Understanding the FinTech M&A boom

January 2019  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

January 2019 Issue

The emergence of the financial technology (FinTech) sector has brought unprecedented disruption to the financial services sector, and beyond. A raft of FinTech startups offer technology which will revolutionise not only how companies operate but how people interact with their bank. From back-office operations to new digital channels for consumers, FinTech is fundamentally changing financial services.

One of the main drivers has been the explosion of mobility. Smart phones, smart watches, tablet computers and a litany of other connected devices have become part of the fabric of daily life. They have altered the way consumers interact with banks, retailers and other businesses. Online payment apps, improved security protocols, biometrics, artificial intelligence (AI), machine learning and blockchain, for example, are improving operational efficiency and customer satisfaction.

Unsurprisingly, the disruptive capacity of FinTech is leading to increased investment. According to KPMG, between 2014 and 2017, FinTech companies in the banking, insurance and asset management industries received nearly $1.5bn in investment per year. 2018 was also a record-setting year for the space, with $41.7bn invested across 789 deals in the first half of the year alone, according to FinTech Global. Further, PwC’s 2017 global FinTech report found that 56 percent of financial institutions have put digital disruption at the centre of their corporate strategy, and, as a result, 82 percent of respondents expect to increase FinTech partnerships between 2018 and 2023.

The US and UK led the way. According to KPMG, the UK saw $16.1bn worth of FinTech investment in the first half of 2018, nearly $2bn more than the US’ total of $14.2bn. The UK saw four of the 10 largest FinTech deals in the world during that period.

Deal drivers

The first half of 2018 saw 141 FinTech M&A deals with a total disclosed transaction value of $39.3bn, according to Hampleton Partners. Vantiv’s $12.9bn acquisition of WorldPay was notable, along with deals involving Nets, iZettle and IRIS software for a cumulative $22.4bn. Private equity giant Blackstone Group also acquired Thomson Reuters Corp’s Financial and Risk unit for $20bn.

Many factors are driving FinTech dealmaking – as well as rising asset valuations. There is a growing acceptance of digital banking, payments and financial data services among consumers and businesses. Corporate and financial investors are targeting FinTech in order to streamline back-office operations, improve their digital customer experience and cut costs. Efficiency around data handling and management can also be improved through FinTech, as it can provide better interconnectivity between applications, which ultimately reduces clutter.

Financial institutions are also increasingly aware that they do not need to rely solely on internal IT capabilities anymore. By entering strategic partnerships with specialised external organisations, they can drive digital transformation. As the pace of change in the financial services industry continues to accelerate, mainstream financial institutions will continue to embrace digital disruption. Some are responding to innovations in the marketplace by, in effect, self disrupting.

The proliferation of FinTech has led some financial institutions to target startups in the space. According to CBInsights, only 18 FinTech startups were acquired by just 10 of the top 50 US banks between 2013 and 2017, but eight of those occurred in 2017 alone. BBVA, Goldman Sachs and JPMorgan Chase have all been active. Others, however, are unwilling to pursue M&A deals, preferring instead to partner with FinTech firms or build internal capabilities of their own.

Regulatory challenges

With the implementation of the Markets in Financial Instruments Directive (MIFID) II and the Second Payments Services Directive (PSD2), financial institutions are facing an evolving regulatory landscape. PSD2, designed to simplify the payments industry and increase competition, came into force in January 2018. It requires EU account providers to give third parties access to personal data, which could dramatically impact intermediaries such as Visa and PayPal. PSD2 essentially removes the ‘middle men’ from transactions by creating ‘Payment Initiation Service Providers’ (PISPs) which allow merchants and banks to communicate with each other directly.

For FinTech firms, PSD2 could create a paradigm shift, allowing them to become third-party providers. Some have begun to offer services which help financial institutions to cope with the regulation. As a result, FinTech companies will transition from disruptors to facilitators or enablers of transactions. PSD2 could be a catalyst for new entrants to the FinTech space, which could impact M&A deal growth and valuations.

The future for FinTech M&A looks robust, though there will be challenges along the way. When acquiring a FinTech company, buyers need to consider cultural, integration and regulatory concerns. They must be willing to introduce new cultural norms and adopt a fresh mindset to effectively integrate a FinTech organisation.

Even so, as FinTech hubs appear in more jurisdictions and as corporates look to increase innovation and reduce cost, the deal landscape should remain active.

© Financier Worldwide

BY

Richard Summerfield