What is driving the growth of fintech M&A?

Fintech’s growing influence on financial services

Innovative digital companies continue to emerge across the financial services sector. In the past these new entrants were met by incumbents with either inertia or fear of their own obsolescence. Now large corporates are viewing fintech start-ups as an opportunity to enhance their product offering and customer experience at a faster pace than their competitors.

PwC’s global fintech publication reports that 56% of financial institutions have put disruption at the heart of their strategy and 82% expect to increase fintech partnerships between 2018 and 2023. This puts fintech M&A at the core of the financial services sector’s development and provides an attractive opportunity for the best fintechs to achieve their aspirational goals.

Willing buyers and willing sellers

The large corporates’ development quandary – buy or build?

Increasingly, large corporates across the financial services sector are considering alternative ways to develop and deliver their digital road-map, rather than a traditional reliance on in-house IT capability. The incumbents appear to have concluded that establishing strategic partnerships with lean, tech-savvy teams will bring significant benefits such as:

• Speedier and more cost-effective routes to market using the most modern technology;
• Access to new client demographics, which prefer to engage through digital channels;
• Reinvigoration, and therefore monetisation of, existing legacy client books; and
• Cross-selling opportunities via multi-functional and adaptable platforms.

In that context, there has been a wave of investment into fintech start-ups by large corporates. Examples from 2018 include:

• JLT – Moola (wealth management);
• Marsh – Bought By Many (insurance); and
• American Express – Cake Technologies (payments).

The fintech start-ups’ distribution quandary – acquire their own customers or leverage a major brand?

Fintech businesses are beginning to recognise the value a larger partner can bring. While the development of technology and the regulatory approval cycle is eminently manageable, the subsequent costs of customer acquisition can be dauntingly material. Further, there is no guarantee of widespread take-up, no matter how advanced or scalable the product. Collaborating with major players can unlock immediate access to millions of customers, thereby proving the commerciality of the product and fulfilling founders’ ambitions for their business.

Seeing the benefits of working together

Our PwC Corporate Finance team has seen first-hand the value that can be created through collaboration between organisations in the ever-evolving wealthtech market having advised on the most recent high profile deal, the sale of robo-advisor, Moola, to financial services giant JLT. This deal provides JLT with a market-leading digital wealth product and talented, highly experienced team, while Moola gains access to a vast client base, the breadth of JLT’s internal resources and a dominant position in the market.

Private equity

Of course, where companies can demonstrate sustainable growing profitability, they will also attract the attention of the private equity community. For these businesses, with proven revenue models and distribution channels, private equity can be an attractive source of capital to de-risk founders and fund growth, effectively postponing the ultimate exit to trade or IPO so that founders can benefit from future upside e.g. Global Processing Services, which sold a stake to Dunedin earlier this year.

Further opportunities for collaboration

As the formation of partnerships, strategic alliances and acquisitions gathers pace across the financial services sector it is becoming increasingly important for large corporates to have a targeted M&A strategy in order to keep up with the pace of technological developments. For fintechs, careful planning for external investment is important to ensure they team up with the most suitable partner, either trade or private equity, at the right time in their lifecycle.

Our M&A report with Mergermarket, Creating value beyond the deal, uncovers how the most successful dealmakers have made M&A pay at every stage of their deal lifecycle. We share detailed insights on what makes an effective value creation approach, the role of people in culture in value planning, as well as insight into the first-hand experiences of executives on both sides of the deal. Download the report.