Fintech wrecks provide opportunities for good banks

The M&A landscape in 2023 could be promising for banks looking for fintech deals, experts say.

After a challenging year for the fintech sector, which has experienced a global decline in funding and mass layoffs, enterprising banks may be able to buy startups whose previous valuations put them out of reach in previous years, said Jonah Crane, a partner at regulatory advisory firm Klaros Group.

“We were for years in what appears to have been a bubble in fintech stocks. We’ve now come through it and had a big correction, and just on price alone it could be an interesting opportunity [for banks],” he said.

According to PitchBookvaluation of listed fintechs fell 60% to 80% by 2022, a stark contrast to previous years when the fintech sector’s sky-high price points were a source of frustration for some banks eager to do deals in the space, said Dan Goerlich, PwC’s head of banking and capital markets deals.

“Over the past five years, fintech valuations have been extremely high because it was such a sought-after property. Everyone felt they were disrupting the sector, he said. “As a result, there really weren’t price points that were attractive – you’d pay too much. And to integrate it with the rest of your products and services, or even just service it, you’d probably never realize the value you paid for it in the long run.”

Amid last year’s fall in valuations, fintech funding on the global stage also fell 46% from the previous year to $75.2 billion, according to CB Insights.

M&A, IPO and special interest company activity also dried up in 2022 compared to the previous year, according to the research firm.

There were 742 fintech mergers or acquisitions in 2022, down 20% from the previous year. Fintech M&A was at its lowest level all year in Q4, with 143 deals.

There were 23 fintech IPOs last year, down 72% from 2021, and nine SPACs in the sector, down 53% compared to the previous year.

“Now that these markets have closed, if [fintechs] still want exits, they will have to seek it through sales to more traditional financial institutions,” Goerlich said.

How banks can prepare

Companies looking at fintech deals should seek more descriptive information about valuations, Goerlich said.

“They should reinvigorate their business development teams to figure out what the value propositions will be in their portfolio to fit into a fintech,” he said.

While fintech M&A may be within reach for some banks this year, firms will still have to contend with rising interest rates and liquidity pressures in the market, he said.

“You also don’t want to end up in a situation where you’re doing a merger in a not-so-hot market and not being able to execute the plan to realize the synergy,” Goerlich said. “I think there’s still a fair amount of planning you need to do.”

Bargain hunters

Not all fintech deals will be bargains for banks, Crane said.

“Payments are very popular, so I don’t think that’s where the real bargains are going to be,” he said.

However, lending-focused firms may face more challenges in the current environment and may be attractive acquisition targets for traditional firms, he added.

“Some of the more lending-focused fintechs could be bought by a bank for their technology, or potentially for access to their customers,” he said.

Neobanks may also emerge as prime targets for traditional banks amid the challenging fintech environment, Crane said.

A traditional bank can act as a built-in distributor for a neobank that has struggled to become profitable on its own, as well as cross-sell offerings, such as lending and insurance, to a neobank’s customers, Crane said.

“Neobanks have been one of the biggest beneficiaries of the endless availability of venture capital to fund marketing and growth initiatives, many of which have not really become profitable,” he said. “We have to see if they can survive this current funding environment, and if they can’t, whether they have attractive technology or products or even customers to bring to a bank.”