The global bank Banco Bilbao Vizcaya Argentaria (BBVA) recent purchased Mexican online payments startup Openpay as part of what it calls a strategy "to accelerate transformation by growing its portfolio of digital businesses." Earlier in 2016, the Spain-based institution acquired the Finnish online business banking service Holvi. It had already purchased three other digital firms and took a nearly 30 percent stake in a fourth in the two previous years.
BBVA, which has invested $250 million in a financial technology venture fund, is hardly alone among big banks when it comes to investing in or acquiring fintech companies.
From the second quarter of 2015 to the second quarter of 2016, Goldman Sachs, Citigroup and Santander Group (or their corporate venture arms) each completed at least seven deals with VC-backed fintech firms, according to CB Insights and KPMG.
The Coming Wave of Fintech M&A Deals
Fintech startups have, "...evolved from being a disruptive threat to a major opportunity for financial institutions. The possibilities for deal-making and M&A are almost limitless," law firm White & Case says, after a recent survey showing that eagerness to capture fintech's potential is driving deals.
Ninety-five percent of financial institutions surveyed by the firm in the third quarter last year expected to make a fintech deal or investment in the subsequent 12 to 24 months. Of those, 22 percent planned to make a majority stake acquisition, 18 percent were seeking a minority stake and another 18 percent were pursuing a joint venture.
Forty-six percent of respondents thought Silicon Valley and San Francisco would host the most attractive fintech targets in the next 12 to 24 months.
As for which sub-sector was expected to see the most upcoming deal making, 28 percent of financial execs cited specialty finance, peer-to-peer lending and crowdfunding, while 27 percent selected blockchain (also known as digital ledger technology) and virtual currency. Another 23 percent cited payment services and 15 percent chose robo-advisory technology, according to the White & Case survey.
"The financial services industry was never going to be left alone as the recent wave of new technology disrupted one industry after another. Yet while this could be predicted, the depth and breadth of change being brought about by financial technology—or fintech—promises to redefine and reshape the sector as a whole," firm partners said in a November 2016 analysis on the White & Case website.
Attorneys from another law firm involved in M&A, Norton Rose Fulbright, wrote in the New York Law Journal in October: "There is every reason to believe that the pending wave of fintech development and investment activity will, if anything, eclipse all prior M&A cycles in the sector. ... The next generation, focused on distributed ledger technologies and big data analytics, could entirely disrupt the financial services business."
Tapping Into Fintech Technology
Financial institutions are looking to speed up fintech strategies, not only to grow and to offer new products, but also to embrace technology to create faster, more efficient, more powerful and more secure infrastructure and platforms, White & Case said.
At least 20 fintech "unicorns"—that is, private firms valued at least $1 billion—are already in operation, according to a CB Insights-Accenture figure cited by the law firm.
Fintech investment grew by 75 percent in 2015, White & Case noted. In the first three quarters of 2016, global fintech investment totaled $18 billion, compared with $19.1 billion for all of 2015. Payment processing firms PayPal, Square and Worldpay landed multi-billion-dollar IPOs, White & Case also noted.
Financial Institutions Look to Collaborate
White & Case interviewed 150 senior execs of banks, insurers, asset management firms, fintech companies--both startups and mature businesses—and private equity-venture capital firms in the United States, Europe and the Asia-Pacific region to gauge their views on fintech.
Nearly nine out of 10 financial services respondents expected fintech to have a major or leading role in their corporate strategy, the law firm said. Fifty-four percent were looking to collaborate with mature fintech companies in the following 12 to 24 months, while 32 percent aimed to make a targeted acquisition of a fintech company to enhance or replace an existing services offering.
The survey also found that 41 percent of firms wanted to acquire a late-growth fintech firm with commercial viability, 34 percent were seeking established, market-proven fintech businesses, and 21 percent wanted early funding or seed-stage companies. Four percent were interested in concept-stage firms.
Overcoming Fintech Acquisition Challenges
Investing through venture funds can be a good tool for exploring the market without committing to acquiring a promising technology. However, U.S. banks and institutions with American subsidiaries face regulatory restrictions that make it difficult to enter fintech that way, White & Case noted.
Banks that must comply with these regulations, "have looked at other ways to engage with fintech. Some have supported incubators and accelerators, providing mentoring, office space and other resources instead of equity investment," the firm said. The report quoted an executive as saying that an incubator is a good way to build relationships and get a feel for what's happening, with the bank holding the startup's hand and getting an idea of how the technology might fit into its business.
Banks are taking multi-pronged approaches—including in-house development, partnerships, acquisitions and fintech funds—an executive told White & Case.
More than a third of financial institutions considered "differences in working culture" to be the biggest challenge facing fintech deals after acquisition, and more than 20 percent cited a lack of technical expertise to integrate the acquired company, the survey found.
Fintech M&A Trends To Follow
White & Case expects a few key trends to dominate fintech M&A:
• Collaboration will drive M&A, as financial institutions realize the value of fintech firms and work with each other and startups to develop standardized technology for the industry.
• Smaller deals will rule because multi-billion-dollar acquisitions are risky and less appealing strategically.
• Fintech incubators and funds will grow.
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