VCs building an 'ecosystem' through fintech investments

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VCs have been devoting more attention — and funding — to U.K.-based digital remittance providers such as TransferWise, Revolut, WorldRemit and their smaller rival Paysend. These startups have the potential to fundamentally disrupt the global remittance industry, which processed $689 billion in transfers in 2018, and is dominated by expensive incumbents.

Last month, London-based Paysend raised £8.7 million from investors including U.S.-based Plug and Play Tech Center, Luxembourg-based Digital Space Ventures, and GVA Capital. In July 2018, it raised $20 million from MARCorp Financial and other investors to develop its Global Account, which enables consumers to spend and transfer money in multiple currencies using its mobile app and prepaid card.

While Paysend’s fundraising is smaller than its rivals, investors interviewed by PaymentsSource are optimistic about its prospects. Daria Kroos, general partner at Digital Space Ventures, said she is working with Paysend to make it the next fintech unicorn.

TransferWise was the first unicorn, and has seen its valuation rise from $1.6 billion in November 2017 to $3.5 billion in May 2019, when it raised $292 million.

“Digital Space Ventures’ vision is to be a different type of VC fund and to invest in fintechs that have sustainable and scalable infrastructure,” Kroos said. “By this, we mean a very revolutionary idea or technology. Our portfolio only focuses on U.K. fintechs, and we wouldn’t invest in pure financial services providers without their own platform.”

Digital Space aims to develop synergies between the companies in its portfolio and to add value to them through its principals’ knowledge and their network of contacts.

“This means we can create an ecosystem for the companies we invest in,” said Kroos. “We don’t just invest in our fintechs. If they are willing, we get involved in helping them with running their business, with strategy development, marketing or networking with other fintechs.”

Plug and Play was an early investor in PayPal and LendingClub, investing more recently in vacation rental tech vendor BookingPal and European challenger bank N26. Digital Space Ventures has invested in Revolut, U.K.-based challenger bank Tandem Bank, and U.K. invoices and expenses app provider Albert, which was acquired by Santander in December 2018.

“We support Paysend’s Freemium concept of creating an ecosystem to make financial services available and affordable everywhere,” Kroos said. Paysend offers global transfers to 70 countries at interbank FX rates and £1/ €1.50/US$2 per transfer.

Alireza Masrour, Plug and Play general partner, said it has about 100 fintechs in its portfolio.

"We look to institutional investors and banks who participate in our financing activity for innovative ideas,” Masrour said.

Unlike other payments fintechs which use third-party technology providers, Paysend owns and controls its own acquiring and processing platform. Also, while TransferWise and Revolut use banking networks for P2P transfers, Paysend uses card rails such as Visa Direct and Mastercard Send, a feature which Kroos said is unique in Europe.

Masrour likes the fact that Paysend developed its own technology and has sole use of it.

“Paysend owns its technology, and keeps it for itself, but other fintechs give their technology to someone else to run,” he said. “If your technology is good, why give it to someone else?”

Plug and Play waited until Paysend achieved momentum before investing.

“We weren’t an early stage investor in Paysend,” said Masrour. In the two years since its launch, Paysend has amassed 900,000 users and facilitated over 2 million transactions, processing $55 million in transfers per month.

Kroos stressed the importance of marketing as well as having innovative technology.

“As Revolut, one of our portfolio companies, showed, once you’ve launched your first product, effective marketing drives growth,” she said. “Paysend is building an ecosystem to cover up to 90% of the financial needs of people around the world, but marketing is the next step for Paysend.”

Paysend recently appointed Unilever consumer marketing specialist Alberto Macciani as its CMO.

“Paysend’s goal is to make transfers easier and cheaper,” said Macciani. “Many fintechs make the mistake of not focusing on consumers, just on technology. Successful fintechs have a strong customer focus, such as [U.K. challenger bank] Monzo, which did a great job of communicating with consumers and setting up the Monzo community for its customers.”

Following betas with its customers, Paysend will launch the Global Account globally in September.

On Paysend’s road map is providing IBANs for the Global Account so that funds can be transferred to and from bank accounts. It also plans to introduce global bank-to-bank transfers plus transfers to mobile numbers.

To protect against FX volatility, Paysend offers a stablecoin that customers can hold, along with fiat currencies such as Euro, USD and GBP, in their Global Account. Its Pays XDR stablecoin runs on Stellar’s blockchain network and, to hedge against FX movements, is backed by a basket of five fiat currencies. These are combined in the stablecoin in the same way as the IMF’s basket of key currencies.

“If you have a combination of five currencies, your stablecoin can never fluctuate ... as much as a stablecoin tied to a single currency can,” said Kroos.

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Venture capital Venture funding Fintech B-to-B payments P-to-P payments Digital payments U.K.