The pace of new technology is so rapid that traditional banking and financial services players are struggling to keep up. As a result, M&A activity in the fintech space is highly strategic, with many organisations simply choosing to acquire their upstart competitors rather than attempt to regain their technology lead. In addition, many of the more established fintechs are acquiring smaller rivals in order to accelerate scale building and expand capability.
And while there was a dip in activity last year due to overall uncertainty in the market, prompted at least partly by shocks such as the implosion of the FTX crypto exchange and the collapse of Silicon Valley Bank, experts have predicted a rebound year for mergers and acquisitions in fintech in 2024.
But while the pace of emerging technology is certainly a material factor in driving M&A in fintech, it is not the only one at play, says Darran Nangle, partner, corporate and M&A at law firm A&L Goodbody. He describes 2023 as a “challenging year” for investment and mergers and acquisitions generally, with particularly strong headwinds for fintech due to increased regulatory scrutiny as well as the broader macroeconomic environment.
“However, with valuations adjusting and interest rates forecast to normalise, we hope to see increased activity in 2024 and 2025,” says Nangle.
On the investment side, fundraising is still largely underpinned by traditional venture capital and, increasingly, family office investments, Nangle says. However, he points out that strategic investments are being made by more traditional banking and financial services players; for example, JP Morgan’s equity investment in Wayflyer alongside its $300 million (€278 million) debt facility.
While it might be expected that M&A is fuelled by big traditional banks seeking to keep up with new entrants and technologies, this has not been the case to date, says Nangle – a notable exception being JP Morgan’s acquisition of Cork-based Global Shares.
“In reality, M&A activity in the fintech sector is largely driven by the already established fintech players such as Stripe, PayPal, Square etc, and private equity sponsors, whether as a platform transaction or via a bolt-on,” he explains.
According to Nangle, the payments subsector has been particularly strong and this is expected to continue. Private equity firm Advent recently announced its acquisition of Nuvei, a platform that allows businesses to accept next-generation payments and offer different payout options for an enterprise value of $6.3 billion. In an Irish context, US multinational UKG Inc, a leading provider of HR, payroll and workforce-management solutions, recently acquired Kilkenny-based global payroll platform Immedis from CluneTech.
Private-equity sponsor Lovell Minnick Partners LLC also recently exited its investment in investor-servicing software platform Deep Pool Financial Solutions via a sale to a global financial software provider.
For the established fintech players, M&A activity can be driven by a number of factors including geographical expansion, technology advancements, talent acquisition (ie acqui-hires), market consolidation and product diversification.
Private-equity sponsors will be focused on the typical attributes for such deals, including revenue growth potential, revenue quality, market share and position, bolt-on opportunities, and exit paths, Nangle notes.
“But also important is the level of embeddedness of the technology in the customer’s technology stack – does it form part of the client’s critical technology infrastructure, making it very ‘sticky’ with its customers and [implying] a long tail on any potential switch to another service provider?”
Given the dynamic nature and rapidly evolving pace of fintech, Nangle points to benefits and challenges for mergers and acquisitions in the sector. Benefits, he says, include geographical expansion into new markets; technology expansion, allowing improved or broadened product offerings; acquisition of skilled teams, potentially in areas where more traditional players do not have resources – for example, developers and data scientists; customer base expansion; potential for a valuation uplift through a shift to a more digital-focused product offering; and, of course, revenue growth.
“However, given the fast pace of change in technology in this sector, there is always a risk in taking the wrong technology path,” he warns. “In addition, to date, regulation in some areas might be considered light and a shift to more onerous regulatory regime or increased regulatory scrutiny, as we have seen with crypto, may slow or curtail growth.”