Bank-Fintech deals did not have a good year in 2022

In 2021, the online personal loan company LendingClub completed the acquisition of Radius Bank, effectively becoming a bank itself. At the very start of 2022, one-stop-shop financial services SoFi completed the acquisition of the small Sacramento-based bank Golden Pacific Bancorp, also becoming a bank.

It looked like bank-fintech deals were going to be the big new trend in the industry, combining the rapid customer acquisition capabilities of a tech company with the stable profitability and cheaper deposits of a bank. But this year has been a different story. Bank-fintech deals faced isolated complications, as well as difficulties from regulators. Let’s take a look at what happened in 2022 and the outlook ahead.

Agreements fall apart

Heading into 2022, it looked like bank-fintech deals would have another strong year. There were several promising announcements, all of which came in November 2021.

First Internet Bancorp (INBK -0.25%) announced its plans to acquire First Century Bancorp, a technology-driven company that had niche businesses including payments, tax product lending, sponsored card programs and homeowner association services. The idea was to marry First Internet’s diverse and growing lending verticals with First Century’s affordable deposit base.

Image source: Getty Images.

According to the merger agreement, the agreement had to be terminated by 30 April. However, the Federal Reserve did not approve the deal until April 29, at which point the parties could not close due to statutory waiting periods. The two parties would have needed to extend the merger agreement, but that never happened because it appeared First Century wanted a higher purchase price than First Internet was willing to pay.

Also in November, another small bank called Patriot National Bancorp (PNBK -0.47%) announced its plan to acquire American Challenger Development Corp and form the largest digital challenger bank in the United States. American Challenger had a strong board and wanted to grow quickly.

But in July, Patriot and American Challenger called off the merger “in light of the parties’ anticipated inability to satisfy certain of the closing conditions to the merger and the recapitalization.” The release also said that American Challenger is exploring a sale of the company, but I haven’t seen any news since then.

The latest blunder comes from the fintech company BM Technologies (BMTX 1.17%), which operates a student loan and banking-as-a-service business. BM Technologies has been successful on the deposit-raising side, but wanted to acquire a bank charter so they could put the deposits on the balance sheet and start making loans to increase margins.

BM Technologies announced that it would buy a small bank in Seattle called First sound bank (FSWA -0.20%). But recently BM announced that both it and First Sound had agreed to end the deal due to a “protracted” regulatory process.

The prospects

I definitely think bank-fintech deals have taken a step back this year with these three implosions. It appears that the Patriot and American Challenger deal failed due to a potential error or miscommunication with Credit Suisse, the investment bank handling the deal. American Challenger sued Credit Suisse after the deal fell apart.

Regulatory issues definitely played a role in the failure of the BM Technologies and First Internet deals. As regulators began to take a closer look at how they would approach large bank deals, a backlog of pending deals developed in the Fed’s pipeline.

Now, First Internet may still have been able to get a deal done, but by the time it was approved, First Century’s deposits had likely become more valuable in the rapidly rising interest rate environment — which is why they may have wanted more money. Still, the fact that the Fed waited until the day before the merger deal expired shows that it is making no effort to really support bank-fintech deals.

BM Technologies spent a full year trying to complete the acquisition before calling it off. When mergers and acquisitions take too long to close, deals begin to lose some of their economic benefits, and many of them are already diluting shareholders.

From what I’ve seen this year, I expect bank mergers to continue to be scrutinized and require a very long regulatory approval process. This may make them less attractive in 2023.