M&As in FinTech Now!
According to the latest report by Dealogic, a record number of FinTech deals were closed in the first 6 months of the year – up 4 times in value compared to last year. Eighty-seven deals worth $117 BN were closed, compared to 89 deals worth $39 Bn last year. It is particularly interesting to note that despite the sharp increase in value, the number of deals is more or less similar, with at least four acquisitions this year valued at over $10 Bn each.
Why is it that FinTech firms are being priced so much higher now? Large, established financial service firms are willing to pay huge amounts to acquire even new, growing FinTechs. Just a few months ago, Fidelty purchased Wordplay for $43 Bn, while Fiserv took over First Data for $39 Bn in January. This doesn’t include the numerous small deals being made by large players such as PayPal, Visa, and MasterCard as they work towards consolidating the market and boosting their revenue. So what is the real driving force behind this surge in market activity?
According to a Dealogic associate, as consumer demand for new, innovative payment services grows, players are responding through consolidation. With newer players disrupting the market, established players are entering strategic deals rather than investing in innovation and technology of their own. This can be seen as a defensive strategy, backed by economic sense as synergies are found. According to Greg Peterson, PWC partner, “The economies of scale that come out of these transactions will allow people to direct their investment in an appropriate way.”
A common theme across many of the M&A transactions taking place during the last two years year is digital payments, as consumer acceptance grows and demand for cashless banking increases. While 71% of Americans still rely on cash to make at least some of their purchases, this number is down from 76% just a few years ago. The number of Americans relying only on cash has also dropped, from 24% to 18%, as users adopt alternative payment modes. Sellers too, are moving towards cashless operations, with the cost of managing and reconciling cash outweighing the benefits of accepting cash as a payment mode.
With market forces remaining the driving force, financial service firms see this as an opportunity to broaden their scope, while streamlining operations and bringing efficiency in data management – all through the FinTech’s technological expertise.
Analysts predict consolidation of the industry to continue, as many believe the FinTech industry is fast approaching its peak. According to the founder of payments startup Curve, there are over 10,000 FinTechs operating today – yet less than 10% of them are known. The majority are expected to die or be bought. Interestingly, a large number of tech investors see M&A as the most preferred exit strategy (53%), which is next followed by IPOs (22%). While we can see acquisitions help the acquirer create synergies and adopt new technologies, these transactions also help startups achieve the scale they otherwise could not imagine.
With the industry having owned considerably in the last few years, FinTech’s most likely to attract investment are those with robust business models. Fancy technology is no replacement for a solid business with smooth execution. Business fundamentals are being scrutinized more closely than ever, and great user experience alone is no longer enough.