Embedded Payments Pegged to Power ‘Transition Economy’ for Next Decade

We’re living in an age of change, according to Conversion Capital Sole Founder and General Partner Christian Lawless.

“These are unprecedented times, bringing about an enormous amount of change to trade, consumption and investment,” Lawless told PYMNTS CEO Karen Webster.

Even in an age marked by skyrocketing inflation, supply chain difficulties and civil and geopolitical unrest, as Lawless said, there’s at least one certainty: The transition economy is here to stay.

That transition economy is being fashioned as trillions of dollars of capital has been withdrawn from the United States, amid cryptocurrency crashes and a loss of purchasing power, he said, noting that inflation is the key culprit here.

We’ve seen a decoupling between China and the U.S., marked by tariffs and economic jousting over intellectual property, he said. The Russia-Ukraine war and surging energy prices have also roiled the global economy. All of this has had a sizable impact on private companies, which have had to, and still must, re-examine their business models and how their supply chains are intertwined, he said.

Related: China Moving Closer to ‘Healthy’ FinTech Launch

China, instead of becoming a solely production-based economy, has become a consumption-based economy. The U.S., by way of contrast, is well on its way to becoming a production-based economy, having roughly 4% of the world’s population but contributing more than 15% of global gross domestic product (GDP).

“We’ll have to look at different areas and countries to produce and consume goods, and we’ll have to look to our neighbors in the north and the south as potential partners,” Lawless said.

Payments will play a central role in cementing those partnerships, helping modernize logistics and freight, he said. Innovation is the prime mover of that change, and what we’re seeing across the globe is a shift toward technology to get it all done faster, more smoothly and at scale.

There are some parallels to what has gone before, he said. Just a few decades ago, as the millennium dawned, pretty much every company sought to be a tech outfit. Nowadays, many firms are embracing the cloud, looking to streamline operations and improve margins.

The U.S. has an inherent advantage here, given the fact that the country has the strongest financial and credit markets in the world, he said. Access to capital and credit is essential to the companies looking not just to survive but thrive and make the leap from turning concepts on a whiteboard into new, disruptive technologies.

The Long-Term Horizon

Right now, turbulence reigns. Conversion Capital, in a bid to navigate market and macro turbulence, must find investment opportunities that may remain obscured by headlines and volatility.

At a high level, it’s an interesting time to put money to work, given the fact that many investors are taking money off the table. But some themes are evergreen, including the fact that financial infrastructure continues to move to the cloud and is being unbundled, and enterprises, banks and financial institutions (FIs) are leveraging those new capabilities.

See also: Embedded Finance Puts Banks, FinTechs on Equal Footing

Drill down a bit, and the push to the cloud is transforming some mainstays of the U.S. economy, including manufacturing, construction and technology, along with the services industry.

A common thread runs through those far-flung verticals, as payments are being embedded in all manner of front-end and back-end processes, Lawless said.

Embedded Payments

Embedded payments have the potential to improve supply chains, which will be necessary amid the great decoupling between China and the U.S., he said.

The vast majority of small and nimble startups — especially the ones disrupting financial services — are based in the U.S., which Lawless said, in grand form, is the most successful startup in history. And that’s despite regulation (which has been evolving rapidly in Europe), which he likened to a tax on innovation.

Much of that innovation stems from the fact that scores of companies grew fat in the age of easy capital, grew too large and lost at least some of their luster. Google and Facebook may not have had the drawing power they once did, and scores of engineers decided to look at new opportunities and industries to transform. And now with the downturn, those engineers, having worked at these (and other) marquee names, are actively seeking to build the next bumper crop of innovators.

The balancing act is to be contrarian while taking the measure of what is trending now, and what will be trending in the future. Conversion has seeded companies through the past several years that have been focused on machine learning (ML), artificial intelligence (AI) and even the early stirrings of the metaverse, he said.

By way of contrast (and with commentary on less attractive areas), he said cryptocurrency remains too complicated, and relatively slow, to replace existing payments rails. There’s no real reason Visa should trade at an implied discount to ethereum, he said, given the triple-digit multiples Visa has in terms of transaction volumes versus crypto firms.

Asked by Webster how long the downturn might last, Lawless said the “cleanup period” may last five years, as geopolitical tensions resolve, inflation is tamed and supply chains untangle.

But beyond that time frame, payments will be integral to the digital transformation, especially since every physical interaction will have a digital touch point. Late last month, the company said it had closed its oversubscribed and largest fund to date, its $122 million Fund III.

Read more: Conversion Capital Raises $122M for FinTech Investments

In terms of investment strategy, the firm will deploy the capital into 25 to 30 pre-seed Series A FinTech companies building software, cloud infrastructure and data technologies. Investments range from $500,000 to $5 million, the company said in its announcement of the latest fund launch.

Lawless was quick to remind Webster that Conversion Capital operates as a venture capital (VC) firm, and as such, it has a longer-term investment horizon than, say, a hedge fund. That horizon extends well beyond what happens, say, in 2023.

“Our job is to invest in the next 10 years,” he told Webster.

And the best places to invest right now, he contended, are in the U.S. and the United Kingdom, as well as a broad range of stable democracies. The change we’re seeing as trading blocs and alliances are being reformed, well, it’s all happening in real time and will constantly give rise to new firms founded on the premise of changing the way it’s always been done to the way things should be done.

“That’s the beauty of innovation; it continues to evolve,” he said, invoking Moore’s Law of growth, “and along the way will create entirely new industries.”