More businesses are seeking commercial strategies that can help them strategically engage with fintechs. The key to success lies in understanding their own risk profiles, leveraging available resources, and staying attuned to the evolving capital markets.
Last week, Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, spoke at the CPI Global Summit about the strategies businesses should explore. PaymentsJournal recently sat down with Bodine to discuss the current state of the space and get a glimpse into an upcoming report.
What was the impetus for the presentation at CPI Global and the upcoming research paper, “Commercial Payments Growth and Fintechs: Partner, Buy, or Go Organic?”
Well, the impetus is the $120 trillion of payments and transfers that occurred between businesses globally in 2022. On each one of those transactions, somebody is collecting fees. So organizations are trying to figure out—as it continues to grow beyond that point—how to get more in that game.
It’s the most asked question by my corporate clients, and that’s how we got to the subject matter. We’re also on the cusp of getting to cross-continent instant payments, which could make the upward trajectory even steeper.
Do you find yourself recommending more partnering, purchasing, or building something internally?
My answer is always either “it depends” or “I don’t know,” and so that brings up the next set of questions for me, which relate to risk profile, operational resources, and capital sources.
First, are you a risk-averse organization or do you operate more like a private equity or venture capital firm? They’re two vastly different things. I typically find that banks are more risk-averse and not necessarily because they want to be risk-averse—it’s because they’re in the most extreme regulatory environment.
With operational resources, what kind of resources do you have internally? Do you have a skeleton staff that is really focused on maintaining existing systems and infrastructure, or do you have capacity that allows you to pursue additional things?
And then, finally, as we all know, capital markets have been pretty tight lately. So it depends on whether you’re having to do some type of borrowing.
There has been a slowdown in funding for startups over the past year. How has that affected commercial payments fintechs?
It has affected it in a very good way, and the reason being is that money is not free anymore like it was during COVID-19, when the base rates were almost at zero. People were easily able to access capital. VCs and private equity were practically throwing capital at fintechs.
The fintechs that don’t have financial acumen have either been flushed out of the market or are about to be flushed out of the market.
I would also say that valuations have become far more accurate, and that’s not great for investors that were in seed rounds during COVID times; the cap tables may have been adjusted. The value of what they hold may not be as great as it was, but I think overall it’s a very good thing. Certainly, if you’re shopping for a fintech, now is a really good time to look if you have the capital because the valuations are far more accurate.
What have you been suggesting to corporate clients relative to acquisitions?
It’s really easy to buy something, and it’s really hard to integrate it. I had some very eye-opening experiences being on the integration side of M&A. And that can be very difficult if sharp due diligence is not done on the front end. We’ve all experienced the scenario where somebody goes to one of the bigger conferences and they come back and I say, “We have to partner with this fintech or we have to look into buying this fintech.”
I got to the point of saying, “Well, that’s fantastic. Here’s some homework for you, including a list of questions or some due diligence.” My suggestion would be that you have very tight plans around how you assess either partnering or acquiring or whatever approach you’re going to take, and don’t stray from it because the ad-hoc scenarios are rarely successful.
You’ve covered a lot thus far. Any final thoughts?
Whether you’re looking to partner, buy, or go organic, understand why you’re doing it on the front end. There is a vast difference between doing something to remain relevant and doing something because it’s a nice shiny toy.
An example is, you go and pursue a fintech in a new market because your competitor is doing it. Well, the fact that your competitor is doing it doesn’t mean maybe operationally that you’re suited to doing it or perhaps or even culturally suited to doing it. That’s different than, for example, if you are a bank that does not have at least receive capability for either FedNow or RTP right now. In that case, I would say you’re at risk of not being relevant pretty soon. So that’s the difference. It’s a very big difference between shiny toys and relevance.
At the end of the day, well-documented plans. Don’t stray from those plans. Ad-hoc scenarios rarely work, and if you don’t have the resources internally to do this type of thing, then surround yourself with experts that do this kind of thing for a living.
