Financial institutions that initially viewed fintech startups as threatening competitors now recognise that these businesses can in fact help deliver services faster, cheaper, more securely and in a more customer-friendly manner. Fintech has moved from being a disruptor to an enabler, and the opportunities for the development of technologies and applications across financial services are almost limitless.
But rather than using M&A in the classic sense as a buy-out tool, institutions are now beginning to see fintech deals as a way to address a wider set of strategic objectives. This evolution—some would say revolution—over the past few years provides tremendous opportunities for M&A and dealmaking in addition to seed investment and growth capital. As the interaction between fintech and established financial services institutions continues to increase, four key trends will underpin M&A in the space.
Collaboration—rather than competition—will drive M&A.
Financial services companies across the board recognise the value that fintech can bring to their businesses. Key to unlocking these benefits will be establishing standardised platforms or technology across the finance sector. Instead of competing with each other and fintech startups to secure the next big thing, stakeholders will work on deals together to ensure that new technologies can be used across the industry as a whole (or among select groups of market participants) rather than by isolated individual companies.
Smaller deals will dominate.
There is no such thing as a “killer app” that can do everything a bank, asset manager or insurer does, so the pursuit of large mega-deals is less compelling strategically. The risk of a multibillion-dollar investment being disrupted or surpassed by a new technology is plausible. M&A, including minority stakes and joint ventures, is one of the levers that institutions will use to explore the market and reduce the risk of being blindsided by new technological developments.
Fintech funds and incubators will expand.
The funds model—in which an institution cornerstones a fund to invest in fintech rather than investing directly—has already proven popular with BBVA, Santander, Commerzbank and Unicredit, and more are likely to follow suit. In addition to removing the integration risk that comes with a direct investment, a fund model allows financial institutions to spread their capital across a range of businesses and avoid putting all their eggs in one basket. Once a concept has proven itself, the door towards ownership or partnership will open. For banks restricted by regulation from investing through funds, incubators and accelerators offer similar routes to market.
Big banks will work together for fintech.
More and more established players in financial services, such as banks and brokers, are forming joint ventures and teaming up with peers and fintech startups to develop fintech solutions jointly. The use of blockchain and other new market infrastructure is just one example.
It is clear that fintech M&A and investment deals will grow exponentially. The opportunities are almost limitless.
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