Top Six Predictions for Fintech M&A in 2023 – Fin Tech

Volatile tech stocks and rising interest rates put the brakes on fintech funding rounds and M&A in 2022. But while investment activity has fallen from 2021 highs, fintech deal volumes have remained well ahead of pre-pandemic levels and the sector is well positioned to deliver consistent deal flow in the coming year.

We share our predictions for fintech M&A in 2023.

Fintech deals felt the squeeze in 2022, with valuations and investment activity directly impacted by the correction in tech stocks and rising interest rates.

Global fintech funding is projected to have fallen by nearly 50 percent in 2022 to around $75 billion, as the formation of new fintech unicorns slowed throughout the year, falling to a low of just five in the last quarter¹.

But as challenging as the past 12 months have been for fintech transaction flow, deal activity has proven robust over a long-term investment horizon. Compared to 2020 levels, fintech investments in 2022 were over 50 percent higher²while analysis from venture investor Accell shows that since 2013 fintech’s share of overall technology funding has risen from 4 per cent in 2013 to 22 per cent in 2022³.

Fintech products have become ubiquitous across the financial ecosystem, with fintech expanding and deepening beyond banking apps, digital wallets and remittances into new areas such as neobanks, remittances, crypto, wealth management and peer-to-peer lending⁴. At the same time, there has been rapid development of Business-to-Business (B2B) fintech infrastructure (“the picks and shovels”) supporting regulatory, compliance and other back-office functions for traditional banks as well as disruptors.

Fintech is still only at the beginning of its growth trajectory, and mergers and acquisitions will continue to be a key lever for growth and value realization as the sector continues to evolve.

We make six predictions for fintech M&A in 2023.

1. Banks are back!

Bank balance sheets are significantly healthier than a decade ago when the first wave of fintech disruption began to build, putting traditional banks in a much stronger position to participate in fintech mergers and acquisitions.

Agreements between banks and fintechs can be mutually beneficial, with banks gaining a younger, digitally minded customer demographic and cutting-edge technology platform, while fintechs gain access to lower capital costs and sticky bank customer bases.

Over the past 12 to 24 months, traditional banks have invested across a number of fintech verticals, ranging from wealth management and robo-advisory to commerce and payment architecture.

Recent examples include JP Morgan’s acquisition of digital wealth management platform Muskat and Greek payments unicorn Viva Wallet; UBS’s acquisition of automated wealth management provider Wealthfront; and Western Alliance Bank’s purchase of digital payments⁵.

Expect a steady stream of similar deals in 2023 as banks look to acquire fast-growing targets with market-leading technology and growing customer bases.

2. Acquisitions and Ventures: 2023 will be a year for Fintech investments

Despite choppy macroeconomic conditions, private equity (PE) dry powder climbs to record levels near $2 trillion in 2022⁶ and PE firms are still very keen to invest in late-stage fintech assets. At the same time, financial sponsors are increasingly moving into VC/growth capital territory by investing in mid- to late-stage funding rounds in addition to more traditional buyouts.

Examples include Advent International’s acquisition of European e-commerce payment solutions provider MANGOPAY and KKR’s investment in payments infrastructure developer Paddle’s Series D funding round.

Fintech-focused venture investors are similarly cash-rich, with Finch Capital putting fintech VC investor dry powder at an all-time high of $28 billion in Europe alone⁷. Early-stage investors may tread more carefully in 2023 and be more sensitive about entry values, but there is still a huge appetite to pursue fintech deals.

The “fear of missing out” that inflated fintech multiples in 2021 has disappeared. Fintech valuations – down between 50 percent and 75 percent in 2022, according to Accell⁸ – has been recalibrated. This will open up an attractive buying window for acquisitions and venture capital sponsors. Expect the “class of 2023” to be a vintage year for fintech investors deploying capital over the next few months.

3. Fintech winners: Eat or be eaten

The correction in fintech valuations will also see well-funded fintechs ramp up their M&A activity as opportunities arise to consolidate markets and buy up the technology, customers and talent of weaker rivals.

For example, Zopa, the UK peer-to-peer lender turned digital bank, has signaled it will be on the lookout for M&A opportunities after raising £75m ($92.40m) in one of the first the major fintech funding rounds in 2023⁹.

Other fintech companies that landed large funding rounds at the top of the market will similarly be well-positioned to acquire competitors that have shorter cash runways, want to avoid a down round, and find it difficult to secure additional capital in a tighter, more selective market.

We have seen a lot of consolidation in the payments space over the last three to four years. Expect more of the same with other fintech verticals.

4. Neobank’s Come of Age

Neobanks – independent digital banks that serve customers via mobile phones and have no physical footprint – will be on the acquisition radars of traditional banks and private equity firms in 2023.

The ability of neobanking platforms to serve customers without the need for physical branch networks is very attractive to traditional banks, as is access to cutting-edge technology and branding that attracts a younger, digitally savvy customer base and helps lower operating costs.

Meanwhile, PE and venture capital investors are attracted by the growth of the neobank market, which is forecast to expand at a compound annual growth rate (CAGR) of 53.4 percent between 2022 and 2030, according to Grand View Research¹⁰.

Neobank consolidation is another theme that will animate dealmaking in 2023. More than 400 neobanks have launched over the past decade, according to McKinsey¹¹but the number of new players entering the market is decreasing and only a select few break even¹². This leaves the neobank space ripe for consolidation, as neobanks that have been able to demonstrate a clear path to profitability move to acquire weaker rivals.

5. Picks and shovels: The real winners during a gold rush

The retail-facing fintech companies may attract the most attention and headlines, but fintech players in infrastructure that provide the “picks and spades” of financial services – such as banking-as-a-service, know-your-client (KYC) and anti-money laundering (AML) tools – have emerged as some of the biggest winners in the fintech gold rush.

Regardless of the volatility in broader markets, financial firms continue to demand innovative technology and products that help them reduce compliance costs, make their platforms more secure and deliver faster services to clients.

Any fintechs with technology that can address these priorities will be sought-after acquisition targets for banks, PE firms and VC investors.

6. Payment agreement flow to remain robust

Payments deal activity has fallen in line with the slowdown in wider fintech M&A over the past 12 months, but despite a testing year, the sector has matured and built the scale necessary to generate sustained levels of deal activity across market cycles .

Consolidation and the requirement to strengthen cyber security and B2B payment capabilities will be among the drivers of ongoing M&A across the payments space.

The demand for consolidation through M&A will be even more pressing in certain payment sub-sectors, such as Buy Now, Pay Later (BNPL), where tighter regulation is on the horizon, making scale more important. (Akin Gump will cover the payment area in more detail in a later article.)

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The content of this article is intended to provide a general guide to the subject. You should seek specialist advice about your specific circumstances.