Fintechs, prepare for a wave of M&A
Jason Purcell, FirstCapital: M&A in fintech awaits
The financial services ecosystem is experiencing dramatic change, driven on the one hand by disruptive fintech models that are causing disintermediation of the financial incumbents, and on the other hand by rapid advances in technology that are disrupting the ancient, creaking core banking platforms. Fintechs, prepare for a wave of M&A, says FirstCapital’s CEO, Jason Purcell, as he sums up the key findings of his company’s new report.
From a revenue perspective, Goldman Sachs says that $4.7 trillion in revenue is at risk of being displaced by new tech-enabled or fintech company entrants, which is a huge threat for financial services incumbents. McKinsey estimates that 10-40% of retail banking revenues and 20-60% of profits are at risk by 2025.
Key trends that are creating opportunity for new entrants include access to instant high bandwidth connectivity through smartphones, the collapse in consumer confidence in financial institutions, the explosion of data and regulatory change.
Fintech start-ups have benefited from a huge amount of investment in the last few years, and this continues to grow rapidly. In volume terms there were only 50 deals in fintech on a global basis in Q1 2010, which had grown to 147 in Q3 2015, while total capital invested grew from $366 million in Q1 2010 to $4.8 billion in Q3 2015.
As well as new entrants, the internet majors (e.g. Google, Amazon, Facebook, Apple, PayPal) are also making major plays in financial services, both through development of new services and through acquisition, and with their financial muscle and understanding of digital consumer behaviour we expect them to become major players in certain key aspects of financial services.
The financial incumbents are now finally awakening to the widespread threats and have started to respond. Some have taken a partnering approach (e.g. Santander referring loans to FundingCircle) and some have been making strategic investments (the largest US banks have made strategic investments in over 30 fintech companies). However, we are seeing more substantial responses starting to emerge, with financial incumbents acquiring in order to build/offer their own online-first solutions (e.g. Vanguard and Fidelity building their own robo-advisor solutions) or acquire (e.g. BBVA buying online challengers Holvi and Simple).
The main areas that have experienced widespread disruption from new online models are lending, wealth management and payments. We expect M&A activity in these sectors to grow rapidly.
Apart from new business models for financial services, we are also starting to see an increase in investment into enabling technology, provided by the software majors and a growing number of emerging new software companies in an attempt to modernise aging banking infrastructure and to deliver new, more flexible and agile services. Areas which offer the most opportunity include security and fraud prevention, regulatory, compliance and risk management, data analytics, personalisation and customer experience, together with strong interest in new technologies such as blockchain.
We expect to see increasing M&A appetite for emerging software vendors, who will be targets for the software majors looking to add new technology to their offerings, driven by increasing adoption and modernisation of their infrastructure by financial incumbents.
