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Fintechs are offering consumers a richer and smoother experience and are removing friction and cost from market infrastructure. Believe the hype! But proceed with caution...
Established financial institutions are engaging with fintech as never before and are now active participants in fintech M&A. Private equity and venture capital appetite for transactions remains strong. Fintech dealmaking is booming as a consequence, and there is every indication that this will continue for some time yet.
Our 2018 M&A forecast
Fintech is the 'darling' of financial sector M&A and will enjoy the spotlight for some time to come as market participants embrace enablers in their quest for competitive advantage.
Technology is fundamentally changing the way we deal with money and capital
Fintech has moved from "disruptor" to "enabler" for many financial institutions and continues to shape the future of the financial sector. Here's how:
Strategics' hunger for more fintech M&A
Strategic buyers have seen tangible examples of fintech success, such as Calastone's purchase and sale of mutual funds using blockchain and Natixis making its first blockchain-powered fund distribution. Case studies like these mean other traditional institutions cannot afford to sit on the sidelines and wait to see how fintech develops. They have had to act and this has prompted a flurry of joint ventures and acquisitions, such as RBS's partnership with blockchain-based mortgage reporting developer R3 CEV, Santander's acquisition of transaction processor Elavon and BNP Paribas's investment in robo-adviser Gambit Financial. Established banks, insurers and asset managers recognise that fintech can accelerate the re-architecture of back-end infrastructure with new efficient and cost-effective models.
PE and venture capital: Fintech high on the deal radar
Private equity and venture capital investors have continued to invest heavily in the fintech sector, attracted by growth prospects and the willingness of financial services companies to do deals, which increases exit options for sponsors. Payment processors Klarna and iZettle have both received financial sponsor backing this year, while Monzo, OakNorth Bank, Nubank, Neyber, Revolut, Tide, Yoyo, Zopa and Neos all reported successful funding rounds in H2 2017.
Fintech's transformation of financial services sector grows apace
EU finance ministers have emphasised the need to introduce fintech regulations to protect consumers, and the ECB has begun drawing up new licensing regulation for fintech businesses. While increasing regulatory scrutiny remains a concern, on the whole, local governments are supportive of the industry and are competing to attract fintech businesses to their shores. Fintech transformation of the financial services sector continues apace.
Fintech remains an M&A focus for financial sponsors and an investment omphalos for many established financial institutions. Global banks and insurers are increasingly looking to 'market infrastructure' fintech as a cure for internal cost management.
By contrast, 'customer-facing' fintech is having an increasingly disruptive impact on traditional retail banking models. Such solutions offer the intuitive end-user experiences which High Street lenders struggle to provide. But penetration of such solutions has not been consistent across all financial subsectors—for instance, penetration within the asset management industry has been more gradual.
- Upward, significant
We are seeing
- Expansion of fintech business, through successful fundraisings as well as inorganic growth strategies
- High, and growing, financial sponsor appetite for fintech
- Steady upward trajectory of strategic M&A. Established financial institutions are engaging with fintech in a variety of ways:
- JVs with existing fintech businesses
- JVs with competitors to develop fintech
- Acquiring the whole/strategic stakes in fintech businesses
- Funding fintech start-ups in exchange for 'early bird' stakes
- Establishing accelerator programmes to foster ground-up development
- Early signs of profit generation for established financial institutions from M&A
- Fintech is being embraced as an 'enabler' of financial service provision—perception that fintech could be the solution to:
- Realising cost efficiencies across existing service provision models
- Maximising existing customer bases, through enhanced data analytics and processing
- Attracting new consumers, especially millennials, who respond well to just-in-time personalised services
- Accessing new markets, including unbanked and under-banked communities in China, Africa, India and SE Asia
- Rapidly growing cybersecurity threats
- Top-down support for fintech businesses, including from national governments across Europe and local EU regulators. However, growing scepticism from supranational regulators could impact M&A levels
- Progressive regulatory and supervisory approach. Both UK prudential regulators are acutely aware of their national imperatives of ensuring the UK financial services market remains 'open for business' as Brexit looms—but they face stiff competition from other regulators across the bloc
- Regulatory intervention (e.g., the European Commission, through PSD2, and the UK Capital Markets Authority, through its February 2017 final banking order, are encouraging 'open banking')
Trends to watch
- Fintech continuing to disrupt traditional retail banking models—how will the High Street banks react?
- Tangible fintech successes boosting M&A activity. We are seeing the first signs of blockchain technology deployment across fund distribution, cross-border FX transfers and securities settlement
- Profit generation for established financial institutions from M&A activity
- Financial sponsors seeking to realise investments through IPOs, disposals and other exit strategies
- Will the UK be toppled as the epicentre of fintech development post-Brexit?
- Regulatory intervention in certain fintech subsectors (e.g., P2P, coin offerings and bitcoin CFD trading)
Key deals and situations
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© 2017 White & Case LLP