Lawrence C. Lee is a top merger and acquisitions attorney operating in the Fintech sector. A partner at Baker McKenzie and based in Palo Alto, Lee was previously in-house counsel for Coinbase where he led strategic transactions and investments.
More recently, Lee and his team represented Affirm in its CAD $340M acquisition of PayBright. Other recent deals include Jumio’s acquisition of AML platform Beam Solutions and Snowflake on its purchase of CryptoNumerics.
Lee’s vantage point as an active Fintech M&A/IPO attorney provides a unique perspective in the financial services sector – an industry that is in the midst of rapid digital transformation. Recently, Crowdfund Insider connected with Lee to learn about his opinions and thoughts on the various sectors of Fintech. Our conversation is shared below.
Digital transformation in the financial services sector is being fueled by the ongoing COVID health crisis. The pace picked up when lockdowns and social distancing kicked in. Is the growth in Fintech sustainable? Are we due for a pause? Consolidation? More mergers and acquisitions?
Lawrence C. Lee: The trends that fueled the explosive growth that we saw in the Fintech space over the last few years continued to drive growth even during the COVID-19 pandemic. These trends include the move towards cashless and contactless payments, digital payment solutions, and modernized payments infrastructure. Mergers and acquisitions transactions in the space also continued at a fast pace in 2020, as we saw many of the large Fintech players seek to both consolidate and bolster their incumbent positions as well as expand and grow their service offerings.
As the world emerges from the pandemic in 2021 and beyond, the Fintech sector will continue to see rapid growth and significant mergers and acquisitions transactions. The large Fintech companies will use acquisitions to drive global expansion and the diversification of new products and service offerings.
Traditional financial institutions will also continue to be very active in acquisitions of Fintech companies. The pandemic highlighted the need for these institutions to prioritize and accelerate their digital offerings in order to stay competitive. Additionally, the need to provide better, faster, and cheaper financial services to a larger market will continue to drive acquisitions.
Sectors of Fintech tend to go hot and cold. Recently, digital banking or neo-banks have been hot. Is this sector of Fintech overdone? Any thoughts on who is winning here? In the US, is a charter better?
Lawrence C. Lee: There remains a lot to be seen in the digital banking sector, both domestically and globally. I recently represented a digital banking startup based in Mexico on its Series A financing—this company aims to revolutionize the banking sector in a country where almost 2/3 of adults are either “unbanked” or “underbanked”. Digital banks allow anyone with a smartphone access to banking services, which brings more people one step closer to financial independence.
There are still significant challenges to overcome, especially on the regulatory front. Banking regulations can differ dramatically from country to country, and many of these regulations were not written with digital banking in mind. This leads to significant challenges (and increased costs) in execution and growth.
Having a bank charter, thus ensuring customer deposits are directly insured, may appeal to more risk-averse customers, but the benefit of having a bank charter depends on a variety of factors. Varo Bank received a bank charter in February 2020, but it is not clear that other digital banks are moving in the same direction, and so its prevalence remains to be seen.
And will incumbent finance (banks) be able to keep pace with change? Are they too saddled with cultural challenges and legacy tech plus too much real estate? Or will they be able to innovate/partner/buy to adapt?
Lawrence C. Lee: Over the last few years, incumbent financial institutions have been on an acquisition spree in the Fintech space. Many of these acquisitions have focused on Fintech and capability building and investing in technologies such as machine learning, artificial intelligence, and blockchain. Examples of these deals include JPMorgan Chase’s acquisition of InstaMed, CapitalOne buying Wikibuy, and Goldman Sachs’ acquisition of United Capital.
As I noted above, the COVID-19 pandemic has also forced traditional financial institutions to improve their digital offerings. However, given the resulting economic uncertainty caused by the pandemic, there are some questions as to whether these institutions will continue to be as aggressive as they were pre-pandemic.
The incumbent financial institutions are well aware that improving and scaling up their digital offerings will be critical to their success and ability to compete in our rapidly digitizing global market, and I expect they will continue to deploy a strategy of acquisitions and innovation to keep pace with such market demands.
And what about SPACs [special purpose acquisition companies] and the numerous Fintech-focused blank check firms. Are they chasing too few deals driving valuations too high? Or is there enough to go around? And is the SPAC boom sustainable or is this just another Wall Street fad? Are the SPAC sponsors the big winners here?
Lawrence C. Lee: The SPAC “boom” has absolutely hit the Fintech sector, including some recent headline deals in 2021, such as SoFi and Payoneer.
I think the SPAC trend in Fintech will continue, and the pace could potentially increase, as many Fintech companies are mature and in the sweet spot for these types of transactions. The growth is also expected to expand overseas.
SPACs provide many larger and more mature Fintech companies another path to liquidity and exit, which, in my opinion, is a positive development. However, as with many trends in the financial system, increased scrutiny from regulators is sure to come, and with this increased scrutiny, additional enforcement. As companies in the space explore various options for liquidity and exit, the potential uncertainty in regulatory enforcement is something that will need to be taken into consideration.
What are your thoughts on Fintech everywhere or embedded finance. Is this the end game? Is this an Open Banking story?
Lawrence C. Lee: The potential effects on the world of embedded finance is extremely exciting to me. It has the potential to dramatically change how consumers interact with the marketplace and conduct business and financial transactions online. Embedded finance will drive significant innovation, and will put even more pressure on incumbent financial institutions to compete and evolve.
My best guess is that embedded finance will not come out of traditional financial institutions, and there is a big likelihood that it will not come from the current players in the Fintech sector either—but it is not too hard to imagine a large, U.S.-based online retailer pushing out an embedded finance product, such as offering banking and lending services to its customers.
You previously worked with Coinbase so you have great exposure to digital assets. What does the industry need in regards to regulation to make it thrive? Legislation? Rulemaking or a safe harbor? What are your thoughts on digital assets that may not be securities nor digital currencies? (utility)
Lawrence C. Lee: In terms of the regulation of crypto, I think consistency is the key to allow the industry to thrive. Crypto does not neatly fit within traditional borders and frameworks of securities regulation, and inconsistent regulatory approaches and a patchwork of regulations will hinder growth.
We’ve only just scratched the surface of crypto and blockchain technology, and its effect on the financial system is only just beginning to be realized. Because of that, a one-size-fits-all approach may not be the most effective in achieving the goals of the regulators while encouraging innovation.
I was at Coinbase during what many have called the crypto winter. Even though prices of cryptocurrencies were low, it was a time of great growth at the company, and a period of exciting innovation in the market. It was also a time of constructive collaboration between us and the regulators. I expect that partnership to have continued, and I am confident that as crypto becomes more and more a part of our financial system, that the regulators will provide the right level of rulemaking and gatekeeping.
Do you have an opinion on CBDCs [central bank digital currency] and the impact of a digital dollar? What about the Bitcoin boom. Sustainable?
Lawrence C. Lee: I know that for many true believers, there may be a view that CBDCs cut against the underlying goals of crypto, given that CBDCs are controlled by single institutions. I think it is too early to tell whether CBDCs will be successful and whether there will be large-scale adoption. But the fact that we’re even talking about CBDCs today shows how far crypto has come in just a few short years.
I think the Bitcoin boom will likely continue. I tend to agree with the opinion that Bitcoin is a store of value, and it is likely the case that the current market capitalization of Bitcoin is still undervalued.
What’s around the corner? AI? Money Centre Fintech? (one-stop for all). And how long will the Fintech transformation continue? Years? Decades? Longer?
Lawrence C. Lee: We will likely experience continuing consolidation in the Fintech sector, with many of the large players expanding globally and providing services up and down the value chain. We’ll also probably see the first signs of embedded finance as soon as this year, which is the first step towards the one-stop-for-all model.
If we’ve learned anything this past year during the COVID-19 pandemic, it’s that a digital offering for financial services firms cannot just be a feature—it must be a core product, a key offering to customers. The companies that are leading the charge in this transformation will continue to push the financial system to innovate and grow for a very long time.