The Future of Fintechs: Expect a Lot More Mergers and Acquisitions Ahead?
Updated: Jun 30
Fintechs started the new 2020 year off with a bang. The industry saw a succession of multi-billion dollar mergers and acquisitions in historic territory. Then the rise of Covid-19 as a global pandemic put a damper on things and forced everyone to rethink their plans. Why have fintechs been on a bull run recently? Do they show any sign of slowing down thanks to Covid?
A 2019 report by KPMG touted 2019 as a "blockbuster" year for fintech; as total worldwide investment in fintech hit $135.7 billion across close to 2,700 deals.
2020 has already seen at least four mammoth mergers: starting in January, Visa bought up financial data transfer tech company Plaid for $5.3 billion. Then, Morgan Stanley announced in February it would absorb E-Trade in a $13 billion all-stock deal. Shortly thereafter, financial software company Intuit announced a $7.1 billion purchase of Credit Karma.
Not to be outdone in Europe, Worldline has announced plans to buy fellow payments company Ingenico in a deal worth €7.8 billion.
Are the rash of M&As a strategic plan to consolidate the industry?
Ropes & Gray LLP published a report in September that found financial executives were bullish on mergers and acquisitions for the fintech market in 2020. The report stated that 72% of financial institutions, including banks, were expecting to purchase a fintech company within two years, whereas just 48% of such companies have already scooped up fintech companies in the past two years. "We're clearly right now in the bull market, especially when it comes to fintech and financial institutions," Cornell University Law School professor Saule Omarova states. "This trend is probably more indicative of the maturation of these companies, of the market demand on them to scale up and to generate profits at the level.”
So why exactly are fintech companies such a hot commodity these days?
According to the Ropes & Gray report, the top reasons stated for buying the fintech companies include the need to expand existing product and service offerings; plus the ability to acquire new intellectual property; and ability to leverage new technologies. These young and dynamic companies have what the established players want.
With tough economic times ahead, M&As with larger, established financial firms such as banks may be the best strategy to survive the coming months and what is looking to be an incredibly bumpy road ahead on financial markets. With lacklustre first-quarter
earnings reports coming in, and the economy heading into a certain recession, the red-hot deal-making has temporarily cooled off as investors re-position themselves. In the months (if not years) of economic turmoil ahead, many small firms lacking the cash reserves could go under, but if a good deal is to be found and they suddenly get bought up by a national bank or financial firm- this guarantees their survival and expansion. With instability the new norm, we can expect to see a lot more M&As in the future, as part of a broader consolidation of the industry as a whole.
For more on the state of the economy, check out our previous blog posting: https://www.apaylo.com/post/a-recession-is-looming-and-what-you-should-know-about-financial-help-from-the-government