Commercial Models, Value Chains, and M&A Activity

August 15, 2019

Commercial Models, Value Chains, and M&A Activity

This year for Money20/20 Las Vegas, we’ve identified 5 stories that exemplify what is happening across the industry. The first story we’ve identified is about how commercial models, value chains and M&A activity are changing how the industry operates. These changes are occurring in companies large and small and across geographies. Whether you are in payments, lending, investing or managing money, these stories will impact you one way or another. Money20/20’s success is dependent upon dialogue, so we’d love to hear your thoughts about this and the other stories on LinkedIn.

Recently, we did a podcast that drilled down on one aspect of this story – commercial models. The podcast examined how the subscription economy has brought new business models to consumer financial services.  We interviewed Dee Choubey, CEO of Money Lion who has used a subscription business model to grow to a customer base of several million, who are actively engaging with their product.  We’ve also seen dramatic changes to the B2B side of financial services as well.  For example, point-of-sale (POS) terminals used to be closed systems with limited 3rd party access to the hardware.  The past few years has seen these systems open up with an App-Store mentality to enable innovative 3rd party companies to design for their hardware.

Opening up the POS hardware platform also has major implications on value chains delivering services.  Whereas in the past, there was tremendous value in obtaining access to the POS hardware which could be monetized over a long period of time, broader access pushes value creation towards other elements like functionality, brand or additional relationships.  We’ve seen this trend in backend payment and account processing relationships as well.  The trend has been away from long-term deals and more towards how technology providers can enable newer technologies and help their customers address market needs faster.

The way that companies are pursuing new opportunities is changing as well.  At the highest level, the options fall into three major groups: build, partner or buy.  A decade or more ago, there was a greater focus on building within the framework of the company.  For example, innovation groups within banks and payment networks would work with the mainline businesses to help them deliver new offering to the market.  Unfortunately, many times innovation groups lost internal battles for resources and focus when paired with massive mainline businesses.  These lost battles affected how innovators within banks saw their place in the institution as well as how corporate leadership structured organizations.  This led to reorganizations and departures which further reduced focus on these internal groups.

About five years ago, we saw banks going heavily into developing relationships with innovative startups.  Tactics for this strategy included being active corporate venture capitalists, supporting accelerators, running hackathons, and actively engaging externally.  The outcome of these strategies was for banks to be involved with many more opportunities than they could have, had they continued to try to build these within the organization.  While some institutions saw success with this, others did not and have pulled back on several of these activities.  There were many market tests and proofs-of-concept, but fewer than expected achieved substantial scale.  Additionally, from the perspective of the startups, they often had to jump over massive hurdles and expend significant resources to work with the banks, which also as just mentioned, resulted in limited volumes.  Obviously there have been some very successful partnerships, but the initial euphoria has been tempered.  Investment activity still continues, but typically in a more measured manner.

We’ve also seen an increase in M&A activity.  Over the past year, there have been several blockbuster mergers in the industry such as the Fiserv and First Data, or TSYS and Global Payments on the technology and processing side or Suntrust and BB&T on the banking side.  These mergers are driven predominantly by scale and creating larger players who have both greater access to markets as well as greater negotiating power.  There has also been significant acquisitions activity by payment networks like Mastercard and Visa, who have been seeking interesting fintech companies to help them build technologies, capabilities, and people who can help deliver new services and products to market.

This year at Money20/20 in Las Vegas, we’ll have more coverage of these trends that will help you understand what is happening across the industry, how you can take advantage of these trends, and figure out practical steps to move forward.  The fintech orchard is still filled with low hanging fruit but with limited ability to take bites, companies should determine which will have the greatest impact.  Regardless of where you sit in the industry, this will be a story to keep track of in the short and medium term.  How have changes to commercial models, value chains and M&A activity impact you and your company?