Financial institutions M&A trends: Fintech

The fintech bull run has escalated, and bank CEOs are no longer standing idly by. Many have grabbed the bull by the horns and entrenched themselves in a stampede towards the digital future!

 

Fintech M&A volumes and values soared in H1 2018 as banks embraced fintech as a key enabler of operational efficiency and customer satisfaction. Private equity and venture capital houses continued to invest aggressively in the space, buoyed by a series of strong exits and growing buyer demand.

Outlook

The magic ingredients for innovation (or at least M&A):

• Banks embrace fintech as a vital solution for legacy challenges
• Success stories intensify private equity/VC appetite
• Top-down support from the European Commission, through national governments and regulators, to local trade bodies

Current market

Upward, significant

We are seeing

• Significant uptick in banks embracing fintech as an enabler of financial services, through strategic investments, JVs with fintechs, home-grown digital offerings, collaboration projects with competitors and accelerator programmes/dedicated venture capital support
• Inaugural deployment of back-end infrastructure fintech strategies, in particular risk management and operational efficiency tools. Though mainstream deployment appears to be some time away yet
• Growth of fintechs, through successful fundraisings, acquisitions and new product/service offerings
• Sustained high levels of financial sponsor appetite, including through specialist fintech investment funds

Key drivers

• Fintech is more widely viewed as a solution to challenges faced by established financial institutions:
  • Reducing cost-to-income ratios, which have remained broadly steady for many institutions since the global financial crisis (due to rising regulatory compliance obligations, resource drain from legacy IT systems and litigation charges)
  • Reducing time lag to deposit/fee receipt through automation of on-boarding and other compliance procedures
  • Increasing wallet share from existing customers through enhanced customer experience, on‑demand and real-time services and tailored products
  • Opening new distribution channels, appealing to Generation Y and mass-affluent customers as well as reaching unbanked/under-banked communities
  • Mitigating rising cybersecurity threats and synthetic identity fraud. AI and advanced analytics are becoming increasingly critical for detection and prevention of financial crime
  • Reversing customer trust erosion through the promise of truly objective and impartial investment advice in the customer's best interests
• Tangible successes boosting M&A activity
• Top-down support for fintech from:
  • National governments through funding and incubator projects
  • Regulators through global collaboration projects and proposals for harmonised standards across the EU
  • Trade bodies through positive lobbying efforts

Trends to watch

• Preference for bank investment through dedicated funds (as opposed to direct investing). The fund model allows maximisation of capital across a range of fintechs and subsequent cherry-picking of appropriate businesses for partnership or ownership
• Rise in outsourcing arrangements as banks succumb to the benefits of scalability, flexibility and variable usage costs which the public cloud offers (compared to private data centres)
• Increasingly fierce competition between regulators to attract and encourage innovation, including dedicated fintech licencing and other start-up support
• Healthy regulatory symmetry for banks and consumer-facing fintech. Santander, BBVA and CaixaBank are amongst those actively seeking a level playing field

Publicly reported deals & situations

Banks believe the fintech hype

• Strategic investments:
  • NatWest: Acquisition of FreeAgent (June 2018)
  • BBVA: Equity investment in Atom Bank and Neon (May – June 2018)
  • Deutsche Bank: Acquisition of Quantiguous Solutions (May 2018)
  • KBC: Acquisition of a minority stake in blanco (April 2018)
  • Sberbank: Acquisition of 60% of Dialog (March 2018)
  • J.P. Morgan: Acquisition of a minority stake in Mosaic Smart Data (March 2018)
  • Banco BNI Europa and Varengold Bank: Investments in MarketInvoice (March 2018)
  • Citi and Crédit Agricole: Acquisition of minority stakes in SETL (February 2018)
• JVs:
  • Albaraka Türk Katılım Bankası: Digital Islamic banking JV with Solarisbank (May 2018)
  • Sberbank: E-commerce JV with Yandex (May 2018)
  • HSBC: Corporate payments JV with PayPal (March 2018)
  • BNP Paribas: Mobile banking application JV with Tink (March 2018)
  • Bank of America Merrill Lynch: SME lendtech JV with Amazon Lending (February 2018)
• New business lines:
  • Santander: Upcoming launch of UK digital bank (May 2018)
  • Standard Chartered: Launch of Cote d'Ivoire digital bank (March 2018)
  • HSBC: Launch of Connected Money (March 2018)
• Collaboration projects:
  • BNP Paribas, Commerzbank and ING: Collaboration on Marco Polo blockchain trade finance project (February 2018)
  • ABN Amro, ING and Société Générale: Agricultural commodity trade collaboration (January 2018)
• Start-up support:
  • Landesbank: Launch of Helaba Digital (May 2018)
  • NatWest: Launch of London, Manchester, Bristol and Edinburgh specialist fintech accelerators (April 2018)
  • BBVA: Investment in Sinovation Fund IV to support Chinese AI start-ups (April 2018)
  • Barclays: Launch of Barclays UK Ventures (April 2018)
  • BNP Paribas: Launch of Finextra fintech investment fund (February 2018)
  • Citigroup: New London-based innovation centre (February 2018)
  • Swedbank: Launch of its Riga accelerator programme (February 2018)
  • Rabobank: Launch of Rabo Frontier Ventures (January 2018)
  • Standard Chartered: Launch of SC Ventures (January 2018)

Top-down support for fintech continues

• Governments:
  • European Commission and European Investment Fund: Joint €410m of funding for Venture EU (April 2018)
  • Scottish Parliament: Launch of FinTech Scotland (March 2018)
  • European Parliament: Launch of EU Blockchain Observatory and Forum (February 2018)
• Regulators:
  • IOSCO: Launch of its support framework to boost cross-border fintech collaboration (May 2018)
  • European, US and Asian regulators: Collaboration to create "global sandbox" (March 2018)
  • European Commission: Plans for common blockchain technology standards to support EU fintechs (March 2018)
  • UK FCA and US CFTC: Fintech collaboration and support initiative (February 2018)
• Trade bodies:
  • British Business Investments: Launch of £500m managed funds programme (May 2018)
  • International Underwriting Association: Encouragement of electronic trade processing (March 2018)

Fintech, the 'enabler'— pushing the boundaries

• Risk management:
  • HSBC: Deployment of Quantexa AI for AML, fraud and terrorist funding prevention (April 2018)
  • Hong Kong Stock Exchange: Deployment of AI for unusual trading activity detection (April 2018)
  • NatWest: Deployment of AI for invoice redirection fraud prevention (April 2018)
• Operational efficiency:
  • Commerzbank: First German corporate FX transaction using blockchain (May 2018)
  • HSBC: First commercially viable trade-finance transaction using blockchain (May 2018)
  • BBVA: Inaugural issue of a loan using blockchain (April 2018)
  • CaixaBank: Inaugural foreign trade operation using blockchain (April 2018)
• Tackling social concerns:
  • Airfox: Launch of free Brazilian Android app to reach unbanked communities (February 2018)
• But not yet ready for mainstream use:
  • Swift: Identification of operational challenges through Nostro liquidity management and reconciliation proof-of-concept test (March 2018)

Scaling-up

• Successful fundraisings:
  • Revolut, N26, Atom Bank, Babb, C2FO, Payslip, RecargaPay, Roostify and solarisBank: H1 2018 successful fund-raisings (January – April 2018)
• Expanding footprints:
  • Tandem Bank: Launch of UK travel cashback card and savings account offerings (February – April 2018)
  • Starling Bank: Launch of insurance app-based platform and business account offering (February – March 2018)
  • Revolut: Launch of commission-free share trading services, pay-per-day travel insurance and disposable virtual card offerings (January – June 2018)
  • Monzo: Launch of current account offering (January 2018)
• Inorganic growth:
  • IHS Markit: Acquisition of Ipreo (May 2018)
  • Paycoinq & Bancontact: Merger (March 2018)
• Availability of growth funding:
  • Ascension Ventures and Unicorn India Ventures: Launch of UK-India Enterprise Investment Scheme Fund (June 2018)
  • Rocket Internet: £2.3bn of funding available for fintech and AI (May 2018)
  • DN Capital: Successful €200m fund-raisings to back European technology start-ups (January 2018)

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Financial institutions M&A: Sector trends

^* Source: Financial Times (February 2018).
^** Source: City A.M. (February 2018).

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