standing on a white shiny Background
The international payments sector is anticipated to be worth a staggering $2 trillion by 2025, and fintech firms around the globe are crowding this market in an attempt to capture over 15 percent of the revenue that traditional banks currently hold, which could be as much $280 billion according to a recent Accenture report.
However, an unfocussed blanket strategy is not efficient enough for the complexity of the global payments market and would have an impact on the profits that can be derived from each transaction. In order to be successful in an increasingly margin-thin market, fintech companies must instead solve vertical specific payment problems.
Flywire believes in this strategic vision, the importance of a disruptive business model and as a result, alone handles one percent of global payments volume. Alongside this, after a funding round led by Goldman Sachs which added $120 million to the coffers, Flywire’s valuation was pushed to over $1 billion and thus, a new fintech unicorn was born.
Soon after the fintech firm’s acquisition of healthcare software provider Simplee, I spoke to Flywire CEO Mike Massaro and Bain Capital Partner Matt Harris about how fintech firms are now profitable businesses and the industry has moved from competition to collaboration to partnerships.
Very little venture capital had been funnelled into financial technology companies until the financial crisis of 2008, but then early breakout success, particularly in the payments space, lent itself to the creation of the likes of Square, Stripe and Braintree and soon enough, Venmo.
Technology driven payments companies have since competed with the legacy players, while the lending, asset management and wealth management industries have been working on their own disruptions, with the insurance space also seeing a lot of entrepreneurial activity.
Massaro kicked off discussions with a pertinent point: “When people talk about disruption, they want to talk about who’s getting disrupted as opposed to what are the core experiences that are getting disrupted. That’s the difference and this is where the evolution in fintech started.”
Similarly, Harris believes that at the start of this evolution, “fintech activity was about highlighting that these digital-first entrepreneurially-led venture-backed companies were providing more delightful experiences or focused on customers, whether they be consumers or businesses, and that the incumbents were sleepy, beset by regulation and under siege by the crisis.”
With new entrants in the challenger bank market coming to the fore, traditional financial institutions started to drive the macro trend of providing a better user experience across the industry. The processes that are yet to be digitised well are those that were, are and will continue to be attacked.
“Flywire is very similar in that we attacked vertical payment industries, such as mobile and cross border payments, that were painpoints for users,” Massaro added. However, the irony is that today, challenger banks, that are intended to disrupt the bank, continue to offer traditional banking services and focus on an arcane kind of product distinction that customers do not care about, questioning whether this is true disruption.
What has changed is that consumers now have multiple banking relationships, whether it’s a few accounts with numerous fintech players in addition to a current account or credit card from a long-standing bank. Massaro predicts that there may be a consolidation which will result in some banks being forced to offer better services and in turn, customers may leave.
However, Harris states that it is impossible to “build a financial services product without having an incumbent as part of the mix. You cannot be a payments company without having a bank partner. All these legacy players are integrally bound up in the new players as well, which requires a softening of rhetoric and an understanding that accommodation is important on both sides, and profitable.”
Fintech company cash never exists outside of the banking system; it must always live in a bank in a custodial account. The technology, on the other hand, where all users interface with their money, that is better off controlled by a technology company. With customer service perfected and investment being funnelled in over the years, fintech companies have also started to generate revenue, but how much do these organizations still rely on funding?
On the acquisition of Simplee, Massaro highlighted that Flywire has constantly been looking at deals in healthcare and education and had been aware of the healthcare software provider from a competitive angle - the company having effectively managed capital and reached good scale in a growing market.
Further, to use Flywire as an example, Massaro explained that the fintech firm had been an efficient business prior to its most recent round, having raised $90 million in primary capital and while raising funds in Series E, retained around $45 million on the balance sheet. In addition to this, as a fintech company, it is easy to get distracted by what looks like easy success, rather than what is right for your business.
Harris says that venture backed companies are culturally known to be in the “move fast, break things” category, but that is not a mindset that works in fintech. For collaboration to be successful, and to Harris’ point, every fintech company is a collaboration with a regulated financial institution, we must all be mindful, careful, thoughtful and to “measure twice and cut once.”
Examples of this include hiring employees too fast, not waiting for the perfect product market fit before expanding or even expanding internationally too quickly. Massaro says that “there are lots of traps that companies fall into that cause them to spend capital on what isn’t necessarily core to what they’re trying to do as a business, and there is a lot of capital in the private market.
“From an investor perspective, it’s more about placing bets. They want to invest in growth, but not growth at all costs. It’s about how you scale your business in a productive and fiscally responsible way.”
