Fintech market in 2023: The intersection of disruption and dispersion

Thomas Mucha, Geopolitical Strategist
Matt Lipton, CFA, Portfolio Manager
Matt Ross, CFA, Global Industry Analyst
2022-11-10T12:00:00-05:00  | S1:E17  | 34:50

The views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk.

Episode notes

Portfolio Manager Matt Lipton and Global Industry Analyst Matt Ross join host Thomas Mucha to discuss their outlook for fintech in today's environment, exploring the recent pullback in the sector, disruptive fintech innovations, potential regulation, and much more.

2:10 – Fintech market overview

4:20 – Fintech opportunities and risks for 2023

6:45 – Buy now, pay later

9:30 – Cryptocurrencies and digital assets

11:30 – Regulation and geopolitics

17:50 – Fintech in a recession

22:20 – Long-term COVID impacts

25:00 – ESG in fintech

28:00 – Collaboration and research process


MATT LIPTON (Cold open): Fintech was the number one beneficiary, in my view, probably more than any sector, in venture capital, that benefited from the Fed policies and fiscal response we’ve had for the last decade. And that’s changing, and I think the market is way too complacent in its view that this is just going to be a 12-month blip. I think companies need to weather three to five years of higher rates, higher costs, lower investment capital from third-party investors. That has some real serious implications, which goes back to dispersion and there’s going to be winners and losers, in my view.

THOMAS MUCHA:         Financial technology, or fintech for short, is one of the more durable and important investment themes of the past few decades. Consumers and companies around the world are using a host of new technologies to deliver financial services in improved ways, from crypto apps, to peer-to-peer lending, to roboadvisors, and lots more. So where are the opportunities, where are the risks across this rapidly evolving sector? Particularly in a great power world, where finance and technology are becoming more strategic industries, and where information is a national security asset. I’m joined today by two Wellington colleagues who are resident experts on the topic, Matthew Lipton, a portfolio manager on Wellington’s Finance Team, who conducts fundamental analysis on public and private firms in the fintech, payments, business services, and consumer financial sectors, and Matthew Ross, a global industry analyst on the tech team who researches global fintech and IT companies around the world. Gentlemen, welcome to WellSaid, and of course to our first episode featuring two Matts. 

MATT LIPTON:  Thanks for having me, Thomas. 

MATT ROSS:      Happy to be here, Thomas. 

THOMAS MUCHA:         Mr. Lipton, let me start with you. So, let’s have your sense of the current state of the fintech sector, and how does this compare to the last few years? 

MATT LIPTON:  It’s a good question. It’s bigger, it’s growing, and it’s very dynamic. To give some perspective, fintech still is an amorphous term, if you ask me. I still don’t think it’s definable, I don’t think you can create some sort of categorization here. And it really started with payments, circa 2010, you had five companies that were really listed in the US that did quote unquote “fintech,” you now have 500, we think, globally, 7,000 that are private, and those areas are growing rapidly. We had 200 newly listed fintech companies in the last 24 months, Thomas, greater than US$200 billion of venture capital go into fintech in 2021. And that number is up four to five X from a few years ago. So, the amount of investment, the amount of listings, and the amount of disruption and changes, is really greater than it’s ever been, but that’s kind of in the eye of the beholder. And I think you can define fintech super broad, I think actually it’s everything from a regional bank that’s doing something very interesting and using digital services for one lending vertical, to some of the most well-known, largest market cap, cutting edge companies that have come out of Silicon Valley, that are changing areas like payments, or lending. 

THOMAS MUCHA:         What’s behind that explosive growth? I mean that’s a massive number. 

MATT LIPTON:  The last three years, even myself as an investor, I think we didn’t even fully appreciate how parabolic the combination of low interest rates, free money from the government, people sitting at home and needing to just interact with financial services digitally because things like bank branches were just closed. The confluence of all of those things, with a healthy dose of globalization, meant that there was really an explosion in digital financial services. What makes it an interesting category as an investor where you’re going to have winners and losers is how many of these thousands of companies are real, as you put it, durable change agents, and how many of them were macro-related beneficiaries of that environment, which may not do so well in a new environment. 

THOMAS MUCHA:         So we’ve had a recent pullback in the sector. So Matt Ross, how is this impacting your outlook, and where are the areas of opportunity, you know, versus the areas to avoid in this current environment? 

MATT ROSS:      I think the opportunities today that I’m excited about are generally pretty consistent with what we’ve been excited about over the last year or two. There’s obviously been a really challenging environment from a market perspective and, you know, private market valuations have started to become marked down, public valuations are down quite a bit. But the companies are continuing to build, and I would say what we’re thinking about as meaningful change and disruption over the course of the next 5 or 10 years really is the same. Some of the areas that I’m particularly excited about: one is embedded finance. So that’s a really broad catch-all term, but to me, when I look back at one of the biggest changes over the course of the last five years, it’s really been the separation of what I call distribution and manufacturing within financial services. So the concept that throughout the entire history of banking, you had to have the balance sheet management and the distribution on financial services products under one house, under one banner, under one brand, because that was the only way that you could create scale and economics. And that’s really changed over the course of the last 5 or 10 years, and a lot of that change has been driven by technology, a lot of it’s been driven by business models, some of the venture capital that’s flowed into the sector, as Matt has alluded to. We have quite a lot of infrastructure now, both technology and also business processes that are standalone entities. It’s created an explosion of opportunity, not just for those companies, but for others to provide financial services to customers. So there are quite a few software platforms now that will never look like a bank, but can offer bank-like products. I think that’s something that’s really exciting, and we’re just scratching the surface of that. Other opportunities that are a little bit more mature is just the cash to card conversion is still relatively early around the world. And so those opportunities that exist as electronic payments proliferate, and as digital payments become more embedded in our day to day lives, the addressable market continues to evolve and grow. So those are areas that I’m really excited about. You know, areas that I’m nervous about, or that I’m trying to avoid, really just trying to figure out where the market still fails to appreciate potential negative estimate revisions, if we have a consumer-oriented slowdown in spending, where does the market not appreciate that that’s going to happen, and trying to avoid some of those companies and stocks where I still don’t think people appreciate the downside.

THOMAS MUCHA:         Yeah, as Matt said, it’s a market of winners and losers, and -- 

MATT ROSS:      Yeah.

THOMAS MUCHA:         -- those opportunities are there along with the risks. So Matt, the other Matt, we mentioned embedded finance here, there’s lots of other buzzworthy topics in this fintech space. Let’s talk about buy now, pay later opportunities. First, you know, let our listeners know what that is, and second, you know, how are you thinking about it? 

MATT LIPTON:  So first, what is it, and then why such a hot topic? It’s a new method of payment, mostly for ecommerce transactions, but that’s getting broader. And it’s installment credit for an ecommerce transaction. So, it is a way to split both a small or large purchase from a merchant website into multiple payments. Typically, as few as four payments over two months, with an average ticket of US$100, some players also do things like 36-month finance for items like mattresses or Peloton bikes being some of the more famous use cases. The second thing is, why is buy now, pay later in the press so often? And one, we can have a lot of fun with numbers because it’s a nascent category, and so we can show very large delinquency statistics, we can point to a heavy mix of subprime borrowers, and we have a press and an investor base, in many cases, that’s still very focused on what happened in 2008 with the subprime crisis and the housing crisis that ultimately led to the global financial crisis. We don’t believe that that’s actually what’s going on here. What we believe is happening with buy now, pay later is that there’s a revolution going on within how certain cohorts of the population like to pay for things, and buy things, and that was married with a big area of white space left available by the banks for point-of-sale lending in ecommerce. The banks have always had incredible products for us to buy stuff in installments in store. But they didn’t morph that product to online, they didn’t have fraud capabilities, they didn’t have capabilities to underwrite and sign up merchants that were ecommerce-driven, and that led for US$300 billion plus of payment volume that technology companies could address. And now buy now, pay later is, you know, 2 to 3 percent of all purchases online. We think that number can get much bigger, we think it can get into the double digits. The last thing I’ll say, and this is the, the misnomer, is that it’s all subprime. Actually, the biggest risk to the banks is that buy now, pay later customers are taking some of the most lucrative customers from the credit card industry, and the most lucrative customer for the credit card industry is not the high-net-worth person, and it’s not the high APR subprime person, it’s actually the person in the middle that revolves a few times a year, but always pays back. And that customer is very savvy. They get bucketed as Millennials who just like this new product called buy now, pay later, but they’re actually very savvy, and they realize that not having revolving balances can save them hundreds of dollars in interest expense a year. And that’s truly why they’ve gravitated towards the product, and that’s also why we think the product, which has no late fees, has more fair terms for borrowers, has staying power, and like I said, will grow into a much larger category over time. 

THOMAS MUCHA:         So it’s convenience, but there’s also an economic piece of it for the consumers, too. Now, another big topic in the fintech press is cryptocurrencies, digital assets. Matt Ross, how are you thinking about this topic? You know, where are the risks, where are the opportunities? 

MATT ROSS:      I think in the near-term, it’s a net opportunity for the payments and fintech industries. You have effectively a whole new class of issuers, to use payments parlance, that are the crypto exchanges and so forth, that have digital wallets that are crypto-oriented. Their ability to get users into the payments ecosystem, so you have a credit card that has a certain brand on it that you have affinity for in crypto, that’s a net opportunity for the payments industry. I look at crypto as an evolution of the internet, not necessarily a revolutionary change in payments infrastructure, and there’s a lot of reasons why I think that is the case. I think governments might have something to say about crypto becoming a payments ecosystem on its own. I think a lot of the problems that crypto purports to solve in payments aren’t necessarily issues that really need solving. But I do think there’s a certain evolution that can happen in terms of digital identity, in terms of other people knowing who we are online and how that can manifest in payments, and manifest in commerce, manifest in just how we interact with the internet generally. So I view this as a much broader technological opportunity than payments and fintech. I think there are certainly some opportunities for crypto to improve certain facets of payments, like cross-border payments, remittances, but I generally think of it as more of a technological innovation, somewhere along the line of the internet, as opposed to something that really radically changes payments itself. 

MATT LIPTON: Let me just add to that, Thomas. There’s a real securities angle here. And I actually think well before payments, digital identity, what we’re going to really see is cryptocurrencies today morph into vessels to hold assets that typically have not been attainable by many investors, because they’re illiquid, they’re not infinitely divisible, they’re not able to move across borders easily. That’s what crypto has a real potential to solve, and there’s a big unlock here, which is regulatory. The big unlock is the SEC and other folks getting around to potentially deeming these as securities. And I don’t think that’s a bad thing, I actually think that’s a great thing for the industry. I think you’re going to see overnight investment banking-like operations pop up that know how to turn assets into securities that are now digitally native. You could take art, you could take real estate, you could take many parts of the fixed income market that are super illiquid and not accessible to most investors. So there’s a lot of potential in capital markets from crypto. And I would say the number one unlock is just getting clarity on what this is. Is it a commodity, is it security? My vote’s security if Gary Gensler is listening to this. And I think it would move things forward pretty quick.

THOMAS MUCHA:         Regulation certainly plays an important role in these burgeoning spaces like crypto and fintech more broadly. So, what do you think, Matt, about the pace of regulation, and how regulation might change the ways that people think of this sector? 

MATT ROSS:      If we’re starting with fintech broadly, I think what’s a big change over the course of the last 5 or 10 years is a lot of governments thinking about fintech as a national strategic imperative. And so there’s a national security angle to financial technology that I don’t think existed a decade ago. And you can even see this with the war in Ukraine. The card networks exited Russia relatively quickly, but because of the moves that Russia made around the 2014 annexation of Crimea, their payment systems were able to continue to function, despite a lot of fintech, you know, mindshare and a lot of fintech intellectual property leaving, because they made the decision a while ago that payments was a strategic national importance for them. So I think that that’s been true, I mean we’ve seen this in China where the Chinese government has effectively locked out a lot of Western payments companies in favor of national champions and local competitors. So I think that is a trend that will continue. It’s a dynamic that companies will have to navigate. If we shift to crypto specifically, I think the range of outcomes and regulation is still quite wide. I would agree with Matt, that some of the opportunities around just securitizing things that haven’t been securitized before, or tokenizing things that you couldn’t trade easily, is a great opportunity. I think that the providence of NFTs, I know they have a bad rap right now, and they seem kind of silly, but I think there’s an opportunity for brands to really change how they interact with consumers in a unique and novel way. It’s unclear to me that those would be treated as securities, but there’s certainly a cryptocurrency element to them. So, I think there’ll be a lot of different angles in which crypto and digital assets evolves, I think some of them will certainly fall under the purview of securities like Matt is saying, I think others will be nebulous, and I don’t know how to classify an NFT that a brand might create on behalf of a fan, I don’t think that’s a security or a commodity, it’s probably somewhere in the middle. So I think the regulatory environment has to catch up there, and it’s not clear exactly what that looks like yet. 

THOMAS MUCHA:         Well, since you mentioned the geopolitical tensions, let’s dig into that point just a little bit more. I’m curious how you think about China’s role in the industry, and how great power competition, you know, this long-running fight over these critical assets, is likely to impact both the opportunities and the risks in the sector? And let’s start with Mr. Lipton.

MATT LIPTON:  We invest in fintech in emerging markets as well, and there’s four countries that are big population centers, and they’re interesting to fintech investors, in my view. Places like Brazil, India, Indonesia, and China. And they have a really interesting recipe for fintech innovation, which is you have a lot of monopolistic behavior, you got state-owned enterprises and state control, but you also have a banking system that’s taken advantage of that, and a payment system that’s taken advantage of that, and has what I would refer to as pretty crappy products with high margins. And if you’re an entrepreneur, that’s always a great environment, which is to go after sleepy incumbents that have a lot of margin opportunity, and problems you can solve, products you can innovate around. You need one other part of the cocktail though, which is you need a government that’s turning populist in support of that behavior. I think you can definitely check the box there in places like Brazil, we’ve seen them deregulate industries like payments, definitely check the box on India, they’ve increased foreign direct investment in things like insurance from 25 to 75 percent. I think Indonesia is actually leaning that way as well, but it’s earlier. When we come to China, what’s different than Brazil, India, and Indonesia is the government’s been less supportive of fintech disruption. Why is that? It’s very important from a currency control, from a banking system soundness and stability that they manage the economy. And unlike some of these other countries, fintechs in China got so big that they became systemically important. And that caused a different policy response, in our view. It also makes it a hard sector to invest in, because you have to contend with what’s in the government’s mind at any given time, and that’s always hard for us to understand. 

THOMAS MUCHA:         Yeah, it’s becoming much more of a strategic sector, certainly from the Chinese perspective, for those reasons that you point out. But I’m curious, how do you guys view Washington’s take on this? 

MATT ROSS:      I think a lot of fintech innovation that Washington has enabled or has allowed to happen has almost been done by accident. So we can go back to the Dodd-Frank bill that was passed after the financial crisis, and the Durbin Amendment that was stuck in that regulated debit interchange down to a very low level for really large banks with over US$10 billion of assets. The loophole of that, or the opportunity is that banks under that threshold can still earn really attractive debit interchange. So debit interchange, every time you swipe a card, the merchant pays a fee, and a big chunk of that fee goes to the card issuer in the form of interchange to help manage the system, help prevent fraud, or help protect fraud, or at least pay for all of those costs. In any case, debit interchange, as I said, was regulated down to a pretty low level for large banks, but the fintechs have found this opportunity to create quite a lot of income for themselves, and revenue opportunities. And so I think one of the reasons that fintech has evolved the way it has in the United States is this Durbin loophole. It’s quite a lot of money that these fintechs have been able to generate, and they’ve used that revenue to raise large venture capital rounds, and then invest in other areas. So I don’t know what the top-down view from Washington would be on fintech regulation, I think they’ve enabled a lot of this innovation from some of the regulations they’ve passed, and I think that was probably accidental. And I think the change administration to administration, or Democrat to Republican, dictates what happens to some degree. But I think the general trends are independent to some degree of what’s happening in Washington in a way that’s very different from what’s happening in China. 

THOMAS MUCHA:         Now, another big change obviously in the sector is what’s happening in the broader economy. You know, whether or not we’re moving into a recessionary environment. How do you guys think about the impacts to this sector when growth is slowing, and we have all this economic uncertainty?

MATT LIPTON:  You know, I’ll tie it back to your last question real quick too, Thomas, there’s very few if any systemically important fintech companies in the US. I think what we’re really talking about is folks that are trying to take market share from traditional banks, traditional insurance companies. There’s no one that has that type of scale, whereas you know, when you had two companies in China controlling more than 50 percent of payment volumes, and even consumer lending volumes at one point, that had to be dealt with probably, right? So, the US government’s been creating sandboxes and kind of swim lanes, and innovating on the fly, and that’s kind of what’s been going on with regulation in the US. And so to tie it to today’s macro, where now we have the crosscurrents of inflation and interest rates, and a much stronger dollar, no one’s looking around and pointing at fintech companies and saying something is going to get broken because of what these companies are doing. I think there’s a lot of focus on – with a strong dollar, and rising rates, and potentially a credit cycle amongst us – is stuff going to break how it always breaks, right, in the capital markets? And people that have lent long and borrowed short, the traditional ways are more likely to trip us up. And there’s just not enough fintech yet to be of consequence. That said, fintech was the number one beneficiary, in my view, probably more than any sector, in venture capital, that benefited from the Fed policies, and fiscal response we’ve had for the last decade. And that’s changing, and I think the market is way too complacent in its view that this is just going to be a 12-month blip. I think companies need to weather three to five years of higher rates, higher costs, lower investment capital from third-party investors. That has some real serious implications, which goes back to dispersion and there’s going to be winners and losers, in my view.

THOMAS MUCHA:         Well what about from the consumer side of things? Is there anything about the industry in particular that makes it either more resilient or more vulnerable to higher rates, slower growth, and all that? 

MATT LIPTON:  The consumer is very smart, is my starting point. And the consumer’s always going to find the fastest, cheapest -- cheapest being an important word -- and easiest way to both make a payment, make a deposit, and finance itself. And that’s one of the misnomers of fintech, these are all commodities. Almost anyone can do these things, it’s how you differentiate amongst yourself. The issue is, is that there’s a lot of fintech players that are very good at the fast part, but the cheap part had to do with the fact that interest rates were zero. And now as that goes away, there’s going to be some business models that don’t look as attractive, there’s going to be some products to the consumer that no longer look as attractive as the traditional banks. The good news is as investors, we’re finding plenty of traditional banks and insurance companies that have all these advantages, have the deposits, which give them a lower funding cost, have great underwriting skills, and they have digitized, so they’re open for business, you don’t need to go to a branch to open one of their accounts and we think they’ll be big share gainers, both from the incumbent financial institutions and the fintechs. 

MATT ROSS:      Thomas, let me add one more thing, a little bit of a different angle from Matt Lipton, who I think is thinking about the question from more of a balance sheet and venture perspective. In the payments universe, we’ll see a consumer spending slowdown, it seems really highly likely that that is going to occur over the course of the next several months, quarters, and potentially years. I think a lot of the public companies that are in the ether now that are investable, generally generate quite strong free cashflow, or they have really balance sheets to weather a downturn. And I think that consumer spending is nonlinear, meaning that the disruption we’ve seen over the course of the last two years in the ways in which consumers spend, I think will be important. Before the pandemic, the rough split was 55/45 services/goods. So every US$100 people spent US$55 on going out to eat, getting coffee, and so forth, and US$45 was going to large, big box retailers and buying a kayak or something. That flipped during the pandemic, because people couldn’t spend on services, and now we’re back to 50/50. So I still think there’s more room to go for the kinds of consumer spending that we’re used to over long timeframes to normalize. I think that transition’s generally beneficial to the payments industry, given the mix in the kinds of customers they serve, and the economics they generate on different kinds of customers. So I think no doubt that we’ll see a consumer spending slowdown or certainly high likelihood. I think that the degree of impact on payments companies is going to be less than people perceive. I think they’re less cyclical than people perceive. And I think that a lot of the businesses that are not in Matt’s camp of balance sheet oriented and need venture funding, are in a really good position from a cashflow and balance sheet perspective to weather the storm well. And maybe in fact, even buy some really interesting strategic assets at attractive prices. 

THOMAS MUCHA:         Matt, you hinted at sort of some of the changes in consumer behavior as a result of the pandemic. And I’m wondering, you know, COVID has had a massive impact, obviously, on so many different sectors and so many different macro inputs. I’m wondering how you guys are thinking about the long-term changes, structural changes, that might happen to the industry as a result of two and a half years now of COVID?

MATT ROSS:      I think a lot of the trend lines were just moved forward by a couple of years. And actually interestingly, we’re seeing the world shift back to ecommerce trend lines from pre-pandemic over the course of the last year. So, a lot of the change that we thought was permanent actually proved to just be transitory to some degree, or at least we’re getting back to normal trend lines. So I would go back to the views that we’ve had over the last couple of years on consumer behavior change. The shift from cash to electronic forms of payment is going to continue. The shift to ecommerce is going to continue. I think some of the new form factors of payment that have been accelerated by the pandemic, like buy now, pay later, like we were talking about earlier, those probably are more durable today than they might have been ex the pandemic, but I think we’re certainly in a period now where consumer behavior there could continue to change, although again, I would say that some of that was happening pre-pandemic anyway. So I think a lot of these changes are relevant from the pandemic, in terms of the acceleration of adoption, but I don’t think they were necessarily a change in direction.

THOMAS MUCHA:         Yeah the pandemic as an accelerator is a common theme you hear on this podcast. Matt Lipton, how are you viewing the pandemic and its impact on this industry? 

MATT LIPTON:  It’s been a blessing and a curse. There’s a very large cap, well researched neo-bank that went from having 2 million monthly active users to almost 50 million monthly active users in the course of two years. That would have never happened if it wasn’t for the need to get your paycheck and your stimulus checks digitally. You know, now those people are hanging around and they’re buying stocks, buying crypto, making payments, taking out loans, like lots of great stuff that they didn’t have access to before. So, it’s improved access, it’s accelerated digitization, and all those things are really good. You know, I have a personal view on the government’s response, in terms of fiscal and monetary stimulus, was, and maybe hindsight is 20/20 on this, Thomas, is going to go down as maybe one of the greatest blunders in Fed history. And now we’re working through that, and that’s going to put stress on a lot of these fintech business models. The good news is that a lot of them did achieve enough scale, enough capital, so much money going into venture capital last year, as I mentioned, that they have the ability to weather the storm, but you really need to now focus on management teams that are not pie in the sky, and understand how to execute in this environment, because it’s going to come back to execution. It no longer is going to be that the best company and the worst company are on equal footing because money’s free. It should make for a really interesting investment environment. 

THOMAS MUCHA:         Yeah, that’s for sure. Now the other key trend I wanted to ask both of you guys about is ESG. And you know, what impact that’s having on the industry, and how are these factors playing out and how are they incorporated? 

MATT ROSS:      If you take each of those three letters individually, I think E, there’s a little bit less of a focus in the sector, just given the business models and the lack of environmental footprint. I think S is critically important, so Matt talked about a neo-bank going from 2 to 50 million MAUs, a lot of those folks are people that generally haven’t had access to affordable financial services. And so I think there’s a lot of social good that has come from fintech investment that is an important consideration in terms of just the opportunity set, in terms of the regulatory environment, how do we think these businesses will be perceived over time if they’re continuing to contribute social goods. I think that’s a factor that’s quite important. Other factors that we monitor from a risk perspective would be data privacy, which is, you know, an evergreen topic, but again going back to buy now, pay later, I think one of the beautiful parts of that business model is their ability to aggregate information about what you’re buying and give you really relevant offers based on it. I look at that as a good thing, some people in the regulatory world might look at that and say that it’s data mining, and it's not a good thing. I guess my opinion is not really relevant to the risk profile, but just trying to understand how different people perceive some of those elements of business models as a social good or a social not so good. So I think the social elements of data privacy and, and some of these other interactions we’ve talked about are quite important to the long-term trajectory of the business. And then governance is really – I think getting back to Matt Lipton’s point around just the quality of the management teams – will be critically important. I think just being able to appreciate who the good management teams are, who the good boards are, what the right incentive structures are, whether companies are aligned with shareholders or not, whether companies are aligned with their mission or not, is again, something that is always important, and is really important today as we think about the world of free money being over and things might be getting more difficult on the macro environment. 

THOMAS MUCHA:         Matt Lipton, any thoughts on that? 

MATT LIPTON:  I think in the private market, we see a lot of passion among the founders, especially for financial inclusion, and that’s why they start businesses and solve problems, and that’s one of the really cool things that I find about this job, and about fintech. An auto lender was able to get a green bond to fund itself. It was able to have a much more competitive cost of capital, which made it a better investment. But the green bond was only available to it because it had hard stats on what it was doing for society, and so if you save somebody US$100 a month on their auto loan, just as an example, all of the sudden they can afford an apartment that’s in a slightly better neighborhood, which is closer to their work, which is a better school district, and so their children are better off, they’re spending more time present in the household, because they don’t have to drive so far for work. There’s real knock-on effects that you can quantify when you start saving people money, and I think that’s the one real promise of fintech, there’s a financial inclusion element, and bringing it back to regulation, that’s why the regulators have been pretty standoffish with this, because the companies that they would be regulating are also the companies that are serving customers that have been unserved for so long. 

THOMAS MUCHA: Absolutely, definitely a needle to thread. So guys we like to cover, in this podcast research process and how you do what you do. Let me ask you a couple questions in that area. First, how does working at a place like Wellington affect your research process, your research philosophy? Let’s start with Matt Lipton.

MATT LIPTON:  We get this question from investors all the time and it’s interesting, because they see niche strategies and they say you know, why do you work at this big place? And I actually think the big place is the secret sauce, and big place, I mean Wellington. And it’s not the obvious, you know, access to research, access to thought leaders all across the globe. But it’s the actual willingness of those people to help each other out, and collaborate, and the truth is that we have a system in place as a firm to reward each other for that collaboration, both in what we learn, and also from a compensation standpoint. So I think we’ve done a great job of driving collaboration, and tying it back to the right incentives for that collaboration, and that’s been super helpful to our process. 

THOMAS MUCHA:         Matt Ross, what do you think?

MATT ROSS:      Yeah, I would echo a lot of what Matt Lipton was saying, I mean one specific example that comes to mind is I was doing research on a company that does payment processing in the Middle East and Africa, and a big push for them is trying to get into Saudi Arabia. And so this was a couple of years ago that they started to make this push. I remember emailing a person who I had never spoken to before in our fixed income group who’s an expert in the Saudi Arabian country and, and sovereign debt, and just everything going on there with the government and monetary policy. So I just emailed him and said can I pick your brain for 30 minutes on what you think this company’s opportunity set would be with knowing these different inputs? And just the ability for someone like me to talk to someone like that really quickly and know that I’m getting a high-quality, unbiased answer, was pretty remarkable. And I could, you know, probably list 100 examples like that where the opportunity to talk to a subject matter expert that doesn’t owe me anything, other than being collegial and trying to help me out, and hopefully someday I can return the favor, I think that is part of the secret sauce of Wellington, beyond just the scale, the access to management, and so forth. And so it allows you to really focus on what you’re good at, and what you can add value on, and just plug in some inputs from other people that know a lot, that you don’t have to go and spend a lot of time in an area that you’re not an expert in and, and may get to the wrong answer anyway. 

THOMAS MUCHA:         Right, there’s always an expert a phone call away around here.

MATT ROSS:      Yeah.

THOMAS MUCHA:         Well let me ask you guys, you know, we’re all avid readers, we’re all looking for an edge, we’re all looking for new ideas, whatever we do at the firm. I’m curious, is there a book that you can recommend that’s either impacted your career or your perspective on fintech or anything you can recommend? And Matt Lipton, what have you got? 

MATT LIPTON:  Yeah, it’s interesting, 2023 is going to be the year of the negotiation. In public markets, you get your price on your machine, and they don’t get to choose their investors. In private markets, it’s a negotiation. And you have to add value, which I think Wellington does, but you also have to convince someone to sell a piece of their company to you and take dilution. So a book I love is, is Never Split the Difference, it’s a better version of How to Win Friends and Influence People, and much more relevant for today’s environment. 

THOMAS MUCHA:         Matt Ross, what do you think? 

MATT ROSS:       My book would be Technological Revolutions and Financial Capital, by Carlota Perez. She documents several hundred years of innovation cycles, and how innovation cycles interplay with financial capital and financial markets. And it's really a brilliant book, it goes back, like I said, hundreds of years, four or five different really massive secular changes in the world, and how over different periods of that secular change, different parts of the financial markets have responded to that disruption and that innovation. Obviously, the world is as up in the air and uncertain today as it’s been, you know, in the last several decades probably, in aggregate. And I think she has a really good perspective, taking a very long-term view on several other periods that rhyme at least with what we’re going through today. And I get a lot of inspiration from reading that. 

THOMAS MUCHA:         All right, last question guys. If you weren’t a fintech investor at Wellington, you know, what could you imagine yourself doing? And let’s start with Matt Ross.

MATT ROSS:      I really love the sector; I fell into it by accident when I started investing at Wellington a long time ago now. But if I wasn’t able to be an investor in fintech, I would probably try and work at one of these companies, truthfully. Something in strategy and finance, or some combination of those two realms, and try and move the organization forward in a lot of the ways that I think the world we’re headed over the course of the next decade, just try and position the company well to take advantage of that. 

THOMAS MUCHA:         Last word to you, Matt Lipton. 

MATT LIPTON:  I’d be building something. Houses or a company, but it would definitely be passion projects, and that’s the great thing about being a fintech investor is that there’s no two companies that are alike. Every day is different. You get a healthy dose of macro on top of that. It's a job that keeps you on your toes every day. 

THOMAS MUCHA:         Well gentlemen, thanks so much for the time, for the insights, for helping us all understand the sector a little bit better. That’s Matt Lipton and Matt Ross. Thanks for being with us. 

MATT ROSS:      Thank you, Thomas. 

MATT LIPTON: Thanks for having me, Thomas.



Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For  professional/institutional investors only. Your capital may be at risk. Podcast produced November 2022.

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