A record-shattering 2015 for fintech industry deals gave way to a lackluster 2016, according to a report last month from KPMG.
But despite the downturn, financial industry disruptors haven’t lost their luster completely. While most – including KPMG’s own analysts – anticipate a market rebound, the accounting firm’s data showed a dramatic fall in deal volume to $25 billion last year from $47 billion globally in 2015. The report detailed an even steeper drop in U.S.-based fintech, which saw deal volume decline to $12.8 billion from $27 billion.
Local fintech players said they are unconcerned by the off year, attributing the slide more to an anomalous spike in 2015 activity rather than the start of a slump for the industry. Mark Trousdale, executive vice president of West Hollywood-based InvestCloud Inc., said the firm’s $20 million acquisition of London-based Babel Systems, which was announced in January, and its move into new headquarters at the Pacific Design Center are signs of confidence in the larger business model.
“Technology has always been an important part of finance,” Trousdale said. “Fintech is certainly changing, but it’s not going anywhere. Information is power and will always be the basis for investing, and being able to get more accurate information faster is what fintech does.”
Trousdale said that the Babel deal was likely InvestCloud’s big transaction for the year, but there was at least one smaller acquisition in the works. The company, which develops investment management software, has raised some $100 million since 2010 and employs 250 in outposts that include New York, London, and Toronto.
Because strategic and private equity money stayed away from many types of deals last year, fintech executives and analysts said the sector’s slow year was not unique. Given that venture capital investment in the sector actually increased to $13.6 billion globally in 2016 from $12.7 billion the year earlier, most players in the space aren’t sweating the M&A numbers and expect there to be ample exit strategies available.
Jed Simon, chief executive and founder of Beverly Grove-based online lender FastPay Partners, said his company is weighing its growth options. FastPay, which is focused on lending to digital media companies, has raised close to $70 million in funding, which does not include an undisclosed commitment in November from Citi Ventures, the venture capital arm of Citigroup Inc.
Simon said the allure of getting more backing – or the potential of being acquired by a big financial institution – is tempered by what that could mean for FastPay’s business model, which is built on flexibility and speed.
“There’s certainly an allure to having a massive balance sheet backing you up,” he said. “But you also become part of a larger and larger system with more rules and ask, would it impact our service? There are pros and cons.”
Divided space
While some firms, such as InvestCloud, focus on information and data, the fintech industry encompasses a diverse array of services that include everything from algorithmic stock-trading platforms to online consumer lending to blockchain. While the space is somewhat fractured generally, the biggest divide exists between companies that seek to innovate within the established framework of the financial industry and those attempting to disrupt the system on a more fundamental level.
David Sands, a transactional attorney at downtown’s Sheppard Mullin Richter & Hampton, said fintech businesses – especially those in the latter category – can run into trouble.
“The difficulty in fintech is that most tech firms don’t understand the fin,” Sands said. “They don’t get the complexity of the regulatory framework and risk financial institutions need to mitigate.”
That perception was reinforced last year when publicly traded Lending Club Corp. – one of the largest and most successful online lending players in the fintech space – was caught in a scandal. The company, which repackages consumer and small-business loans for sale on the secondary market, admitted to selling an investor $22 million in unwanted loans. The development forced Renaud Laplanche to resign as chief executive in May. Lending Club’s share price cratered after the scandal and hasn’t recovered much since, closing at $5.29 on March 1 – a decrease of nearly 80 percent from its December 2014 initial public offering price.
But for some fintech players, the Lending Club scandal represents opportunity. Take Costa Mesa-based Payoff Inc., which helps consumers pay down credit card debt with lower-interest fixed-rate loans. The company has raised $70 million in equity capital so far and has originated $110 million in consumer loans, according to Chief Executive Scott Saunders.
Saunders said the idea of new lending models was gaining credence with heavy-hitters such as Goldman Sachs Group Inc., which are starting to launch competing platforms. However, the thought of selling the firm to a bigger player hadn’t crossed his mind.
“We’re very focused on our core business, improving different aspects of our model, and getting the platform to profitability,” he said. “The real win, whether for big banks or small fintech firms, is developing trust with the next generation of consumers and we feel we can build an exceptional experience for the customer.”
