Back
Financial institutions M&A: Sector trends - January 2019
Insight

The face of consumer finance is changing

Financial institutions M&A sector trends: consumer finance — H2 2018 and outlook for 2019

Specialty finance is now viewed as a mainstream source of credit by SMEs, which has encouraged the rapid growth of lending platforms and success of direct-lending funds across Europe. Specialty finance will thrive as credit assessment criteria continue to hamper established banks.

Ashley Ballard Partner, London EMEA M&A Group

 

Consumer finance:* Credit cards/Consumer credit

  • Deal activity involving credit card businesses blooms—trade consolidators, financial sponsors and big banks see opportunities
  • Buyers scrutinise historic compliance weaknesses/strengths as well as potential impact of any upcoming regulatory changes before taking the plunge

CURRENT MARKET

Upward, marginal

WE ARE SEEING

Trade consolidator and late-stage PE-led M&A

KEY DRIVERS

  • … Healthy buyer appetite from:
    • Trade consolidators—seeking scale and product range
    • Financial sponsors—disrupting sleepy incumbents and turning a profit
    • Big banks—international exposure and access to new cross-selling opportunities
  • Sellers feeling the pressure:
    • To offload “riskier” consumer credit offerings
    • From regulators for increased market competition
  • Rise of white-labelling models

TRENDS TO WATCH

  • Competition from new fintech entrants, keen to expand into banking products and services (e.g., Klarna, Marqeta, etc.)
  • Increasing risks associated with card businesses:
    • Heightened regulator intervention in M&A (e.g., UK CMA’s Phase 2 review of PayPal’s acquisition of iZettle)
    • Heightened regulator intervention in operational matters (e.g., European Commission’s probe into interchange fees charged on tourists’ card payments)
    • Heightened government social prerogatives (e.g., proposal for stricter mandatory credit assessment rules for consumer credit in Norway)
    • Heightened litigation risk—retailers clubbing together to stop abusive dominant behaviour (e.g., Visa’s and MasterCard’s ongoing legal battle relating to unlawful swipe fee levels)

Our M&A forecast

Lucrative  M&A opportunities exist. However, competition is stiff for assets where governments/regulators are seeking to instil market competition by encouraging sellers to offload businesses. Buyers need to carefully assess existing compliance strengths and weaknesses of targets as well as the potential impact on profitability of any upcoming regulatory changes.

 

Consumer finance: Payday lenders

  • The sun continues to sets on deal activity involving payday lenders, as the UK FCA’s interest rate caps crush profit margins
  • As one door closes, another opens—providers of alternative credit options step up to fill the void left by payday lenders crushed by the UK FCA’s interest rate caps

CURRENT MARKET

Decline

WE ARE SEEING

Dwindling financial support

KEY DRIVERS

  • Deal-making has slowed as financial sponsors focus capital on more lucrative areas within the European financial services landscape
  • Increased operating and regulatory pressures—the UK FCA continues to heap pressure on the remaining market players to atone for perceived harm to vulnerable consumers

TRENDS TO WATCH

  • New entrants stepping up to service the market segment left vacant by exiting payday lenders:
    • Dynamic loans—interest rates decline in proportion to credit score increases (e.g., Chetwood Financial’s Livelend product)
    • Short-term loan options by regulated deposit-taking institutions (e.g., Monzo)
    • Micro-lending—smaller amounts to be repaid over several months (e.g., Oakam)
  • Decline of predatory businesses practices and unjustifiably high interest rates
  • High levels of regulatory oversight:
    • Possible expansion of the UK regulatory perimeter (e.g., introduction of price-capping across more high-cost credit products)
    • Active policing of customer complaints handling and mis-selling compensation payment plans

Our M&A forecast

The UK FCA has crippled mega-margin lending across the country. However, market players with safer, consumer- centric business practices may rally to avoid certain consumers being locked out of credit markets or pushed into other forms of high-cost loans.

 

Consumer finance: Specialty finance/ Market place lending

  • The sun rises on M&A in the specialty finance space—support from established banks, financial sponsors, trade consolidators and local governments turbocharges deal-making
  • Technology-led market metamorphosis continues at pace

CURRENT MARKET

Upward, significant

WE ARE SEEING

Shaken, not stirred—cocktail of established banks, financial sponsors and trade consolidators actively involved in M&A

KEY DRIVERS

  • Expanding universe of potential investors:
    • Established banks—embracing the digital revolution, including through deployment of multi- boutique structures
    • VC and late-stage PE—opportunity to capture an under-serviced markets
    • Trade consolidators—conquering their own niches
    • Governments—credit availability for SMEs
  • Successful IPOs, despite challenging capital market conditions
  • Growth capital for market players—successful capital raisings have provided funding for organic expansion by smaller players and M&A firepower for first-movers
  • Growth of new lenders, encouraged by government support for alternative finance for SMEs (e.g., Spanish Law for Promotion of Entrepreneurial Financing)

TRENDS TO WATCH

  • Market at an inflection point:
    • First movers (including Amigo and Funding Circle) have enjoyed successful IPOs. Listed platforms will have access to capital necessary to turbocharge expansion plans
    • Traditional asset managers seeking to utilise peer-2-peer platforms for large-scale capital deployment (e.g., Waterfall AM’s funding of £1 billion of SME loans through Funding Circle)
    • Governments ensuring debt funding for SMEs through peer-2-peer platforms (e.g., British Business Bank’s £150 million SME funding commitment through Funding Circle)
  • Consolidation of Europe-focused direct-lending funds

Our M&A forecast

High levels of M&A activity as established banks, financial sponsors and trade consolidators vie for market share amidst growing market demand. If “no-deal” Brexit replays the credit crunch, specialty finance will become an increasingly important source of working and growth financing for SMEs.

 

Credit cards / Consumer credit—Publicly reported deals & situations

 

Healthy buyer appetite

Deal highlight

White & Case advised one of the bidders for Israel’s largest credit card business, Leumi Card, ultimately  acquired by Warburg Pincus.

Deal highlight

White & Case advised SIA, a European leader in the payments infrastructure space, on its €375 million acquisition of First Data Slovakia and First Data Hellas Processing Services

Trade consolidators:

  • La Banque Postale: Acquisition of 35% of La Banque Postale Financement (December 2018)
  • Agos Ducato: Acquisition of Profamily (December 2018)
  • BGL: Acquisition of Saverd (October 2018)
  • SIA: Acquisition of First Data Corp’s CEE card processing businesses (October 2018)
  • Zmarta Group: Takeover offer for Insplanet (September 2018)

Strategic investors:

  • Bankinter: Acquisition of AvantCard (September 2018)
  • Warburg Pincus: Acquisition of Leumi Card (July 2018)*

 

New fintech entrants

  • Chetwood Financial: Liveland dynamic load JV with Clearscore (November 2018)
  • Marqeta: Payment cards and processing JV with Visa (October 2018)
  • Klarna: Launch of payment card (July 2018)

 

Increasing operational risks

Litigation risk:

  • Future Finance: Payment of €2 million compensation to customers for UK Consumer Credit Act breaches (July 2018)
  • Visa and MasterCard UK Court of Appeal’s landmark judgment in favour of a group of British retailers relating to unlawful swipe fee levels (July 2018)

Regulator intervention:

  • PayPal-iZettle: Phase 2 review of PayPal’s acquisition of iZettle by UK CMA (December 2018)
  • Visa and Mastercard: Offer of cap on interchange fees charged on tourists’ card payments in response to European Commission probe (December 2018)

 

Wider market influence—new regulatory burdens

  • Norwegian Financial Services Authority: Proposal for stricter mandatory credit assessment rules for offer of consumer loans and credit cards in Norway (September 2018)
  • UK Payment Systems Regulator: Launch of wide-ranging investigation into limited competition within the UK’s card industry, with a focus on card-acquiring services (July 2018)

 

Payday lenders / High-cost credit—Publicly reported deals & situations

 

Bullish PE support

  • Wonga: £10 million rescue by Accel Partners and Balderton Capital, ahead of collapse into administration (August – September 2018)

 

Increased operating risks

  • UK FCA: Order on payday lenders to bring forward customer compensation for mis-sold loans, notwithstanding insolvency concerns (October 2018)
  • CashEuroNet UK: Customer complaints increased by >200% in H1 2018 (September 2018)
  • QuickQuid: Customer complaints increased threefold in H1 2018 (September 2018)

 

Specialty finance/ Marketplace lending—Publicly reported deals & situations

 

Growing buyer/ investor/ partner interest

Private equity/venture capital:

  • Zopa: Successful £60 million funding round (led by Augmentum, Northzone and Bessemer) and £44 million funding round (led by Wadhawan Global Capital) (August – November 2018)
  • Divido: Successful US$15 million Series A funding round, led by Dawn Capital and DN Capital (September 2018)
  • LendInvest: Successful US$40 million funding round, led by Atomico and GP Bullhound (September 2018)
  • KKR: Dutch and German SME lending JV with NEOS and Schroders (August 2018)
  • Ares: Raise of €6.5 billion European direct lending fund (July 2018)

Governments:

  • UK British Business Bank: £150 million of funding for Funding Circle (November 2018)

Management:

  • Crowdhouse: Partial MBO (December 2018)

FI:

  • Liberbank: Spanish business participation JV with October (December 2018)
  • BAWAG: Acquisition of BFL Leasing (December 2018)
  • Bank of New Mellon: Investment of £300 million into ThinCats (September 2018)
  • Poštová banka: Acquisition of Amico Finance (August 2018)

Trade consolidators:

  • abcfinance: Acquisition of G.R. Factoring (December 2018)
  • EC Financial Services: Acquisition of JET Money (September 2018)
  • City of London Group: Acquisition of Acorn to Oaks (July 2018)
  • White Oaks: Acquisition of LDF (July 2018)
  • Paragon Banking Group: Acquisition of Titlestone Property Finance (July 2018)

 

Vertical integration

  • Waterfall Asset Management: SME loan funding JV with Funding Circle (December 2018)
  • Anaxago: Launch of Anaxago Capital (September 2018)

 

Market inflexion point

Deal highlight

White & Case advised Amigo Holding PLC, the leading company in the UK guarantor loan space, on its £1.3 billion IPO on the London Stock Exchange

IPOs:

  • Fellow Finance: Nasdaq First North IPO at €55 million valuation (October 2018)
  • Funding Circle: LSE Main Market IPO at £1.504 billion valuation (September 2018)
  • Amigo: LSE Main IPO at £1.504 market valuation (June 2018)

Expanding horizons:

  • Zopa: Successful grant for UK banking licence (December 2018)

 

Regulators roll up their sleeves

  • ECB: Proposal for stricter scrutiny of investment funds and other firms across the EU’s shadow-banking industry (September 2018)

 

Click here to download PDF of this chapter.

 

FULL MAGAZINE
Financial institutions M&A: Sector trends

 

Source: *Non-EU transaction. Included for illustration of possible future European trends

 

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2019 White & Case LLP