Due diligence in fintech – preparing for the future

March 2020 | Article


The fintech industry is booming, with experts stating that the sector will grow at an annual growth rate of 24.8% to reach $310 billion by 2022. As the technology moves rapidly, new opportunities arise every day, and players are scrambling to capitalize on these opportunities. This has led to a large number of mergers and acquisitions in the sector, with large players making strategic acquisitions that allow them to adapt to the changing requirements of the modern consumer. In 2019, we saw four large M&A deals in the fintech space – Fidelity’s acquisition of Worldpay for $43 billion, Fiserv’s acquisition of First Data at $22 billion, Global Payments’ merger with Total System Services in a $21 billion deal, and the London Stock Exchange’s acquisition of Refinitiv for $14 billion. Although 2020 has only begun, we’ve already seen a couple of massive deals, namely Visa’s acquisition of Plaid for $5.3 billion, and Worldline’s $8.6 billion acquisition of rival Ingenico. it’s safe to say then that 2020 looks to be another big year for investment in fintech. Along with this, venture capital investments in fintech have also been on the rise. Although short of 2018’s peak (driven by Ant Financial’s massive fundraise), 2019 still saw over 1,900 deals, with around $34.5 billion invested. Almost half of those were driven by the 83 mega-round investments of over $100 million.

Clearly, there’s a lot of interest in investing in the fintech space today, and with rapidly evolving technology, adoption of new solutions is likely to increase, further driving investments up. For instance, digital payments has grown to an approximately $4.8 trillion industry this year at a 15% YoY growth rate from 2017, and is likely to hit $6.7 trillion by 2023. Therefore, if we are looking at investments of this magnitude today, we are likely to be seeing much higher numbers in the near future. But with an industry that’s changing so quickly, how does an investor make an accurate assessment of the target company?

With the right due diligence partner.

By working with the right partner doing your commercial and IT due diligence, investors can be sure that they get an accurate assessment of the target company today, and its prospects tomorrow. While it might be tempting to work with a partner with broad experience across industries, fintech is both nascent yet exceedingly dynamic. To properly assess a fintech company, then, you need a partner that is specialized in the fintech and payments industry; one that is especially able to understand both how the industry has evolved so far as well as where the industry will likely be in the near future.

As expert consultants in the fintech and payments industry, we’ve successfully supported clients the world over with both commercial due diligence and technical due diligence services in this space. As a result, we’ve amassed unique, specialized insight into the field, and are therefore able to ensure we are suitably equipped with the right resources to evaluate new and innovate players. In this post, we look at 5 key advancements in the fintech space, and why it’s important that investors be sure to partner with a due diligence firm that has the necessary expertise to accurately gauge the value of a company that works with these new technologies.

1. The blockchain

Over the recent years, the blockchain has gone from being an innovative idea that could potentially disrupt the fintech space soon to a sub-sector that’s growing in leaps and bounds. According to one estimate, the business value added by blockchain in the finance sector will be over $176 billion by 2025 and a whopping $3.1 trillion by 2030. Spending on blockchain solutions in fintech is expected to reach nearly $16 billion dollars annually by 2023.

Blockchain has been around as a technology for just over 10 years now, and as a result, there is a definite dearth of expertise in the sector, let alone its niche applications in the fintech space. If an investor is looking to invest in a fintech solution provider that utilizes blockchain for cross-border transfers, digitizing financial instruments, or even to simplify and secure customer identification, their due diligence partner needs to both have the necessary expertise and real-world experience to assess the solution’s viability, as well as the commercial and technical knowledge needed to determine the target company’s stability and growth prospects. At Penser, we have developed the capabilities and skills needed to understand which blockchain solutions are more promising than others in the fintech space, and have shared this insight with our clients and partners to help inform their investment decisions.

2. Artificial intelligence and machine learning

Like the blockchain, artificial intelligence and machine learning have increasingly become more important to the fintech industry. Both these technologies have helped optimize service delivery, free up human capacity, as well as aid in detecting fraudulent activity early.

AI has become extremely relevant to enabling better engagement through AI-enabled chatbots and robo-advisors. This has helped by taking on simpler tasks while freeing up human advisors and support staff to handle more complex requests, among a host of other potential solutions. A number of startups have leveraged their knowledge in this space to provide fintech solutions – for instance, Kasisto has backboned AI assistants for several banking institutions; Betterment utilizes robo-advisors to democratize wealth management and remove account minimums typically needed;  while HooYu provides AI-powered biometrics that banks such as NatWest have leveraged for remote account openings.

Machine learning, in turn, has found increasing value in KYC and AML use-cases, as well as in fraud detection. DataVisor, a start-up in the big data / AI / ML arena, used machine learning to develop a “clustering algorithm” that allows it to counteract application and transaction fraud in real-time.

As these technologies advance, so will their application in the fintech space, putting the onus on the investor to separate the wheat from the chaff. A company like DataVisor touts a 94% fraud detection rate on its website, but in order to fully understand the veracity of this claim, your due diligence partner should be able to both understand the underlying technology and evaluate it for bugs or gaps, while also intelligently assess its position in the market and its scope for growth. Specialist firms such as Penser are among the few capable of doing in-depth analysis that covers the applications of artificial intelligence and machine learning in banking and fintech.

3. Cybersecurity

As we covered in a recent post, cybersecurity is growing into a sizeable industry on its own. As of July 2019, there were almost 300 investments made in cybersecurity globally totalling over $6 billion. Spending on cybersecurity is expected to cross $133 billion in 2022. This is largely driven by the fact that as the technology develops, so increases the opportunities of bad actors to exploit vulnerabilities that were overlooked. This results in heavy costs – according to the IBM Cost of a Data Breach Report 2019, the global average cost of a data breach is estimated at almost $4 million; the UK is close to this global average, but the US, at over $8 million, is significantly higher.

Nowhere is this more relevant than in the financial space. The global average cost of a data breach in the Financial industry is $5.5 million. Therefore, investments in cybersecurity companies – both as an investor or as a client – requires specialized due diligence. Penser performs specialized vendor due diligence as well as standard commercial and technical due diligence for clients, allowing them to leverage our skills to make an informed decision about who they partner with.

4. Customer Intelligence

With the digitization of financial services, as with every other industry today, massive amounts of customer data are being collated. This big data can then be utilized through better statistical models or new-age technology (artificial intelligence, etc.) to generate deeper insights on customer behavior. This would, in turn, ideally feed into better solutions that are personalized to your customer’s requirements. Big data can also leverage these insights to better predict market performance and define customized investment portfolios. This data can also be leveraged to provide innovative solutions – Quandl provides financial, alternative and economic data that helps investors make better decisions, while Tala leverages data science to provide credit services to underserved areas around the world.

How the target company gathers, manages and leverages its customer data will, therefore, make a big impact on how the business grows. In order to make sense of their use case, your due diligence partner will need to be knowledgeable about both the technical side of big data collection, statistical modelling, as well as market and macroeconomic factors that may influence the fintech space. A general due diligence partner, with its cookie-cutter approach, will simply not be able to provide the level of insight needed to inform the investor’s decision.

5. Automation

Last (but not the least), we come to automation opportunities in the financial technology space. As services become more digital, a large number of transactional jobs can potentially be automated, taking some of the pressure of the financial services provider. According to a Gartner study, RPA (Robotic Process Automation) has shown 63% growth in 2018, year on year, with estimates now saying that the market will reach $1.3 billion this year. RPA is extremely efficient at automating repetitive back-office tasks, freeing staff up for more value-added functions. RPAs can perform rule-based tasks easily faster and with 100% accuracy.

These automations cover a whole range of services that are essential to a business. Vendors such as Fresh desk and Zendesk leverage automations to support companies with their customer support efforts, while invoicing and billing solutions like Freshbooks take the pressure of the accounts departments. Services like Xendoo and Quicken also help by automating the accounting and bookkeeping services of many companies.

Judging these automated solutions, though, is as much an art as it is a science. While one may be able to assess the cost-efficiencies easily through an analysis of the metrics, it takes a specialized skillset to understand the quality of those cost-efficiencies, and if the automation is optimized. Nuances such as these can make a big impact to a company’s bottom line, and therefore, need a specialized eye to do an accurate assessment of the business. A due diligence partner such as Penser, with deep knowledge in the fintech and automations in the sector, would simply be able to provide more depth in their assessment.

As experts in the payments and fintech space, Penser encourages all our partners and clients to leverage our knowledge to help them better make informed investment decisions, especially because the impact of not selecting the right due diligence partner can be catastrophic. To know more about our due diligence services, click here. Or contact us directly if you’d like to get in touch.