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

The relentless march of fintech

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

2018 has been a transformational year for fintech M&A. Deal values and volumes have reached new heights as established financial institutions pin hopes on well‑placed bets to deliver competitive edge and market share. VC and late‑stage investment firms are also actively stoking the fintech fire.

 

Outlook

The digital revolution is well underway. 3 reasons why M&A shows no signs of slowing down:

  • Established financial institutions view fintech as the solution to operational challenges
  • Voracious appetite of private equity, venture capital and family‑office investors
  • First‑mover fintechs have achieved critical mass and are now seeking to capture market share inorganically

CURRENT MARKET

Upward, significant

WE ARE SEEING

  • Banks are vigorously embracing fintech as an enabler of financial services, with significant appetite for customer experience enhancement and risk-management technologies
  • Banks are deploying multiple investment strategies, including home-grown digital offerings, direct equity investment, JVs/other partnerships, cross-border innovation consortia and accelerator programmes/dedicated VC funding support
  • In the other direction, fintech businesses are now considering becoming banks themselves
  • And new entrants to the market include new banks with technology as part of their core DNA
  • Early testing of blockchain-based back-office infrastructure, particularly for risk management and operational efficiency; though mainstream deployment appears to be some time away yet
  • Financial sponsors actively participating in fundraising and providing growth capital
  • Fintechs scaling-up through successful funding rounds and expanding their repertoire of products and services
  • Fintechs with critical mass deploying inorganic growth strategies
  • ICOs and cryptocurrency-dealing buck the trend—polarised reaction:
    • Heralded as the vanguard of the digital revolution by governments, regulators and financial institutions in some geographies (e.g., Malta and Switzerland)
    • Scorned by market participants in others (e.g., UK), who are demanding heavier regulation
  • Crypto businesses gaining scale through M&A and expanding into “traditional” financial services

The fintech M&A market is growing rapidly. ‘Traditional’ institutions and financial sponsors are now having to compete head on with fintechs with critical mass in highly competitive auction  processes.
Hyder Jumabhoy, Partner, London, EMEA M&A Group

KEY DRIVERS

  • Established financial institutions view fintech as the solution to operational challenges:
    • The urgency to claw back customer ownership and loyalty otherwise being lost to consumer facing technologically advanced apps
    • Margin compression from “traditional” service models— banks searching for lower cost-per-customer through digital efficiencies and compliance cost  management
    • Embracing changing customer utilisation models— banks investing in on-demand, interactive solutions as well as HR to operate them
    • Detection and prevention of cyber-attacks, identity fraud and money laundering
    • Tapping into new markets and distribution channels, including unbanked/under-banked emerging communities
  • High levels of financial sponsor (i.e. private equity, venture capital and family-office) appetite:
    • Growing seller and regulator familiarity with financial sponsor ownership
    • Private equity dry powder—successful sponsors have enjoyed mega-fundraisings
    • Opportunities for platform investments/buy-and-build as well as interim value generation through out-licencing
    • Even late-stage investment firms (e.g., KKR, Warburg Pincus, SoftBank, etc.) have reaped rich multiples on exit
  • Growing maturity of the fintech sector—first-movers capturing market share inorganically
  • Support for fintech at all levels:
    • Transformative financial regulation bolstering innovation (e.g., PSD2)
    • Collaboration projects between EU governments (e.g., Declaration on the Creation of a European Blockchain Partnership)
    • Innovation infrastructure created by national regulators (e.g., Finanstilsynet’s regulatory “sandbox”)

TRENDS TO WATCH

  • Banks coming under pressure from activist investors and other stakeholders to evidence tangible value from expensive innovation investments
  • Growth in competition between national regulators to attract fintechs (e.g., UK, Germany, Ireland, Sweden, etc.)
  • Emergence of more fintech unicorns, seeking scale and market share through M&A
  • Consolidation of crypto exchanges—with >500 exchanges which remain comparatively alien to “traditional” investors; exchanges may need to consolidate to stabilise and maximise returns
  • Fintech companies seeking full banking licences

 

Our M&A forecast

High and increasing level of M&A activity, with a particular focus on process efficiency, AI/machinelearning and regtech. However, innovation is expensive, and integration of new technology by established institutions is often hampered by legacy IT systems. Stakeholders will soon demand tangible returns on their capital and patience.

 

Publicly reported deals & situations

 

Banks believe the hype

Strategic investments:

  • Santander: Acquisition of Albert(December 2018)
  • Barclays: Acquisition of minority stakes in Form3 and Marketinvoice (August – November 2018)
  • Luzerner Kantonalbank: Acquisition of minority stake in SwissSign (October 2018)
  • RBS and Santander: Acquisitions of minority stakes in Vizolution (September 2018)
  • Société Générale: Acquisitions of Treezor and Lumo (June – September 2018)

New business lines:

  • Barclays: Launch of new digital platform across cash management, trade and working capital in Portugal, Spain, France and Ireland (September 2018)
  • UBS: Launch of biometric recognition pilot project (July 2018)

JVs:

  • Santander: Open banking JV with Moneybox (August 2018)
  • Standard Chartered & Ant  Financial: Blockchain cross-border remittance solution JV for Hong Kong and the Philippines (June 2018)

Cross-border innovation consortia:

  • J.P. Morgan, Royal Bank of Canada, ANZ, Société Générale and Santander Interbank Information: Network blockchain payments collaboration project (September 2018)
  • Bank of America, Citigroup, J.P. Morgan, Goldman Sachs, Wells Fargo, BNP Paribas & Deutsche Bank: Bond issuance technology platform (June 2018)

Investment in dedicated fintech funds:

  • Alfa Bank: Cornerstone investment in Corviglia Capital (October 2018)

Start-up support:

  • ING Ventures: €7.5 million investment into Cobase (September 2018)
  • Saxo Bank: Launch of fintech academy in Hainan, China, in conjunction with Sanya University (July 2018)
  • Danske Bank: Creation of co-working space for fintechs in Belfast HQ (June 2018)

 

Fintech, the “enabler”— pushing the boundaries

Deal Highlight:

  • White & Case advised Goldman Sachs on its equity investment in JUMO, a mobile financial services platform which enables the provision of credit and savings products to customers in Africa and Asia-Pacific

Risk management:

  • UBS: Cross-border fund sales compliance JV with Investment Navigator (October 2018)

Tackling social concerns:

  • Wagestream: Launch in Ireland and UK, aimed at reducing employee reliance on high-cost credit alternatives (October 2018)
  • JUMO: Successful funding round, led by Goldman Sachs (September 2018)

 

Financial sponsors believe the hype

  • Triple P Capital: Acquisition of Contemi Group (December 2018)
  • NXMH: Acquisition of Bitstamp (October 2018)
  • Corviglia Capital:  Launch of new US$500 million European fintech fund (October 2018)
  • Belvoir Capital: Anchor investment in WMD Capital (October 2018)
  • Index Ventures, Balderton Capital and Communitas Capital Led US$7 million funding round for Credit Benchmark (October 2018)
  • Valar and Alven Capital: Led €20 million Series B funding round for Qonto (September 2018)
  • Kinnevik: Led US$60 million Series B funding round for Monese (September 2018)
  • Highland Capital Successful third fundraise of €463 million for fintech investments (June 2018)

 

Scaling up

Successful fundraisings:

  • Credit Benchmark: Successful US$7 million funding round (October 2018)
  • Qonto: Successful €20 million Series B funding round (September 2018)
  • Monese: Successful US$60 million Series B funding round (September 2018)

Expanding footprints/ product lines:

  • Revolut: Successful grants of Lithuanian banking licence, Singaporean remittance licence and Japanese financial services authorisation (November 2018)
  • Tandem: Launch of Hong Kong digital lending offering (November 2018)
  • Sonect: Cash dispenser app JV with Temenos (September 2018)

JVs:

  • Marqeta: Payment cards and processing JV with Visa (October 2018)

Inorganic growth:

  • Advanced Blockchain: Acquisition of Nakamo.to (December 2018)
  • Kirey: Acquisition of MPM Software (November 2018)
  • Credit Karma: Acquisition of Noddle (November 2018)
  • Fexco: Equity investment in Cambrist (June 2018)
  • Finastra Group: Acquisition of Malauzai Software (June 2018)

 

Top-down support for fintech continues

Governments:

  • Italian government: 27th EU Member State to sign the declaration creating a European Blockchain Partnership (September 2018)

Regulators:

  • Norwegian Finanstilsynet: Launch of 2019 regulatory “sandbox” (November 2018)
  • French AMF: SETL to connect to Target2- Securities platform, a €1 billion ECB-run project (October 2018
  • ECB: Licencing practical guide to support fintechs through the EU bank licence procedure and assessment (September 201
  • Swiss FINMA: Relaxed AML rules from 2019 for Swiss fintech licence applicants with gross revenue of <1.5 million Swiss francs (August 2018)

 

Polarised reaction to cryptos

ICOs/Cryptocurrencies:

  • Global digital currency reached US$13.7 billion in the first five months of 2018, nearly twice that of the whole of 2017*

SCEPTICISM:

  • Governments:
    • UK: Veto of trading of Royal Mint’s digital gold token (October 2018)
    • UK: UK Parliament Treasury Committee 22nd Report on crypto-assets called for regulation of crypto markets siting multiple risks including cybersecurity, AML and lack of retail consumer protection due to price volatility (September 2018)
  • Regulators:
    • UK Financial Conduct Authority: Launch of 2019 consultation to consider ban on sale of derivatives based on cryptocurrencies (October 2018)
    • EU Financial Action Task Force:  Licencing and regulation of cryptocurrency exchanges and encrypted wallets expected by June 2019 (October 2018)
    • FIs: Wealthify, Nutmeg and Scalable Capital: Calls for regulation of cryptocurrencies (July 2018)

SUPPORT:

  • International trade bodies: International Monetary Fund encouragement of central banks to issue digital currencies to combat declining use of cash (November 2018)
  • Regulators:
    • Swiss FINMA: Crypto Finance’s and Crypto Fund’s licences to distribute funds in Switzerland (June – October 2018)
    • New York State DFS: Square’s virtual currency licence (June 2018)
  • FIs:
    • SIX:  Support for Amun Crypto ETF’s cryptocurrency index tracker, acquisition of minority stake in PassOn and construction of DLT-based cryptocurrency trading platform (July – November 2018)
    • SBI Group:  Acquisition of 12% of Clear Markets (July 2018)
    • Andreessen Horowitz: Raise of US$300 million fund to support cryptocurrency projects (June 2018)

 

Market participants seeking scale

  • Bitcoin Group Acquisition of Tremmel Wertpapierhandelsbank (November 2018)
  • trade.io Acquisition of Primus Capital Markets (November 2018)

 

Bad publicity

  • Financial.org: Closure of all investors’ US$ accounts and conversion of balances to its new cryptocurrency, FOIN, which cannot be withdrawn until 2019, following UK FCA sanction (June 2018)

 

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FULL MAGAZINE
Financial institutions M&A: Sector trends

 

* Source: Reuters, June 2018

 

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