U.S. banking acquisitions of large fintechs remain rare as startups grow rapidly


More and more leading fintech companies are exceeding the size banks can assimilate as potential acquirers, keeping the competition between traditional banks and disruptors as healthy as ever.

Big commercial banks have bought out several fintech companies in recent years, but few deals have been large enough to warrant disclosure of a stock. Market watchers cite several reasons why fintech targets have tended to be smaller, unlike a wave of billion-dollar mergers and acquisitions activity among the traditional banks.

It is difficult for banks to absorb a large fintech company with a disruptive approach that contrasts with traditional banking models. Meanwhile, fintech companies are wooing customers with lower fees than banks. This poses challenges for banks’ existing lines of business if they are to acquire these fintech competitors, leading most banks to stick with small fintech deals.

“I would say it’s always very difficult” to sell big fintech companies to banks, said Steve McLaughlin, founder and CEO of investment bank Financial Technology Partners LP, in an interview. “Banks are subject to a lot of restrictions on what they can do in terms of capital spending or otherwise.”

“These grassroots (fintech) institutions are taking on the highest-paying businesses of banks,” McLaughlin said. “So the banks don’t want to cannibalize themselves.”

As fintechs gained momentum, they were able to put real competitive pressure on banks, said Alex Johnson, director of fintech research at Cornerstone Advisors.

The traditional high-cost banking model, especially in terms of branches and staffing levels, results in costs being passed on to customers in the form of fees, Johnson said. The challenger banks have encouraged certain incumbents to review this approach. In June, historic digital bank Ally Financial Inc. announced it was eliminating all overdraft fees, and several traditional banks with a high concentration of branch offices, including PNC Financial Services Group Inc. and Fifth Third Bancorp, introduced new services. alert to help prevent overdraft fees, Johnson mentioned.

High valuations, top priorities

There isn’t a long list of banks that could acquire fintech targets larger than $ 500 million without having to make big commitments to their investors, said Henry Pinnell, managing director of the banking division of investment from Barclays. The public market rates banks based on financial metrics such as book value or the difference between total assets and liabilities, which can be more accurate than using a bank’s profit. The large amount of goodwill incurred in M&A transactions, especially for an expensive fintech target, could make calculations more difficult for a bank’s balance sheet, Pinnell said during a July 29 webinar hosted by S&P Global Market Intelligence.

Even for neobanks with large deposit and loan bases – businesses familiar to incumbent banks – valuations of the most successful businesses exceeded what most bank buyers could handle. FT Partners advised London-based digital bank Revolut Ltd. in its latest round of funding of $ 800 million announced in July, directed by SoftBank Investment Advisers (UK) Ltd. and Tiger Global Management LLC. Revolut has increased its post-currency valuation six-fold to $ 33 billion from its previous cycle just 18 months ago. In the United States, the valuations of major neobanks are rising rapidly, with Chime Financial Inc. recently reaching a valuation of $ 25 billion.

The unusual economic dynamics of the coronavirus pandemic, when consumers poured cash and bank income from loan interest contracted, also led banks to focus on their core business rather than making big deals. technological at this point, Johnson said. However, he expects banks’ appetite for mergers and acquisitions in small fintechs to increase, as there is a greater variety of potential products that banks can offer by acquiring a small startup than before.

This interest in mergers and acquisitions could also be encouraged, as the formation of partnerships with fintechs becomes increasingly competitive, Johnson said. If a fintech doesn’t partner exclusively with a bank, a full acquisition could leave the bank cornering that company’s supply.

McLaughlin’s FT partners have helped fintechs navigate private fundraisers and valuations that are increasingly important in M&A discussions. The company acts as an “arms dealer” for fintechs, supporting founders and entrepreneurs through fundraising, mergers and acquisitions and IPOs, he said. Among neobanks and alternative lenders, FT Partners advised Series E of Upgrade Inc. in August, led by Koch Disruptive Technologies LLC; the SPAC merger of Moneylion Inc. in February; and the IPO of GreenSky Inc. in 2018.

SNL Image

He also advised the British neobank The sale of the secondary stake in OakNorth Bank PLC in September and October 2020, and it is would represent Cross River Bank, a US bank specializing in fintech partnerships, to raise new capital, which could value the company at $ 2.5 billion.

Banks appear willing to make deals for asset-generating targets rather than tech platforms, Pinnell lamented. On August 10, Truist Financial Corp. announced a $ 2 billion deal for a point-of-sale lender specializing in home construction and renovation loans, Service Finance Co. LLC. Service Finance does not market itself as a financial technology company, but even so, the treats elicited mixed reactions analysts, and some feared it would affect the bank’s share buyback plans and dilute its earnings per share.

While the Truist deal was important, mergers and acquisitions for fintech companies have shifted heavily towards even larger deals since early 2020. Eight deals worth over $ 5 billion accounted for more 69% of the total value of global transactions from January 2020 to August 6. according to the latest fintech transaction tracking tool compiled by S&P Global Market Intelligence.

Leave A Reply

Your email address will not be published.