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Supplements » FundTech Autumn 2020

Roundtable: From fundtechs to fund managers

FundTech – How has Covid-19 impacted the fintech world? Has it made a lot of the smaller companies more vulnerable to either competition or acquisition? Or has the situation strengthened the case for the use of digital technology and homeworking?

Zubairi – Covid-19 has shown massive gaps in several areas. For example, during lockdown, nobody could send a fax to a Luxembourg institution because nobody was in the office to collect it, so suddenly all settlements became digital. It was the same with signatures, which all became digital. We’ve seen a massive influx of requests from the traditional institutions asking us to help them identify what is going on in specific areas such as digital signatures, e-identity, or mutualisation of KYC processes. The real focus is on cost-cutting, and regtech seems to be booming. Most of the start-ups in our facility are having a field day right now because they have been inundated with meeting requests from institutions.

Belding – Covid has had a positive and a negative effect. To some degree, people have pressed the pause button on everything while they get through this period, especially the early stages of lockdown in March and April. If you are a fintech waiting for the next big deal that really launches you, that probably got delayed. But the bigger picture is that the more things you do in an automated way, the more money you save. Certainly the impact that Covid had on the mobility of people and the ability of people to work together in a more traditional way is exactly the type of driver you want to create much greater levels of automation. We helped several companies who were in big trouble because the faxes were dropping off the fax machine in their office and they couldn’t process it. The ultimate effect is probably going to be positive, because people will look to focus on the things where you really need human beings and then just automate the hell out of everything else. A lot of fintechs have that principle at the heart of what they do so I think it’ll work for them very much in the next few years.

Hale – The sad truth is that only one in 20 fintechs survive in the medium term. It’s not that they get acquired, they just fail because they don’t get the momentum to get off the ground and start making money so they survive in the medium term. In the Covid-19 environment, cash was being protected by investors and customers alike. It is starting to open up a bit because the world’s getting to a new norm. But if fintechs want to get their business from a cash-burning situation to a cash-positive situation, they need their clients to invest in technology rather than preserving cash and not making the capital expenditures necessary to digitalise their businesses. The environment remains tough, with venture capitalists being more cautious and driving a hard bargain when they invest, because they know fintechs may need the cash relatively urgently to survive. 

Having said all that, there’s a massive opportunity. The reason that the likes of Amazon have been so successful during Covid is because the whole world is moving to digital and Covid has accelerated that process. So if you can get through the pinch point that we’re in now and come out the other end with a strong solution, the transformation of the industry will accelerate.

Hampshire – There are two perspectives on this. In terms of deal flow and new businesses looking for investment, there’s a very healthy pipeline of acquisitions and investments that we want to make within our funds and we’re seeing a lot more opportunities to invest and a willingness to invest. As investors, working closely with the portfolio businesses during Covid has been important because if you’ve got some great businesses in your portfolio that are hit with some short-term challenges, then you need to support them, and we’ve done that. 

In the longer term, the transition to technology-based working and remote working has been very positive for fintechs. Clearly, the last six months have been difficult for all businesses, and small businesses in particular, but I do think the world is far more open and alive now to the pace of digital transformation and what’s possible with technology than they would have been 12 months ago. That’s got to be a positive thing for fintechs.

Vinden – At Alpha, we’ve definitely seen an increase in clients looking to buy cheap fintechs. There is still a lot of dry powder out there looking for a good home. Maybe some of the pre-Covid prices were a bit inflated and now they are looking more like value-for-money prices.

Hale – There is plenty of dry powder. Getting the angel investor, venture capital or private equity firm to put the money into the business is the challenge. The level of due diligence and the price they’re willing to pay, that’s the problem.

Vinden – We’ve talked a lot about asset servicers, and I’m pleased because it’s an unsexy part of the industry which doesn’t often get too much focus, but I think the acquisition of Charles River by State Street has been a real game-changer in terms of how people think about technology ecosystems and asset servicing. I expect there to be much more M&A of that style within the asset servicing sector on both the traditional and alternative side. There’s a lot that can be done in their own technology stacks and there’s a lot of interesting fintechs out there that can be bolted on. 

FundTech – How successful have asset servicers’ innovation labs been? Do you foresee maybe a whole spate of acquisitions from custodians, rather than looking to accelerate their labs?

Hale – No, and I’ll tell you why. Asset servicing banks’ and fund administrators’ margins are thin compared to fund managers because they are typically large and playing the scale game, so they don’t really have the desire and budget to invest in true innovation. They are trying to show they’re becoming more digital so they have to have these innovation labs, but I haven’t seen anything of materiality come out of these labs. They’ve probably kissed quite a few fintech frogs but have they delivered anything that has made a material difference to the industry? They might have introduced some robotic process automation but that is lipstick on a pig to me – putting robots on top of a nest of spaghetti when you should be fixing your underlying infrastructure.

Zubairi – I do disagree a little bit with Keith. I am pleasantly surprised with Societe Generale, among others including State Street and JP Morgan, which has been doing interesting stuff with tokenisation. Societe Generale was the first institution in Europe to do a tokenised offering using its own internally developed start-up which is being spun off. Again, it boils down to the fact that the European banks are not in good shape, and they are the core asset servicers. The major innovations are going to come from the Americans and Asians because the financial industry as a whole seems much healthier over there.

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