August 15, 2017
As influential as the FinTech community may seem to dedicated parties, the environment that entrepreneurs were determined to disrupt went through a learning curve and is rapidly balancing itself. More precisely, the environment – constituted by institutional leaders or large financial technology companies – is turning disruption to its advantage by using successful/promising newcomers as instruments to re-establish, or reach leadership, in niche markets.
Over the past few years, financial services industry stakeholders have been heavily involved with the startup community in one way or another – investments, incubators, accelerators, challenges, consortiums, regulatory sandboxes, etc. Startup-institution relationships (whether its Carrier-InsurTech or Bank-FinTech cases) have evolved from competition to a beautiful friendship, bringing out the best and accelerating innovation adoption.
On the other hand, while the benefits of collaborative culture are undeniable, imbalanced partnerships may also impose a long-term threat to the startup side by eradicating its competitive edge (IBM Watson vs. RegTech, for example). For the powerful players, this would result in opportunities expanded to niche markets along with redefined positioning in the native market. Significant capital allocations into strategic acquisitions will follow the stage of active learning, and institutional players will rapidly turn competition into the way to reinvent own operations and leadership.
The opportunity to use competition for own advantage has been noticed by long-time leaders a while ago, with the pace of actions accelerating since the beginning of 2017. Young talented teams are seen as instruments to ensure their own position and expand into niche verticals.
Less than a week ago, for example, PayPal acquired Swift Financial to boost small business lending. As reported by TC, for PayPal, the acquisition should bolster a portion of the company’s business that has seen increased competition over the years. It first launched a Working Capital product for businesses back in 2013, and since then has seen competitors like Square and Kabbage emerge as offering their own credit lines to small business customers.
Technology leaders are also expected to become more aggressive in strategic acquisitions to get hands into new niches or strengthen positions in existing. Referring to a European PSD2 and an example of IBM (which is expected to go on a major strategic ‘shopping spree’ as soon as next year), Daniel Döderlein, CEO of Norwegian FinTech startup Auka, shared with CNBC that larger players would start to acquire "fragments" and "niche verticals" – vendors that cater to a specific market – because larger players would need payments technology in place to exploit the EU's PSD2. Tech giants that have shared a long-standing relationship with banks but still rely on older technology would begin to show an interest in a "flood" of new FinTech firms, Döderlein added.
Community banks are not shying away from acquisitions to get into the game either. At the beginning of March, Flagship (a Florida-based community bank) acquired BankMobile, the digital bank, for $175 million, including all deposits, technology, intellectual property and customer accounts. BankMobile had approximately 1.7 million student checking accounts and approximately $500 million of noninterest bearing deposits.
Commenting on the acquisition, Frank Burke, Chairman, President & CEO of Flagship stated in the official press release, "Our Board of Directors, with the assistance of our advisors and investment bankers, studied a variety of strategic options available to Flagship. While Flagship continues to believe in the demand for a locally owned and managed community bank, and will continue its model of local community banking through its two branches in Clearwater, we also recognize that digital banking is expanding and the acquisition of BankMobile provides us with an opportunity to meaningfully expand our digital banking footprint beyond our Florida markets.
From a community bank to a large and powerful financial institution – Visa has been noticed to be making strategic investments to ensure its unshakable leadership. Based on its recent partnerships and investments, professionals emphasize that Visa is willing to make partnerships with anyone who it believes will enhance the payment experience for its card holders. Examples of recent strategic moves include its partnership with PayPal (one would think those two are not the most natural allies, but nonetheless), strategic investment and partnership with Klarna, and, finally, a multi-year partnership and strategic investment in Marqeta, an open API card issuer platform.
Another major player, BNP Paribas, acquired French FinTech startup Compte Nickel at the beginning of this April. As reported by TC, Compte Nickel was one of the leading FinTech startups in France. You can open the equivalent of a current bank account in thousands of tobacco shops in just a few minutes. Compte Nickel gives you an IBAN and a Mastercard for €20 per year.
Compte Nickel offered quite a different experience from the typical banking experience in France, where even for online banks, customers have to sign different documents and wait a few days. With this seamless onboarding experience, Compte Nickel managed to attract more than 500,000 clients.
TC reports that BNP Paribas will keep running the service and is aiming for 2 million customers before 2020. With this acquisition, BNP Paribas has an opportunity to use Compte Nickel’s talent to work on new digital projects in the future. The bank, in fact, operates its own digital-first retail bank called Hello Bank, which is reported to be working pretty much like a regular BNP Paribas account without offering much innovation in in this space.
Goldman Sachs cannot be omitted in the list of interesting examples. While not particularly an acquisition example, since the beginning of 2017, Goldman Sachs has invested in about 15 FinTech firms focusing on capital markets businesses, while JPMorgan has bet on nine, Bloomberg reports.
Investments, however, are expected to become a less popular strategy. In fact, Spencer Lake, the former Vice Chairman of Global Banking & Markets at HSBC and currently the chairman of the Dublin based Fenergo, shared that it is "just a matter of time" before banks start to buy technology companies as part of their efforts to automate more parts of their businesses. "It is currently that case that banks are investing as minorities in many startups – usually those that they are using in the business. As time goes on I can see that larger controlling stakes will be sought after," he added.
He believes that while banks are currently investing as minority shareholders in FinTech firms, especially those that they are using in their businesses, this is set to change with time and banks will turn out to be not only majority shareholders but increasingly owners of FinTech firms.
In fact, new research from international law firm, Simmons & Simmons, published in April, shows strong investment appetite among banks and asset managers, with 31% expecting to acquire a FinTech firm in the next 12 to 18 months as a way to improve their digital innovation.
A different study suggests that as much as 50% of the world’s financial services firms are planning to acquire FinTech startups in the next five years. And 8 out of 10 institutions foresee making strategic partnerships with peer-to-peer lenders, digital money transfer platforms, and myriad other firms that are reshaping the business of money.
Commenting on the findings, Khasruz Zaman, M&A Partner at Simmons & Simmons, shared, Major financial institutions are increasingly looking at making FinTech acquisitions as a way of accelerating the adoption of new technology and innovation in their businesses. We expect this to result in a significant increase in investment and M&A activity in the FinTech sector over the coming years.
With this focus on acquisitions and investments, it is essential to adopt a streamlined process for executing transactions and to ensure that regulatory and reputational considerations – which could have an impact on the viability of a proposed transaction – are dealt with up front.