The world of finance has changed due to the digital ecosystem. Mergers and acquisitions have significantly increased as part of the trend of collaboration and partnerships that have evolved during this shift. Several factors have contributed to this. Technology advancement has been the key factor. The cost of converting legacy systems to digitally-native platforms has led to increasing partnerships, with larger corporations combining with smaller technological organizations to grow and upgrade their tech. This is due to the rapid advancement of technologies and the resulting need for global digitalization. From this article, we can get a comprehensive understanding of the reasons for the fintech M&A rise, the benefits of fintech M&A rise in the industry, and the future of M&A in fintech.
New technology used to enhance and automate financial services is referred to as “fintech” in general. Although the idea has been around for a while, developments in biometrics, artificial intelligence, quantum computing, and distributed ledger technology have revolutionized transformation. Recent changes have led to an influx of several start-ups with a variety of business strategies trying to expand their customer base or introduce novel goods and services. Fintech will probably witness a surge in M&A activity. This is because the sector consolidates established businesses that aim to take advantage of new technology to enhance the financial services they offer. It is possible through a buy-or-build approach, similar to other industries that have reached this stage in their development cycles.
Understand Fintech M&A
Before the pandemic, certain businesses were at the forefront of technological development. JP Morgan, for instance, processed loan applications for over 360,000 hours in 2017 using artificial intelligence. But in 2020, the overwhelming demand for PPP (Paycheck protection program) loans and other financial services in the context of a remote work environment propelled the rest of the financial industry down the technology adoption curve. Bankers frequently turned to B2B fintech firms like Ncino, Kabbage, Finicity, and Plaid to streamline their banking processes as they were no longer able to transact business at branch offices. Zachary Peret, the creator of Plaid, estimated that banks spend $300 per customer manually, highlighting the opportunity to boost profitability by automating inefficient banking procedures including data collecting and loan application reviews.
Similarly, during the pandemic, fintech companies themselves felt the necessity to speed up their product offerings. While fintech companies are skilled at developing and deploying technology quickly, they frequently struggle to efficiently manage regulatory and compliance barriers. Due to their enormous size, financial institutions have sizable divisions that handle back-office tasks like compliance. This led to mergers & acquisitions of fintech companies. The fintech companies accepted merger proposals with business structures that could effectively remove the regulatory and compliance barriers.
Pros and cons of Fintech M&A
The term “fintech” refers to all the technologies that are changing the way we handle money. From the development of double-entry bookkeeping systems to the present-day gadget learning algorithms for investing in the real estate market. After all, fintech is everywhere.
- Practically every aspect of life and business is impacted by the development of commercial technology, and the potential for wealth creation seems limitless.
- Finance technology decentralizes the economy.
- It encourages clarity.
- As we return to the more pragmatic area of financial technology, there is a tendency toward a decrease in personnel being required to execute financial services.
- It has the potential to cause a worldwide imbalance.
- It can jeopardize privacy.
Rise of Fintech M&A
In the first half of 2022, global Fintech M&A started to rise considerably. Fintech companies started actively collecting clients and combining important operations at the start of 2023. For companies looking to increase productivity, simplify access to the market, and solidify their position therein, this trend appears to be paying off. The number of new Fintech companies has dropped by 85% since 2020 after a decade of promising investment opportunities and expansion. Parallel to this, Fintech M&A activity has been on the rise, rising by 70% when compared to pre-pandemic (2019) data and by 46% when compared to 2021 figures.
The future of M&A in fintech
Analysts claim that despite present supply chain issues and worries about a global recession, M&A peaks won’t be fleeting. Companies are being forced by the current economic crisis to reduce their risk levels and make budget concessions, which leads to substantial layoffs. These elements will increase the significance of M&A opportunities. It is a huge opportunity for businesses that prefer to enhance their market position by reducing competition and gaining market share rapidly.
Reasons for the Rise of M&As in Fintech
Several variables, including technology developments, shifting societal norms, and an environment of favorable regulations, have contributed to fintech’s explosive growth. According to FinTechs, upcoming technical advancements will likely fuel the market’s continued growth and have an impact on the creation, distribution, and utilization of financial products and services over the next few years. The expansion of digital financial services has attracted international neo-banking businesses, but well-established domestic players will compete on an equal basis. Through the deployment of creative distribution strategies, regulatory firewalls, and the launch of new products, regulators promote innovation.
Emergence of Neobanks
Neobanks are fintech businesses that provide their customers with banking services like cash or deposit accounts via online or mobile platforms. These banks are often not subject to the same regulations as conventional banks. The size of the worldwide neo-banking market was estimated at $47.39 billion in 2021 and is projected to increase by 53.4% from the year 2022 to 2030. The banking ecosystem was altered by economic uncertainty, increased competition from digital banks, constantly shifting consumer demand, and rapidly advancing technology. This led to the emergence of neobanks.
Market Share Pursuits from Buy Now/Pay Later Providers
A form of short-term financing called “buy now, pay later” enables people to purchase basic items like household goods, gadgets, and clothing. It is a point-of-sale (POS) installment loan system that manages repayment while enabling clients to make purchases. E-commerce businesses, fintech firms, and even banks have started to provide customers with buy now pay later services. A variety of application-based fintech companies, provide buy now pay later loans. This option is currently available for a variety of goods, from technology to clothing, along with grocery shopping, booking vacations, meal delivery, and other costs. The global market for “buy now, pay later” was valued at US$ 125.09 billion in 2021 and is projected to reach US$ 3268.26 billion by 2030, growing at a CAGR (compound annual growth rate) of 43.8% from 2022 to 2030.
Rise of Challenger banks
In 2022, a total of 43 new challenger banks have entered the market. This is true despite the global economic slowdown brought on by the pandemic and the international conflict. The challenger bank industry has seen 43 newcomers successfully enter the market, whereas a significant number of important fintech companies have frozen employment and reduced their employees. This increase represents a 17.11% increase over new market entrants in 2021, a year that was largely hailed as a boom time for fintech due to significant investment in the industry. Despite being the world leader in fintech, the United States trailed Europe in terms of new digital bank startups, with 10 new challengers starting in the last year, which brought the total for North America to 73.
Rise of Cryptocurrency
According to an estimate from late 2020, about 2,300 US businesses accept Bitcoin, which does not include Bitcoin ATMs. A growing number of businesses all around the world are adopting Bitcoin and other digital assets for a variety of transactional, operational, and investment needs. There are several advantages and disadvantages of using cryptocurrency for commercial transactions. There are unknown risks and compelling rewards, just as in any frontier. Therefore, organizations considering incorporating cryptocurrency into their operations need to have two things:
- a clear understanding of why they are doing so,
- and a list of the numerous questions they need to take into account.
Traditional investments that have been tokenized, as well as new asset classes, could provide access to new capital and liquidity pools via cryptocurrency.
Growth of Fintech Geographic Reach
According to projections, the market for fintech technologies will increase at a CAGR (compound annual growth rate) of 20.3% from 2021 to 2030, from a value of $110.57 billion in 2020 to $698.48 billion in 2030. Fintech, which attempts to enhance and automate the supply of financial services, is the application of new technical breakthroughs to goods and services in the financial sector. Furthermore, it employs several technologies, including application programming interfaces (API), artificial intelligence (AI), blockchain, and data analytics, to compete with the delivery of financial services currently provided by traditional banking means.
How is the rise in fintech M&A impacting the whole industry?
Startups in the fintech sector, which offer financial services based on technology, represent a major revolution in the sector. To innovate and facilitate, these newly established corporate organizations use digital technology like computers, the internet, mobile devices, and data, which puts them in an intense rivalry with established competitors like banks. To compete with these new rivals, banks are developing several different methods, one of which is acquisition. The operating performance, liquidity, and financial leverage of banks are significantly improved as a result of fintech and bank mergers and acquisitions. But the market performance of banks is negatively impacted over the long term.
Top fintech M&A deals
Many industries have struggled during the last year. The supply chain issues and concerns about a significant global recession affected several industries, including FinTech. Its financing levels appeared to be declining in many global marketplaces. Several mergers and acquisitions have occurred in 2022 up to this moment. However, a lot of those transactions proved ineffective. Despite the challenging environment, some noteworthy merger and acquisition transactions in FinTech were conducted in 2022.
Vista Equity acquired Avalara
Vista Equity Partners (“Vista”), a renowned international investment firm concentrating exclusively on enterprise software, data, and technology-enabled businesses, in partnership with institutional co-investors, has completed the acquisition of Avalara, Inc., It is a leading provider of tax compliance automation for businesses of all sizes. They discharged the purchase consideration in cash amounting to $93.50 per share. Avalara shares have stopped trading and are no longer listed on the New York Stock Exchange as a result of the transaction’s completion. Avalara received legal and financial advice from Simpson Thacher & Bartlett LLP, Perkins Coie LLP, and Goldman Sachs & Co. LLC. Vista’s financial advisor was BofA Securities, while its legal counsel was Kirkland & Ellis LLP.
Global Payments acquired fellow PayTech
Global Payments, a global provider of payment technology, will pay $4 billion to purchase EVO, a rival producer of PayTech solutions. EVO will be purchased by Global Payments as part of the agreement for $34 per share. In comparison to EVO’s most recent closing price and its 60-day average price in recent times, the buying price is higher by about 24% and 40%, respectively. It anticipates that this acquisition will broaden its pool of potential customers, strengthen its position as a market leader, increase its presence in both new and existing geographies, and strengthen its B2B software and payment solutions with accounts receivable software that is widely accepted by third parties.
Technisys acquired SoFi
SoFi Technologies Inc. is paying approximately $1.1 billion for banking software provider Technisys. Around 10% of SoFi’s market value will be transferred in the all-stock transaction. The agreement grants SoFi authority over its core banking platform, which is the back-end system used by banks to operate mobile banking applications, open accounts, and monitor consumer deposits. SoFi will roll out customized financial services to its banking clients using the Technisys platform. According to SoFi, the Technisys acquisition might result in an increase in sales of up to $800 million by 2025. Additionally, it might result in cost savings of up to $85 million throughout the period. SoFi presently relies on two different legacy software vendors to run its credit card and banking services, as well as its savings and checking accounts. It can integrate those capabilities with the help of Technics.
Fiserv acquired Finxact
The developer of the cloud-native banking solution that is driving digital transformation in the financial services industry, Finxact, Inc., has recently announced that it has signed a definitive agreement to be acquired by Fiserv, Inc. a leading global provider of payments and financial services technology. The deal furthers Fiserv’s digital banking strategy by enhancing its top account processing, digital, and payments solutions and establishing Fiserv as the go-to partner for clients seeking to scale, accelerate, and broaden the digital banking services they offer their consumers. Fiserv was an early investor in Finxact and will pay approximately $650 million to purchase the remaining ownership interest under the terms of the agreement.
Manage your company’s equity for M&A with Eqvista!
M&A transactions can benefit existing businesses as well as Fintech companies. The possible risks associated with M&A transactions must be understood by businesses so that they may take appropriate action. Eqvista aids you in M&A transactions and equity valuation. We offer direction, advice, and best practices to make sure equity is safeguarded from challenges during M&A deals. You can avail of this service by signing up with Eqvista. Get in touch with us right away to learn more about our services!