Clash of the Titans

By Kevin Hoffberg

clash of the titans image

The shock waves could impact all fintech players

Visa’s announcement it intends to acquire Fintech superstar Plaid is just the latest example that the larger Fintech space has fully entered what I call the “Clash of the Titans” phase (the non-bank edition). The action is at the big table with implications for everyone in and around the category.

Consider the action in just the last two months (November 2019 - January 2020).

On November 20, 2019, PayPal further signaled the world they are “in it to win it” with its purchase of shopping and rewards platform, Honey Science Corporation. The payments space has been and will continue to be an attractive and profitable place to play, and PayPal is placing a pile of chips on owning a bigger piece of those flows by getting into millennial customers’ shopping and discovery experience earlier in the process with HSC.

Five days later, Discount broker behemoth Charles Schwab blew up the status quo with its announcement it will acquire TD Ameritrade, a move that might have made J.D. Rockefeller swell with pride: Use your scale to hammer your competitors’ core revenue stream (in this case trading fees) and then swoop in to acquire the rest before the dust settles. In a race between traditional wirehouses, direct-to-consumer, and independent RIAs and Broker Dealers, Schwab boxes in the first by dominating the rest.

And now this

On January 13th, Visa announces it will acquire Plaid for an eye-popping premium. At least it feels eye-popping if your investment horizon is measured in quarters.

Unless you’re a Fintech geek, you may never have heard of Plaid. They are the piping and plumbing for a big chunk of the “open banking” and “banking disruptor” firms, and like Stripe, have quietly become a gateway player to the future.

And, hearkening back to PayPal’s raising the ante in the payments space, Visa covered and raised the bet. Visa is playing longball and history will show this is their YouTube moment (remember when Google “overpaid” for that?). Bonus points: the move puts the screws to rival Mastercard, a strategic investor in Plaid in the same round as Visa, in 2018.

Double bonus points: Visa’s move intends to redefine the category. This quote says it all…

“We are increasingly trying to move from being strictly focused on payments, to being focused on the movement of funds for any purpose around the world,” said Visa CEO Al Kelly in a conference call on Monday. “As big as Visa is in terms of the bank accounts that we can reach, we’re not as big as we need to be if we want to be a formidable player in money movement around the world.”

And further signaling their intention to stay at the big table, just days later Visa raised the bet yet again with its purchase of VGS, a firm with sparkling credentials in developing strong encryption. This is yet another piece of a big puzzle Visa is assembling. While only the insiders can see the box cover, there are lots of clues when you look at the 46 companies in Visa’s portfolio of investments and outright purchases.

In other news

Meanwhile, BBVA, the large Spanish multinational bank, made a non-announcement announcement. t is now exploring product sales on the Amazon platform; yet another example of the awkward dance between Big Tech and Big Finance. Disregard the noise, which this mostly is, and seek the signal. BBVA is also “in it to win it,” if not in the US, then in all the Spanish-speaking world.

And finally, while nobody was looking, 2019 set another mergers and acquisition record in the wealth management space according to a new report from Echelon Partners: a total of 203 deals in 2019, a seventh straight annual record. This bested the record deal flow set in 2018 by 12.2% and represented a 15.4% annual growth rate.

Consistent with the “Clash of Titans theme,” this deal flow includes the aforementioned Schwab purchase, but also less splashy deals by industry heavyweights Goldman Sachs, BlackRock, Broadridge Financial Solutions, Invesco, and Envestnet.

Side note: Notice who’s missing from this list? Most of the legacy financial services firms.

But, what does it mean?

The recent wave of high-calorie acquisitions provides important clues about what the big strategic (non-bank) players think is important.

The first and most obvious is customer control. A good example is through Payments, or now, “moving money around the world”.

The big scale players, and this includes Apple, Amazon, Paypal, Visa, Uber, and more are vying to disintermediate banks to nip a piece of every purchase you and I make. In an increasingly cashless society, there is no getting around the toll-taker.

As a side note, if I were running a “disruptor bank” that relies on a share of the interchange fees, I would be watching this very, very closely.

The second big move is on the product side.

The last couple of decades of the twentieth century could accurately be called the “financialization” decades. Financial engineering has remade corporate balance sheets, but more importantly created whole new categories of investable assets, where things you would never expect are turned into tradable securities.

Beside client control, M&A activity in the Managed Money aka Wealth Management space is being accelerated because, in my view, the current version of Wealth Management is the walking dead. Many of the functions previously performed by wealth managers: asset allocation, portfolio construction, trading, tax optimization, etc. are all better done using technology. The race by upstarts to arbitrage away Managed Money’s fees and profits is fully underway. Firms like Betterment, Wealthfront, and Robinhood showed the way. What Robinhood started on commissions, Schwab finished.

There are Managed Money firms betting people will still want live people to give advice, firms betting they won’t, and firms like Schwab that will win either way.

Schwab’s scale also makes them an obvious medal contender in the race to make previously illiquid and thinly traded asset classes more broadly available. Those new pools of profits will be diminished at the unit level but increased significantly in the aggregate. Firms like Schwab mean to control the cards on both the demand and supply side of the equation.

Game on

Depending on your point of view, all of this is either alarming or exciting. We think there is still tons of room for innovation, but now with the added environmental element that the Titans have fully joined the game.