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Hitting a home run: Spotting investment opportunities

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About $1 billion has been invested in the payments/fintech industry over the last couple of years. “As a venture capitalist I’m going to bet that over 90% of that is lost money,” said Larry Berlin, vice president at venture capital and equity research firm First Analysis.

Berlin referenced the figure during a panel discussion he moderated Wednesday morning on how to spot investment opportunities. He pointed out that two years ago, there were 170 mobile wallets on the market. Today, the only three left standing appear to be Apple, Google and MCX. “That means 167 investments were losers,” Berlin said.

In light of these drastic ups and downs, investors face some challenges when it comes to picking out the next big investment opportunities in retail payments technologies.

Dickson Chu, executive vice president of development and chief product officer at Ingo Money, said that it helps to ask the question: What problem are you trying to solve with this innovation, and is there actually a problem?

With mobile wallets, for example, he said it’s not surprising that adoption is waning. “Fundamentally, so far, there’s no problem to solve.”

One trend that he says is interesting is the shift in financial services offerings.

“What we’re witnessing today is the unbundling of financial services. The days of the bank supermarkets are starting to go away,” he said.

Chu said he sees potential in things like blockchain technology, but not because of the Bitcoin piece of it.

“There’s always going to be those fads, but there is something interesting and dramatically important around this distributed ledger concept,” he said. “There are companies out there trying to figure it out, and I think that will continue to be part of that unbundling of the banks.”

Fostering innovation

Chu pointed to Cisco as one company that’s taken a smart approach to innovation. They spend no money on R&D and instead pay attention to interesting developments in the marketplace. “At some point, they find something they care about, and then it’s innovation through M&A. So I think for large incumbents, that is not only a viable strategy, but it’s the only strategy for them to effectively innovate.”

Michael O’Loughlin, director of consulting at IT services firm CGI, referenced an observation he read recently that said that innovation is not bred out of bankers. “Bankers are not paid to take risks; they’re paid to do their jobs,” he said. Since 2008, they’re also trying to do more with less with few resources left over for innovation. “It’s not the perfect cocktail anymore, so they’re trying to serve it as a separate drink,” he said. “So unless you make it part of your culture, the banks are going to get left behind.”

O’Loughlin said that startups need to be able to convince banks of the practicality of their innovations. “You have to be part of solution for the bank in order for the bank to understand: How do you make it real?” he said.

“Making it real is something many people just seem to miss the boat on. I have a great idea, but I haven’t thought about how to make it real and deploy it.”
The next opportunity

Berlin asked panelists where they would put their money if they could pick any place right now.

Ben Brown, senior consultant at First Annapolis Consulting, said that if someone would have asked him that question a couple of years ago, he would have pointed to the alternative lending space. Today that space is saturated, and Brown sees fraud management tools and startups as having the most potential now, especially with the emergence of new use cases like EMV, POS, tokenization and real-time bank transfers. “There are lots of shifts in the way fraud is happening,” he said.

Chu said he would place his bets on companies that are using transaction data to engage and interact with the consumers. “The data-oriented companies that are creating new experiences, I think that’s where the money’s at.”

Autumn Giusti
Autumn Cafiero Giusti is a New Orleans-based writer and editor with more than 15 years of professional experience. Giusti has covered global payments and financial services since 2006, having contributed to nearly a half-dozen trade and consumer publications. She previously served as news editor for New Orleans’ weekly business newspaper and as a daily newspaper reporter in Florida.

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