- Bank and fintech M&A in the US increased by 31% by the end of 2021
- M&A has become a fierce battleground for banks, says a deal advisor.
- Banks are rebuilding corporate development teams to compete with large fintechs building deal teams.
Banks are eager to scale their services by digital means to stay competitive and relevant. The quickest way to do that is to acquire a fintech company that meets whatever payment, lending, or automated services it needs to keep its edge on the competition.
JPMorgan, for example, has acquired 13 fintech and consumer companies since 2020 to advance its product and service offerings. And Wells Fargo’s Head of Technology, Saul Van Beurden, said at RBC’s Global Financial Institutions Conference in March that the bank is in talks with many fintechs and would partner with those that provide “a solution to a problem that we want to solve for our customers or clients.”
Overall, deals for fintechs by banks and
fintech companies
increased in 2021, according to a Deloitte report. There was a 31% year-over-year rise in deal volume from 164 US deals in 2020 to 216 by 2022.
Competition has heightened as once-small financial startups have grown into massive strategic players in fintech M&A, Jonathan Shiery, partner at deal advisory firm Guidehouse, told Insider.
“I think banks are gonna have a big challenge competing just from a valuation perspective,” said Shiery.
In 2021, a year of record deal volume for the fintech space, the industry witnessed some of the biggest acquisitions take place; payments provider Block, formerly Square, announced it would buy Australian buy-now, pay-later company Afterpay for $27 billion and PayPal acquired Japanese payment processing fintech Paidy for $2.73 billion. Ranking lower on the list was Goldman Sachs’s $2.24 billion purchase of the Atlanta-based lending company, GreenSky.
Some fintechs like Marqeta and Betterment have achieved enough scale to leave behind outsourced deal teams and install their own to source and target other fintechs for strategic partnerships or acquisitions. In January, Insider reported headhunters for fintechs were poaching junior talent from investment banks to raise the experience level of their young dealmaking units.
The top five
largest banks
have the corporate development teams to be strong players in fintech M&A, but as you start going further down the list, said Shiery, the presence of those teams dwindles.
Guidehouse
Shiery recalled meeting a two-person corporate development team at a regional bank two years ago. The bank hadn’t been making many investments or acquisitions in some time, and so didn’t need a large team focused on sourcing, targeting, and integration. For the most part, the bank was focused on bolting smaller like-minded financial companies to its larger business units.
However, because of the robust M&A activity today, banks are rebuilding their corporate development teams, adding experienced integration professionals, to not only source the right deals and better compete for them but also acquire companies faster. Shiery expects that trend to continue for the next few years.
“They’re trying to make sure when they buy, they can integrate immediately. They don’t want a two-to-three-year integration; they want a 12-month integration,” he said.
Fintech valuations have dipped this year in the public and private markets, but the landscape doesn’t quite spell out discounts for banks, Shiery added. Instead, it’s a clear sign of uncertainty around how the
Federal Reserve
will treat rising inflation from the pandemic and the fallout from the Russia/Ukraine war.
Outside of the financials, banks will face challenges in two areas they’ve always struggled with when it comes to fintech companies: culture fit and talent.
Banks can offer fintechs more product distribution channels, a larger customer base, significant financial backing, and human customer support. But it comes with a lot more regulatory scrutiny and outdated technology. Fintechs have to ask themselves if they want to integrate with legacy technology.
“That becomes a big challenge for them to get around, like some of the compliance investments that need to happen on the backend,” Shiery told Insider.
Fintechs also have to consider the type of talent they will be able to attract at a traditional bank. The tech space easily attracts early career professionals and college students. It’s sexier to them to say they work for a well-known tech name, a private equity-backed company, or even a private equity firm right now than a legacy bank, Shiery said.
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