How fintech consolidation could change the banking landscape
Amount, a banking technology provider, wanted to become a one-stop-shop for its customers. The Chicago-based company has already helped financial institutions such as Barclays, Regions Financial and TD Bank digitize account opening, loan applications and credit card applications, and offer buy now/pay later financing . Digital small business loans were a missing item in his arsenal.
Instead of building this capability itself, the company sought another fintech with this expertise.
Amount acquired Linear Financial Technologies, of Reston, Va., for $175 million in cash and stock on February 1. Linear also came with a roster of blue chip banking clients, supporting institutions such as Citizens Financial Group, Fifth Third Bancorp and Huntington Bancshares in the digital origination, onboarding and processing of small business loans.
“We are always looking for new growth opportunities,” said Adam Hughes, CEO of Amount.
The market for fintech mergers with other fintechs — and sometimes even banks — is “heated up and heated up,” said Sara Elinson, head of fintech mergers and acquisitions and payments at EY Americas.
FT Partners, in its 2021 Fintech Almanac, said last year was the busiest for fintech M&As ever, with announced deal volume totaling $348.5 billion. Among the biggest deals of the year was the sale of lender Afterpay to Block, formerly known as Square, for $29 billion, which FT said was the fifth-largest fintech deal on record.
And this data only captures the approximately 320 transactions in which purchase prices have been made public. According to FT Partners, 1,167 transactions involving fintechs were announced last year in which acquisition prices were not disclosed, compared to 772 in 2020.
Several factors are driving this fintech M&A boom. For some startups, increasing profitability means improving the services they offer — directly or through banking partnerships — which can be done faster and easier by buying a business with a customer base and workforce. qualified work in place. Others are looking to swallow the competition to become leaders in crowded spaces, such as buy-now/pay-later loans or digital-only banking, or want to cover more territory by expanding into other countries. .
And for many buyers, money is not an issue. According to PitchBook, a financial data firm that tracks venture capital, private equity and mergers and acquisitions, US fintechs raised $50 billion in 2021, up from $20.5 billion in 2020 and 16.5 billion in 2019. Globally, private fintech companies raised $141.6 billion last year, according to FT Partners.
Robert Le, senior emerging technology analyst at PitchBook, predicts that the trend of fintech mergers and acquisitions will continue in 2022.
A record number of exits in 2021 means venture capitalists are brimming with money they can recycle into fintechs. “Because VCs are seeing this record VC activity, they want to deploy even more capital into fintech,” Le said. “Generally, VCs follow the trend.”
At the same time, as publicly traded tech stocks are revalued, he sees the lofty valuations of fintech companies falling. That could make them more attractive targets for buyers, he said.
Two notable deals have been announced in recent weeks. On January 26, Walmart announced that its startup Hazel had agreed to acquire challenger bank One Finance and early-salary access provider Even Responsible Finance in a move widely seen as an effort by the retail giant to offer a wider range of banking services to its customers and employees. The merged company will take the name of One.
On February 7, Fiserv announced that it was buying Finxact, a cloud-based core-as-a-service provider. The agreement will help expand Fiserv’s account processing, digital and payment products and serve more customers.
The frenzied pace of M&A activity is increasing the number of financial services companies with diverse, comprehensive product sets and broad geographic reach that more closely resembles what large banks can offer. Some, including LendingClub and SoFi Technologies, have taken a few leaps forward by becoming banks themselves through acquisitions.
“In ‘early fintech,’ whenever you want to count that, a lot of companies were targeting single-line products and focused on being a robo-advisor or allowing early direct deposit,” said Niall Williams. , Principal Analyst at CB Insights. “But as these fintechs evolve, it’s harder to be monoline. If you want to improve profitability and grow the business, you want to offer more financial services products. »
Cryptocurrency and buy now/pay later are two particularly hot categories for mergers and acquisitions, said Elinson of EY Americas.
An example of the former is crypto firm Coinbase’s 2021 purchase of Bison Trails, a blockchain infrastructure platform. Block’s purchase of Australian installment lender Afterpay is an example of this.
“Complete afterpay [Block] with full functionality,” said Brian Riley, director of credit counseling at Mercator, in August. Block will be able to reach a wider range of buy-now/pay-later merchants, as well as expand these loans through its consumer-facing Cash app.
It could also help Block stand out in an increasingly crowded buy now/pay later market. Arizent’s research from March 2021 showed that PayPal controls almost half of this market in the US, with Afterpay ranking third and Square not making the list. “Fintechs are still trying to position themselves,” said PitchBook analyst Le. “You have Klarna, Affirm and Afterpay still trying to jostle for market share.”
Competition is also fierce among challenger banks, many of which offer similar services such as mobile-first capabilities, no maintenance fees, early deposit of paychecks and lenient overdraft policies.
Consumer lender Oportun announced in November that it had agreed to buy challenger bank Digit for $212.9 million. The goal was to expand its range of banking services to include mobile banking, automated savings tools and investment robots.
The deal closed in December. In an interview, Oportun CEO Raul Vazquez said the merger “creates a neo-banking platform that we believe is unmatched by anyone today.”
Oportun, of San Carlos, Calif., provides direct personal loans and credit cards as well as personal loans in partnership with money service businesses. Digit in San Francisco pioneered the concept of automated savings. It introduced automated investing for retirement in 2020. The acquisition of Digit also diversifies Oportun’s revenue streams to encompass loan income, interchange fees and subscription fees.
Sometimes what starts out as a partnership can turn into an acquisition. Vestwell, a New York company that helps financial institutions administer workplace investment programs such as 401(k)s, has spent several years partnering with BNY Mellon’s Sumday subsidiary. Sumday has focused on helping states administer their 529 college savings, 529A ABLE, and other publicly sponsored savings plans.
Vestwell entered into the Sumday deal in February (pricing was not disclosed). “We’re a technology company and it makes a lot more sense for us to port technology and build at a rapid pace rather than house it at BNY Mellon where it’s not a core specialty,” said Aaron Schumm, Founder and CEO. of Vestwell. The acquisition of Sumday “gave us the ability to jump on the strategic roadmap and have this offering today. We were in partnership, then it made sense to buy.
Some fintechs that aspire to be more bank-like have more ambitious buying targets than other startups. A handful of them have acquired banks to obtain a charter, instead of going the long and expensive route of obtaining a bank charter.
For example, regulators approved the acquisition of Radius Bancorp by LendingClub in early 2021. LendingClub Chairman Steve Allocca said in early 2020 that he was looking for a low-cost source of funding for his loans, the ability to issue loans directly and a means for its customers to accumulate savings.
In late 2021, BM Technologies absorbed First Sound Bank in Seattle to form BMTX Bank. While BM already offered a range of products through partners, including credit cards and personal loans, the charter will let BMTX create these loans itself while continuing to develop deposit, crypto- currency, investment and others.
In January, the Federal Reserve and the Office of the Comptroller of the Currency approved SoFi Technologies’ deal to buy Golden Pacific Bancorp and form SoFi Bank, National Association. The acquisition will allow SoFi to lower its cost of funds by holding more loans on its balance sheet and accepting deposits directly from customers, rather than relegating those tasks to partner banks.
Elinson cautions that acquiring a bank still requires a fair amount of regulatory approvals and may not speed up the process of obtaining a charter as much as these companies might think. “I wouldn’t expect a ton of M&A activity around this,” she said, “but I would expect a ton of fintechs exploring whether they should pursue a charter banking.”