Financial institutions M&A: Sector trends - June 2018
What's inside
June 2018
We highlight the key European M&A trends in the first half of 2018, and provide our insights into the outlook for M&A moving forward
Introduction
In 2017, the European economy expanded by 2.5 per cent, its strongest performance since before the global financial crisis. However, economic growth has done little to ease mounting stakeholder pressure on the bloc’s financial institutions. Persistently low interest rates, increasing regulatory burden, competition from fintechs, unavoidable IT cost hikes and elevated consumer expectations are only some of the factors which have led to declining revenues for many of the region’s largest and most well-established financial services businesses.
The call of the global financial elite in Davos for consolidation across Europe’s financial services industry was somewhat inevitable.
Banks have emerged from the global financial crisis with a clearer picture of how they need to be structured. Strategic M&A is back as banks across Europe consolidate and lean in to the fintech revolution.
State-aided banks are a fertile source of deal flow. Institutions continue to deleverage balance sheets and dispose of non-core businesses, while governments seek privatisation. But make no mistake — deals are hard fought, with risk allocation needing to be carefully managed at every turn.
Fintech M&A volumes and values soared in H1 2018 as banks embraced fintech as a key enabler of operational efficiency and customer satisfaction. Private equity and venture capital houses continued to invest aggressively in the space, buoyed by a series of strong exits and growing buyer demand.
New regulation, competition from fintech disruptors and ever-more sophisticated and demanding retail investors (wanting more for less) have forced asset/wealth managers to build scale through mergers of equals, acquisition of smaller players and buy-in of technology. The global financial crisis is behind them, but the new challenges are no less daunting.
M&A in payment services is red hot, but anti-trust concerns in the trading platform space and dominant incumbents in the custodian sub-sector has meant deal activity as a whole has been uneven.
Regulation has put the brakes on deal activity involving credit card providers and payday lenders, but specialty and marketplace lenders are continuing to attract large amounts of strategic and private equity interest.
Consolidation activity intensifies with possible mega-mergers on the horizon
White & Case partner Gavin Weir shares his predictions for the asset/wealth management sector over the next 12-18 months and discusses what has been driving consolidation within the sector.
The fintech bull run has escalated, and bank CEOs are no longer standing idly by. Many have grabbed the bull by the horns and entrenched themselves in a stampede towards the digital future!
Fintech M&A volumes and values soared in H1 2018 as banks embraced fintech as a key enabler of operational efficiency and customer satisfaction. Private equity and venture capital houses continued to invest aggressively in the space, buoyed by a series of strong exits and growing buyer demand.
Outlook
The magic ingredients for innovation (or at least M&A):
Banks embrace fintech as a vital solution for legacy challenges
Top-down support from the European Commission, through national governments and regulators, to local trade bodies
Our M&A forecast
High and increasing level of M&A activity, with a particular focus on process optimisation/transformation, AI and market infrastructure fintech.
Many established European financial institutions have taken the plunge of attempting to integrate fintech solutions. The time will soon come when institutions will discover which work best for them and which do not. That realisation will drive M&A even further.
Current market
Upward, significant
We are seeing
Significant uptick in banks embracing fintech as an enabler of financial services, through strategic investments, JVs with fintechs, home-grown digital offerings, collaboration projects with competitors and accelerator programmes/dedicated venture capital support
Inaugural deployment of back-end infrastructure fintech strategies, in particular risk management and operational efficiency tools. Though mainstream deployment appears to be some time away yet
Growth of fintechs, through successful fundraisings, acquisitions and new product/service offerings
Sustained high levels of financial sponsor appetite, including through specialist fintech investment funds
Key drivers
Fintech is more widely viewed as a solution to challenges faced by established financial institutions:
Reducing cost-to-income ratios, which have remained broadly steady for many institutions since the global financial crisis (due to rising regulatory compliance obligations, resource drain from legacy IT systems and litigation charges)
Reducing time lag to deposit/fee receipt through automation of on-boarding and other compliance procedures
Increasing wallet share from existing customers through enhanced customer experience, on‑demand and real-time services and tailored products
Opening new distribution channels, appealing to Generation Y and mass-affluent customers as well as reaching unbanked/under-banked communities
Mitigating rising cybersecurity threats and synthetic identity fraud. AI and advanced analytics are becoming increasingly critical for detection and prevention of financial crime
Reversing customer trust erosion through the promise of truly objective and impartial investment advice in the customer's best interests
Tangible successes boosting M&A activity
Top-down support for fintech from:
National governments through funding and incubator projects
Regulators through global collaboration projects and proposals for harmonised standards across the EU
Trade bodies through positive lobbying efforts
Trends to watch
Preference for bank investment through dedicated funds (as opposed to direct investing). The fund model allows maximisation of capital across a range of fintechs and subsequent cherry-picking of appropriate businesses for partnership or ownership
Rise in outsourcing arrangements as banks succumb to the benefits of scalability, flexibility and variable usage costs which the public cloud offers (compared to private data centres)
Increasingly fierce competition between regulators to attract and encourage innovation, including dedicated fintech licencing and other start-up support
Healthy regulatory symmetry for banks and consumer-facing fintech. Santander, BBVA and CaixaBank are amongst those actively seeking a level playing field
Publicly reported deals & situations
Venture capital investment into UK fintech saw a 153% increase in 2017 year-on-year.*
Global fintech deal volume reached US$29.35bn by Q2 2017.**
Banks believe the fintech hype
Strategic investments:
NatWest: Acquisition of FreeAgent (June 2018)
BBVA: Equity investment in Atom Bank and Neon (May – June 2018)
Deutsche Bank: Acquisition of Quantiguous Solutions (May 2018)
KBC: Acquisition of a minority stake in blanco (April 2018)
Sberbank: Acquisition of 60% of Dialog (March 2018)
J.P. Morgan: Acquisition of a minority stake in Mosaic Smart Data (March 2018)
Banco BNI Europa and Varengold Bank: Investments in MarketInvoice (March 2018)
Citi and Crédit Agricole: Acquisition of minority stakes in SETL (February 2018)
JVs:
Albaraka Türk Katılım Bankası: Digital Islamic banking JV with Solarisbank (May 2018)
Sberbank: E-commerce JV with Yandex (May 2018)
HSBC: Corporate payments JV with PayPal (March 2018)
BNP Paribas: Mobile banking application JV with Tink (March 2018)
Bank of America Merrill Lynch: SME lendtech JV with Amazon Lending (February 2018)
New business lines:
Santander: Upcoming launch of UK digital bank (May 2018)
Standard Chartered: Launch of Cote d'Ivoire digital bank (March 2018)
HSBC: Launch of Connected Money (March 2018)
Collaboration projects:
BNP Paribas, Commerzbank and ING: Collaboration on Marco Polo blockchain trade finance project (February 2018)
ABN Amro, ING and Société Générale: Agricultural commodity trade collaboration (January 2018)
Start-up support:
Landesbank: Launch of Helaba Digital (May 2018)
NatWest: Launch of London, Manchester, Bristol and Edinburgh specialist fintech accelerators (April 2018)
BBVA: Investment in Sinovation Fund IV to support Chinese AI start-ups (April 2018)
Barclays: Launch of Barclays UK Ventures (April 2018)
BNP Paribas: Launch of Finextra fintech investment fund (February 2018)
Citigroup: New London-based innovation centre (February 2018)
Swedbank: Launch of its Riga accelerator programme (February 2018)
Rabobank: Launch of Rabo Frontier Ventures (January 2018)
Standard Chartered: Launch of SC Ventures (January 2018)
Top-down support for fintech continues
Governments:
European Commission and European Investment Fund: Joint €410m of funding for Venture EU (April 2018)
Scottish Parliament: Launch of FinTech Scotland (March 2018)
European Parliament: Launch of EU Blockchain Observatory and Forum (February 2018)
Regulators:
IOSCO: Launch of its support framework to boost cross-border fintech collaboration (May 2018)
European, US and Asian regulators: Collaboration to create "global sandbox" (March 2018)
European Commission: Plans for common blockchain technology standards to support EU fintechs (March 2018)
UK FCA and US CFTC: Fintech collaboration and support initiative (February 2018)
Trade bodies:
British Business Investments: Launch of £500m managed funds programme (May 2018)
International Underwriting Association: Encouragement of electronic trade processing (March 2018)
Fintech, the 'enabler' — pushing the boundaries
Deal highlight
Banks understand what fintech means for their businesses. HSBC's deal with Quantexa, for deployment of AI tech for AML, fraud and terrorist funding prevention, is the first of many to come.
Risk management:
HSBC: Deployment of Quantexa AI for AML, fraud and terrorist funding prevention (April 2018)
Hong Kong Stock Exchange: Deployment of AI for unusual trading activity detection (April 2018)
NatWest: Deployment of AI for invoice redirection fraud prevention (April 2018)
Operational efficiency:
Commerzbank: First German corporate FX transaction using blockchain (May 2018)
HSBC: First commercially viable trade-finance transaction using blockchain (May 2018)
BBVA: Inaugural issue of a loan using blockchain (April 2018)
CaixaBank: Inaugural foreign trade operation using blockchain (April 2018)
Tackling social concerns:
Airfox: Launch of free Brazilian Android app to reach unbanked communities (February 2018)
But not yet ready for mainstream use:
Swift: Identification of operational challenges through Nostro liquidity management and reconciliation proof-of-concept test (March 2018)
Scaling-up
Deal highlight
Revolut and OakNorth have both moved into "the black" within three years of launch. These successes have spurred VC firms to invest even more vigorously.
Successful fundraisings:
Revolut, N26, Atom Bank, Babb, C2FO, Payslip, RecargaPay, Roostify and solarisBank: H1 2018 successful fund-raisings (January – April 2018)
Expanding footprints:
Tandem Bank: Launch of UK travel cashback card and savings account offerings (February – April 2018)
Starling Bank: Launch of insurance app-based platform and business account offering (February – March 2018)
Revolut: Launch of commission-free share trading services, pay-per-day travel insurance and disposable virtual card offerings (January – June 2018)
Monzo: Launch of current account offering (January 2018)
Inorganic growth:
IHS Markit: Acquisition of Ipreo (May 2018)
Paycoinq & Bancontact: Merger (March 2018)
Availability of growth funding:
Ascension Ventures and Unicorn India Ventures: Launch of UK-India Enterprise Investment Scheme Fund (June 2018)
Rocket Internet: £2.3bn of funding available for fintech and AI (May 2018)
DN Capital: Successful €200m fund-raisings to back European technology start-ups (January 2018)
