Author: Andrew Woolston (Intern)

Reviewed by: Ralph DiFiore (CCO), Marcus Magarian, Chris Gioffre

The financial technology boom observed over the past few years has significantly impacted Latin America’s fintech ecosystems.  As discussed in the Payments in the Middle East article, rapid growth in smartphone and internet adoption is fueling fintech VC and M&A markets in Latin America.  Small and medium-sized businesses have increased access to banking and financial services resulting in an abundance of fintech startups in the region.

LatAm Fintech Growth

Latin America has experienced exceptional growth in the fintech space since 2018. The below figure details some key figures of the fintech landscape in Latin America in 2018.

Since 2018, the fintech landscape in Latin America has shown continued growth.  A catalyst for the growth experienced in the fintech industry in Latin America has been operational changes forced by pandemic life and the increased venture capital interest in the region’s ecosystem.  Latin American fintechs secured $481m in funding in Q2 2019, a six-quarter high for the region at the time.[1]  This $481m in funding topped both China and India Q2 funding in 2019.  The $481m is 69% of the total venture capital raised in LatAm in all of 2018.  Furthermore, LatAm-based fintech funding has grown at a 57% CAGR since 2016.  South America funding has grown 153% quarter-to-quarter.

Accelerated Growth Continues in the New Decade

Growth trends of 2018 and 2019 continue, and interest from foreign investors builds. In 2020, VC firms invested $4bn spread over 488 transactions in LatAm startups.  Fintechs saw 39% of the total amount invested in their sector.  In the first half of 2021, Latin America’s fintech sector raised $7.6bn.[2]  Investments increased twelvefold in the second quarter of 2021 compared with the same period of 2020.  Five Latin American fintech companies achieved unicorn status in the first half of 2021 – Clip and Bitso in Mexico, dLocal in Uruguay, and C6 and Ebanx in Brazil.  By December, eleven Latin American fintech companies achieved unicorn status – making up 52.4% of total unicorn startups in the region.  Two firms saw U.S. IPOs in 2021 (Nubank; dLocal) and one more confidentially filed for a U.S. IPO in October 2021 (Ebanx).  Uruguay’s dLocal June U.S. IPO minted a new female billionaire cofounder.  Bitso achieved the status of Latin America’s first crypto unicorn.  In the first nine months of 2021, startup funding is up 174% from all of 2020, with at least 25 M&A deals so far just among startups.[3]

An overview of Latin American fintech unicorns can be seen below:

Implications & Outlook

The Latin American fintech markets are red-hot and are not expected to slow down in the coming months.  Major players in private equity and venture capital such as Softbank Group Corp, General Atlantic, and Sequoia Capital have their eyes on the LatAm fintech boom, fueled by the internet boom accelerated by pandemic lockdowns.  Shoppers’ necessity to move online and growth in contactless payments to reduce COVID-19 spread has allowed innovators to take advantage of widespread and increasing use of smartphones, wireless networks, and payments cards.  Furthermore, the comfortability of digital wallets has increased in the region.  As a result, Latin America presents many opportunities for domestic and foreign businesses alike to grow by acquiring innovative LatAm-based firms.  M&A can function as a key strategy for firms looking to gain a strategic advantage without developing the competitive edge they are seeking through in-house building and development – which could require a significant amount of time and capital.  The current landscape in Latin America presents interesting opportunities for firms with expertise in M&A, private placements, and strategic advisory services to help clients in an exciting emerging financial technology market.

Sources

https://iupana.com/2021/10/11/bank-fintech-acquisitions-latam/?lang=en

• Commentary on fintech market and M&A in Latin America

JPMorgan makes Brazilian retail banking debut with 40% stake in C6 Bank – Reuters

• C6 bank corporate round information

Payment company DLocal raises $617.65 million in U.S. IPO – Reuters

• DLocal IPO Information

FOCUS Tech stampede as investors hunt Latin American unicorns – Reuters

• 2021 figures and outlook commentary

Fintech M&A: Latin American and Chilean Fintech ecosystems in the global eye – Philippi Prietocarrizosa Ferrero DU & Uria

• Historical growth figures and commentary

Latin America Unicorn Leaderboard – The Association for Private Capital Investment in Latin America

• General Information on LatAm startups

Shares of Digital Bank Nubank Rise 15% In IPO, Valuing the Company at $45 Billion and Minting a New Female Billionaire Cofounder – Forbes

• Nubank Valuation

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[1] Fintech M&A: Latin American and Chilean Fintech ecosystems in the global eye – Philippi Prietocarrizosa Ferrero DU & Uria (Oct. 22, 2021)

^[2] Bank and startup acquisitions are rising in LatAm’s hot fintech market (Oct. 11, 2021)

^[3] FOCUS Tech stampede as investors hunt Latin American unicorns (Oct. 21, 2021)

Author: Andrew Woolston (Intern)

Reviewed by: Ralph DiFiore (CCO), Marcus Magarian, Chris Gioffre

Consistent with the rest of the world, COVID-19 accelerated the adoption of digitized and contactless payments in the Middle East.

Despite 80-90% smartphone penetration in GCC Arab States, Israel, Iran, and other leading markets, the Middle East is still heavily dependent on cash. In the region, only one-third of retail transactions are conducted electronically. Underdeveloped digital-payments infrastructure and services, underbanked consumer and merchant segments, and a cultural preference for cash contributions to lacking digital payments integration.

In spite of this preference for cash, transactions card payments still managed to grow 70% in the year before the pandemic from February 2019 to January 2020.  Another indication that sentiment is changing was found in the UAE where consumer digital payments transactions grew more than 9% annually between 2014 and 2019 (compared to Europe’s 4-5%).

Key Growth Statistics

• Saudi Arabia’s digital POS transactions doubled over 2020. 90% of survey participants believe more than half of new users will stick to digital solutions adopted during the pandemic.
• In McKinsey’s August 2021 survey on payments in the Middle East, more than 80% of respondents believed the growth rate of non-cash payments rose more than 10%. 43% placed the growth rate at over 20%.

With survey respondents favoring marketplaces and specialist fintechs over banks, local acquires, and e-wallets by 33% percent, respectively, SMEs are believed to seek solutions that go beyond pure payments. The growth opportunity resulting from SME preferences led 43% of respondents to believe that more than half of small and medium-sized merchants will start selling online in the next five years consequently resulting in growth in digital payments. In addition, lower merchant discount rates are expected to fuel the transition and adoption of digital payments.

Current Payments Sentiment in the Middle East

Despite COVID-19’s immediate impact, consumer preferences data supports the continued growth of the digital payments market in the Middle East. 58% of consumers in the Middle East expressed a strong preference for digital payment solutions.[1] Alternatively, only 10% strongly preferred cash. In the next five years, Middle East experts expect digital wallets (e-wallets) to be the most preferred mode of payment. The graph below depicts a five-year estimate of preferred payment methods in the Middle East based on the McKinsey survey mentioned above.

Nonbanks as Market Leaders

Global big-tech companies are expected to dominate consumer digital payments, with telecom company wallets and banks or bank-backed wallets trailing closely behind. In the Middle East, big-tech and telecom companies are favored in payments over incumbent banks due to their competitive advantage in technology expertise and well-established broad reach. These firms are expected to have a leg up in development and a better understanding of consumer preferences.

Telecoms’ success in digital payments.

Saudi Telecom Company’s STC Pay leveraged its strong telecoms presence to scale 4.5 million active customers by November 2020. 55% of mobile subscribers to STC Pay are STC customers. Partnerships with Western Union (raised $200 million at a $1.3 billion valuation) and Mastercard have enabled the company to cater to customer preferences and win market share.

Open Banking

Open Banking regulatory reforms are expected to help shape the future of payments in the Middle East. Open banking requires banks, with the consent of their customers, to share customers’ financial data with other banks or authorized financial services providers. In the Middle East, Bahrain passed regulations to institute open banking rules in 2018, followed by governance and data sharing guidelines in 2020. In early 2022, Saudi Arabia plans to launch open banking. Survey respondents identified regulatory approval for open banking as the leading catalyst for widespread customer adoption of digital payments. Incentivizing the shift from cash to digital payments for customers trailed open banking as a catalyst for digital payment adoption by 7%.

Open banking allows payments to avoid banks in the monetary transactions. 80% of survey respondents believe the implementation of open banking regulations will spark decoupling of savings account balances and payments capabilities. In this open banking environment, customers are expected to favor payment services companies with a better customer experience than banks, which tend to lack user-friendly payments ecosystems. STC Pay and other nonbanks can be expected to continue to thrive and win market share as the payments space transforms with open banking legislation.

Cross-border Ecosystem Developments

Cross-border payments in the Middle East require real-time, reliable digital payment infrastructure. The UAE and Saudi Arabia are home to two of the world’s three largest remittance corridors, processing $78 billion in payments in 2020. The necessity for agreements between countries for real-time settlement and the scaling up of digital money-transfer operators are expected to drive cross-border transactions in the near to mid-term.

Active Cross-Border Transaction Initiatives in the Middle East
Initiative	Who	Description
Project Aber	Saudi Arabia & the UAE	Initiative produced a common digital currency between Saudi Arabia and the UAE
The Buna Payment Platform	Members of the Arab Monetary Fund	Initiative supports multicurrent payments among the members of the Arab Monetary Fund
The AFQ System	Countries in the Gulf Cooperation Council (GCC)	Initiative connects real-time gross settlement systems of the countries in the GCC

Source: McKinsey

Opportunities for Banks to Compete

Banks must evolve to compete in the Middle East market. Banks can remain relevant by digitizing customer journeys, acquiring or investing in fintechs, launching new products such as e-wallets and building an ecosystem, partnering with established ecosystem players or conglomerates, or carving out a stand-alone payments business from their active payments arm to act like fintechs to compete like other players in the space. Banks need to develop strategies to prepare for the implementation of open banking and the risk of disintermediation. Partnering with fintechs in the space on products in a similar nature to Goldman’s partnership with Apple and their launch of Apple Card can be a way to flourish in the open banking environment. Targeting the right segments will be imperative to incumbent banks’ success moving forward.

The Middle East as a target for consolidation among regional providers through M&A. Global players looking to capitalize on growth opportunities in the Middle East are expected to be seeking market share by targeting regional firms with local solutions accepted by the market. The Middle East is also attractive as a gateway to Africa’s payments market.

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[1] https://www.mckinsey.com/industries/financial-services/our-insights/the-future-of-payments-in-the-middle-east

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Author: Andrew Woolston (Intern)

Reviewed by: Ralph DiFiore (CCO), Marcus Magarian, Chris Gioffre

In the News: Company Highlights

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Toast:

Toast priced its NYSE IPO at $40 a share on September 22, 2021, valuing the company at $20 billion. Shares rose 56% on the first day of trading to close out at $62.51 a share but have since dropped to $49.78 a share. Toast was hit hard as the pandemic forced restaurants to close. As cities returned to pre-pandemic operations, sales rebounded rapidly, and by the third quarter, revenue was higher than a year earlier. Revenue reached $823.1 million in 2020 and tripled in the second quarter of this year to $424.7 million.[1] However, net loss reached $135.5 million in the same quarter due to rising sales and marketing costs and to R&D expenses.

Remitly:

Remitly began trading publicly on the Nasdaq on September 23^rd, 10 years since it entered the cross-border remittance market. Trading opened at $43 a share at a $7 billion valuation – 30x its 2020 revenue – but shares have since dropped to $37 a share on September 29^th.[2] Remitly remains much smaller and less profitable than its largest competitor Western Union. Revenue doubled from 2019 to $257 million in 2020 and has almost reached profitability logging a $1 million loss in the quarter ending June 30, 2021 – down from an $8 million loss in the year prior.

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Sources:

[1] Ari Levy. “Toast Surges 56% in NYSE Debut after IPO Valued Restaurant-Tech Company at $20 Billion.” CNBC, CNBC, 22 Sept. 2021, www.cnbc.com/2021/09/22/toast-surges-in-nyse-debut-after-ipo-valued-company-at-20-billion.html. Accessed 30 Sept. 2021.

[2] Kauflin, Jeff. “Shares of Money-Transfer Fintech Remitly Rise 13% in IPO, Valuing It at $7.8 Billion.” Forbes, 30 Sept. 2021, www.forbes.com/sites/jeffkauflin/2021/09/23/shares-of-money-transfer-fintech-remitly-rise-13-in-ipo-valuing-it-at-78-billion/?sh=23e2ef28ecaf&utm_source=newsletter&utm_medium=email&utm_campaign=newsletter&utm_term=null. Accessed 30 Sept. 2021.

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Author: Andrew Woolston (Intern)

Reviewed by: Ralph DiFiore (CCO), Marcus Magarian, Chris Gioffre

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As response to high valuation expectations, earnout transactions are M&A transactions in which the seller is granted additional compensation in the future if the business hits specified financial or other milestones.

For example, you, a seller, believe your company is worth $100 million today, but based on valuation metrics a fair valuation would be $50 million. A buyer will offer you $50 million, and you will receive the other $50 million upon attaining pre-determined milestones. The milestones are commonly determined by targets for gross sales, revenue, EBITDA margins, or gross profit targets. For example, the deal terms may establish that the seller will receive 5% of gross sales over the following three years.

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Why Include an Earnout Structure?

Buyers

Advantages

Reduces uncertainty. Instead of an upfront lump-sum payment, the buyer benefits from a longer payment period for the business by leveraging an earnout structure (from a cash flow perspective). If earnings do not hit expectations, the buyer pays less for the business than the seller’s upfront asking price. In this sense, purchase price is directly linked to actual performance and keeps the seller incentivized to perform, reducing uncertainty for the buyer. Buyers with limited liquidity may also find this deal structure attractive because the cash or stock paid at earnout is less than the cash flow generated from the investment. Additionally, buyers do not have to turn down deals based on disagreements over valuation.

Disadvantages

Lack of planning. If improperly managed, a buyer may have to pay the earnout before cash flows can sustain the investment. It is important to conduct proper analysis on the earnout structure and understand the breakeven point at each earnout milestone. From the buyer’s perspective, cash or stock from the earnout should not exceed the cashflow generated from the investment. Additionally, earnouts do not eliminate the possibility of bankruptcy or slow growth so buyers need to conduct proper due diligence in every transaction.

Sellers

Advantages

The seller achieves their valuation. Many financial and strategic buyers utilize financial metrics such as valuation multiples when determining the upfront purchase price to pay for a company. An earnout structure allows the seller to receive the amount they think their company is worth based on expected growth. With proper analysis and understanding, earnout milestones are achievable based on the sellers’ projections of future growth. In addition, the earnout structure enables the seller to spread out taxes over the length of the earnout contract – reducing the tax impact of the sale. In addition, if the deal structure is a combination of cash and stock, the stock the seller receives could increase in value and be worth more than the total valuation.

Disadvantages

Increasing uncertainty. Juxtaposing the advantage for the buyer, it is possible the seller may not hit their desired valuation if the future earnings are lower than expected and hurdles established in the deal terms are not met. Therefore, it is imperative sellers are forward-looking – planning ahead as to the structure of hurdles and thinking about what their company looks like post-acquisition. With proper analysis, the projections and hurdles should be realistic and achievable.

Earnout’s Place in Today’s Transactions

Earnouts could allow you to close a transaction in times of uncertainty. As a result of current market conditions, uncertainty surrounding the resurgence of the delta variant, and the high valuations seen in the tech industry, an earnout structure may be an attractive option for companies looking to acquire/to be acquired another/by another firm and get a transaction done. In the tech industry, earnouts may help reduce some of the purchase price risk in an industry with many M&A targets lacking a lot of operational history and a well-proven business model.

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Who Leverages Earnout Structures?

Public vs. Private Transactions

Private markets favor earnout usage. A 2013 University of Chicago Law Review found only 1% of public acquisitions include earnouts while SRS Acquiom found 12% of private acquisitions involved earnouts in the same year.[1][2] Private sellers often can hide information during the due diligence process in a much greater capacity than public sellers.  Due to the transparency of public sellers and regulatory requirements to disclose financial data, public transactions offer greater levels of confidence and clarity on the financial health of the seller. Additionally, public companies already have proposed valuations via share price, which lowers the variance of sale price between the buyer and seller. The financial and informational transparencies required of public companies reduces the earnout offer, in comparison to private acquisition targets.

Usage by Sector

Acquirers in the Life-Science and Tech industries favor earnouts compared to their counterparts. Life-science transactions often involve earnouts based on trials, FDA approvals, and other factors that determine a company’s financial success. Within the last 36 months, 72% of US private & public Life-Science deals included earnouts.[3] In the same timeframe, 14% of US private & public Technology deals included earnouts. 70% of the earnout transactions in tech involved revenue as an earnout metric. 36% of deals utilized an earnout length of 1 year or less, compared to 35% of life science deals exhibiting an earnout length of greater than 5 years. This discrepancy emphasizes how earnouts can be leveraged in different industries with vastly different outlooks while still providing a win-win for both buyers and sellers. Acquisition targets in the tech industry may involve earnouts due to the uncertainty around how the product will evolve and change the future market landscape – a winning technology has a short window to establish a leading presence in the market.

Highlighted Acquisition in Tech

In Lightspeed’s largest acquisition at the time (closed Jan 7^th, 2020), Gastrofix was acquired for cash consideration at closing of $60m, including small cash amount for the settlement of certain Gastrofix liabilities, and approximately $44.5m in Lightspeed shares.[4] An earnout of $4m in cash and $3m in Lightspeed shares dependent on milestones was included in the deal structure.

Noteworthy M&A Deals Leveraging Earnouts in 2020

Source: Acuris Capital Intelligence

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Sources:

[1] Brian JM Quinn, Putting Your Money Where Your Mouth Is: The Performance of Earnouts in Corporate Acquisitions, 81 U. Cin. L. Rev.
(2013) Available at: http://scholarship.law.uc.edu/uclr/vol81/iss1/3. Accessed 10 Sept. 2021.

[2] “Key Findings: SRS Acquiom 2017 Deal Terms Study.” Deal Law Wire, 2 Aug. 2017, www.deallawwire.com/2017/08/02/key-findings-sra-acquiom-2017-deal-terms-study/. Accessed 10 Sept. 2021.

[3] “MarketStandard.” Srsacquiom.com, 2021, marketstandard.srsacquiom.com/home#Earnouts. Accessed 10 Sept. 2021.

[4] Lightspeed POS, Inc. “Lightspeed Third Quarter 2020 Earnings Report”. 6 Feb. 2020. https://s1.q4cdn.com/971105498/files/doc_financials/2020/q3/LSPD-3Q’20-Earnings-Deck-vFINAL.pdf. Accessed 10 Sept. 2021

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Author: Andrew Woolston (Intern)

Reviewed by: Ralph DiFiore (CCO), Marcus Magarian, Chris Gioffre

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Facebook and other social media giants have received large amounts of scrutiny regarding the transparency of data usage to their users over the past few years. For many consumers, data privacy scandals surrounding Facebook opened a can of worms. The world’s desire to control who can access their data as well as how their data is used and protected, is expected to grow. Interestingly, consumers generally are taking little initiative to keep their data protected.

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Today’s Efforts

Consumers can take simple steps to address data privacy concerns. In 2020, McKinsey surveyed 1,000 North American consumers to gauge key metrics such as views, data collection, hacks and breaches, regulations, communications, and in particular industries. The graph below demonstrates the current sentiment of consumers from survey respondents. The most frequent action to protect against unwanted data collection involves clearing cookies and browser history (64% of the sample). The subsequent protective measures taken by consumers drops 23 percentage points, falling  to less than half of consumers taking this action. While overall concerns and knowledge of data collection and privacy are rising, actions to combat these issues remains low.

Source: McKinsey

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Data Privacy and eBanking

What do data privacy and security firms offer eBanking?

Plaid is a leader in eBanking data security solutions. With BofA rolling out Plaid data integration in 2021, Plaid has solidified itself as a leader within digital banking communities by way of transforming the customer experience. Plaid provides services to consumers concerned about data collection and privacy the ability to monitor their data – a protective precaution not listed in the above survey but important nonetheless.

Fintech unicorn, Plaid, aims to take some of the obfuscation and shadiness out of data collection in online banking by clearly and transparently providing consumers lists of third-party services users have allowed access to data, and which aspects of users’ data are shared. Plaid’s service can be offered in a bank’s online banking platforms or hosted through Plaid’s portal MyPlaid.com. Banks are attempting to give customers significant control over their data sharing, aiming to allow the turning of access off and on from within their banking platform. MyPlaid.com allows customers looking to take precautionary measures to view their connections across multiple banks and allows for more detailed knowledge about the data shared with third parties. Plaid’s customer base grew 60% last year as the pandemic forced mobile banking to the forefront of personal finances.

Announced on April 7th, 2021, Plaid’s most recent valuation landed at $13.4 billion in a $425 million Series D funding round led by Altimeter Capital Management, Silver Lake Partners, and Ribbit Capital.[1] This funding follows the collapse of a deal with Visa after DOJ antitrust concerns. The new round of funding is expected to facilitate the scaling of the company and its product lines.

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Data Concerns

Data privacy and data sharing continue to be sensitive topics with the public. Plaid, like many fintech firms involved in the data sharing & privacy space, is involved in a Consolidated Class Action Complaint. The complaint was filed in September 2020 and involves 11 plaintiffs that alleged Plaid used their consumer banking login credentials to harvest and sell their detailed financial data without their consent.[2][3]

The action was partly dismissed, but as Plaid continues to respond to the privacy-related claims consumers’ confidence in the company will be challenged if there are any misgivings or lack of transparency. The Class Action reminds us how sensitive the data privacy and data sharing space continue to be with the general public.

Every consumer needs to ask themselves: Do you have a predisposition to big tech and data sharing? How concerned are you about data security? Are you a Plaid user yourself?

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• Alessandro Bianchi, Joins RYLTI as Strategic Advisor to Capital Raise for Disruptive AI Innovation
• Alessandro Bianchi Joins Riddec as Exclusive Advisor to Drive Growth and Capital Raising
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Source:

Harkey, Scott. “Bank of America Rolls out Plaid Data Integration.” Forbes, 3 Feb. 2021, www.forbes.com/sites/scottharkey/2021/02/03/bank-of-america-rolls-out-plaid-data-integration/?sh=5a41ef5d6a11. Accessed 30 July 2021.

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[1] Wilhelm, Alex. “Plaid Raises $425M Series D from Altimeter as It Charts a Post-Visa Future.” TechCrunch, TechCrunch, 7 Apr. 2021, techcrunch.com/2021/04/07/plaid-raises-425m-series-d-from-altimeter-as-it-charts-a-post-visa-future/?guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAACVyJuNI4pl3ev9dJxryoH7c7GW02stcxbkl0peqf_SN2YGuM5k4xZOQn9o91JGBsvjaF6lc7uOrG03Mzs2e42gjLayzOSfuhGN4pk7nN53W3Sr_SwIku-patcCxuToGTQ49oRJU1K9Z4lDM5PH8AS_B8dxCTOuxJbFfZeVp6pGG&guccounter=2. Accessed 30 July 2021.

[2] “Plaid Federal Electronic Surveillance Claims Dropped, Privacy Claims Survive | JD Supra.” JD Supra, 2021, www.jdsupra.com/legalnews/plaid-federal-electronic-surveillance-3374087/. Accessed 30 July 2021.

[3] “Plaid Partially Successful in Tossing out Class-Action Complaint – Privacy Allegations Still Remain.” The National Law Review, 2021, www.natlawreview.com/article/plaid-partially-successful-tossing-out-class-action-complaint-privacy-allegations. Accessed 30 July 2021.