No man is an island when it comes to fintech, and in the pursuit of a better world driven by better financial services, it’s clear that standing together means progressing together. This September at The Fintech Times, we’ll be delving into every corner of what it means to be a fintech ecosystem. We’ve dedicated the entire month to investigating what makes a successful fintech ecosystem, how fintechs can work together more effectively, as well as providing a regional view of some of the industry’s best examples of community collaboration.
Moving swiftly on through our final week of coverage into fintech ecosystems, today we’ll continue our investigation into the industry’s current attitudes to expansions, mergers and acquisitions, with a particular focus on the latter.
Fintech is certainly no stranger to mergers and acquisitions (M&A), and indeed, our own headlines have done well to document current movements in that space.
There are many different reasons as to why a company, fintech or otherwise, might seek to merge with or acquire another company.
Typically, this might be done to bolster the scope or capability of a product or service, and increasingly M&A has been used as a means to source new talent and fresh ideas.
To expand upon the leading trends of M&A, we’ve invited a series of industry experts to our discussion today to find out what this behaviour is actually trying to achieve, and if they’ve been successful in doing so.
Current market conditions
Launching our conversation, Maegan Morrison admits that while M&A activity across all sectors has decreased when compared to a stellar 2021, the tech sector has remained reasonably buoyant with expectations of a strong second half of 2022.
Morrison is a partner in Shearman and Sterling‘s M&A practice, where she advises on corporate finance transactions for listed companies, financial sponsors, financial advisers and large private companies.
“Although tech valuations are still expensive compared to the global markets, the length of time which has now elapsed since valuations began to readjust means that valuation expectations are now starting to converge between buyers and sellers which brings parties to the table for a possible sale,” she comments.
On the sell-side, for existing investors looking for an exit in the short to medium term, to Morrison “it is clear that the M&A market is more likely to offer a more certain exit than the IPO markets,” which she explains are still suffering from the effects of war in the Ukraine, post-effects of the pandemic, inflation and expectations of a recessionary outlook.
Despite these factors, she emphasises that there may still be some green shoots in IPO markets, but that they are unlikely to be seen in the market until 2023.
“On the buy-side, despite the increase in interest rates, there is still private equity money available for investment, particularly as some of the funds previously invested in SPACs start to be returned to investors,” reassures Morrison.
She confirms that strategic buyers are actively seeking to absorb disruptors in order to build and future-proof their businesses.
“Governments, such as the UK Government with a new supply-side reformer PM, are seeking to encourage investment in high-growth sectors to grow the economy out of a possible recession,” she comments.
“Tech, biotech and life-sciences are obvious sectors for this investment. All these factors should result in a benign environment for M&A activity in the fintech sector over the short to medium term, despite the economic headwinds facing the global economy.”
Access to new products
According to Michael B. Tannenbaum, acquisitions fall into three broad categories: talent acquisitions, product acquisitions, and business acquisitions.
Tannenbaum is the chief operating officer of Brex, the San Francisco financial services company that supplies startups with the banking stack they need to scale.
Tannenbaum goes on to explain that talent acquisitions or ‘acquihires’ generally incur the lowest risk and are the smallest types of acquisitions, which makes them the most frequent.
“Talent acquisitions are similar to how they sound,” he says, “they focus on teams of people, but have limited product traction.”
Elaborating on this, Tannenbaum explains that in this instance, teams often have built up industry or sector expertise and a cadence and rapport of working together, which is valuable to potential acquirers.
“In fintech, these acquisitions are particularly valuable because teams often have significant experience operating with the regulatory or financial constraints endemic to fintech,” he continues.
“These specialised skills are beneficial, even if the existing products the team has built are not as critical to the acquiring company’s business.”
Tannenbaum emphasises how product acquisitions meaningfully expand the product set for a company when the purchaser typically plans to maintain the acquired product.
“Fintech acquirers find value in products that are hard to build and operate within constrained environments (regulatory, legal, operational or liquidity),” he comments.
“Success within these constraints is usually an indication that the product will be viable when expanded to the acquirer’s larger customer base.”
In relation to business acquisitions, Tannenbaum says that these try to focus on adding revenue and profits; being the largest and most infrequent type of acquisition.
“They tend to be driven by the desire to enter new verticals,” continues Tannenbaum. “Fintechs take advantage of these when they want to enter adjacent spaces that have unique regulatory and operational constraints.”
“With the sell-off in publicly traded fintech stocks – driven largely by rising interest rates – it’s likely more fintechs are going to be exploring strategic alternatives, so we expect fintech M&A of all varieties (talent, product and business) to increase in the coming months,” Tannenbaum concludes.
A standalone identity
“We’re currently seeing a trend in banking and finance: Banks are trying to become fintechs, and fintechs are trying to become banks,” comments Eric Bierry. “This has given rise to a number of fintechs that attempt to solve the problems that traditional banks solve, in order to appeal to other fintechs that will ultimately acquire them.”
Bierry is the CEO of Sopra Banking Software (SBS), which over the past 10 years, has expanded its operations into 100 countries, due in part to nine acquisitions it made along the way. The company now works with 1500+ banks globally as they digitise their offerings and reimagine their roles in the banking industry.
“In a way, fintechs are trying to bypass traditional banks through the acquisition of other fintechs that allow them to be banks,” he continues.
Incumbent banks boast centuries of expertise and infrastructure. Bierry states that acquiring their way to the top in this instance doesn’t mark the best approach for ambitious fintechs.
“What we’ll begin seeing is banks equipping fintechs with the infrastructure and capabilities they’re currently lacking – for instance, funding, lending and regulations – through an emerging Banking-as-a-Service (BaaS) model,” he emphasises.
According to Bierry, banks won’t be seeking to match the customer experience offered by fintechs, but they can power the back office needs that fintechs are struggling to build or acquire.
“For instance, licensing, cybersecurity infrastructure and capital and regulatory requirements,” he states as an example.
Bierry concludes by adding that through such a symbiotic relationship, the industry can expect to see banks and fintechs take on distinct and equally important roles rather than trying to meld into one another.
“This will reduce the need for the types of acquisitions that are designed to keep banks and fintechs in competition,” he says. “Instead, both will be able to focus on innovation that allows them to reimagine their respective roles in the growing finance sector.”
Here, Brian Kaas, president and managing director at CMFG Ventures, discusses how the market for fintech acquisitions will evolve over the course of the next year, and how his company will aid that trend.
“We expect to see a rise in fintech acquisitions over the next six to 12 months, as banks acquire fintechs to gain capabilities, fintechs merge with competitors to grab market share and struggling fintechs run short on capital,” he comments.
For Kaas, these acquisitions present strategic opportunities to drive growth, accelerate into new markets and expand product offerings for buyers.
Elaborating on this, he goes on to explain CMFG Ventures’ applicability to M&A. In Kaas’ position overseeing investments for CMFG Ventures and acquisitions for CUNA Mutual Group, the company has invested in or acquired nearly 60 fintech companies over the last six years.
“We are big believers in leveraging a combination of investments and acquisitions to help accelerate our strategy and boost capabilities,” he explains.
“By having a broad suite of solutions at our disposal, we are able to deliver fully integrated end-to-end solutions into the market, versus offering one-off solutions.
“This helps to mitigate the integration challenges faced by most financial institutions while delivering seamless digital experiences to their customers,” concludes Kaas.
Free customer acquisition
Confirming many of the views outlined in this discussion so far, Ari Horowitz states that “fintech companies are looking to be acquired because they want to continue to grow.
“If they can get cash upfront via an acquisition, that’s a great way to finance their business because they don’t have to raise external capital – they can grow while funding their losses.”
Horowitz is the chief executive officer at the e-commerce software-as-a-service (SaaS) company Swiftline, which is headquartered in the US.
Developing his point, Horowitz outlines how the urge to acquire comes from businesses wanting to cross-sell their products with other businesses.
As an example of this, he cites his company Swiftline, which has existing customers that it believes will want the products it’s acquiring, which Horowitz describes as free customer acquisition, which reduces the customer acquisition cost (CAC) and makes the acquisition process more efficient.
“We’re also able to insert the new product into our existing data platform,” he adds. “Most e-commerce SaaS and fintech businesses are only as good as the data they sit on.”
“If a company has a smaller data platform, then by acquiring them we can offer to plug their product into our larger, more sophisticated data platform and theoretically it will improve,” Horowitz continues. “In return, if it’s a better product after we acquire it, then we can charge more for it or get a better conversion rate when we sell.”
Finalising his point, Horowitz admits that the company often comes across businesses that simply not running operations well – either they don’t fully understand digital marketing or they don’t have a great sales force.
“By acquiring them we can leverage our infrastructure to accelerate the business,” he adds. “We also find entrepreneurs who’ve built great businesses but they see that their industry is changing and if they don’t sell now, they could be stuck with their business for a long time. If they can get cash for it today, that’s a win for them.”