Will US firms scoop up European fintech?

A weak pound could be the catalyst for a much talked about fintech M&A boom.

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What with 2022’s turmoil in public stock markets, decline in venture capital volumes and general bearishness to all things tech, many have expected a boom in startup mergers and acquisitions.

With IPOs, the usual “exit” that most founders work towards almost closed for now, companies that have a solid business but are still a long way from sustainable revenue will increasingly merge or buy each other. At least that’s the theory.

So far, that hasn’t really happened in fintech.

Fintech M&A activity was noticeably quieter during Q2 2022 with the lowest number of deals (318) since the same period in 2020 (298) and the lowest volumes ($37.3 billion), also since Q2 2020 when it was $8.3 billion, according to FT Partners.

Could the trend be about to change?

This week, Capdesk was acquired by Silicon Valley-based Carta, its US rival.

On the same day, the American crowdfunding fintech Republic announced that the takeover of Seedrs was finally complete.

Could these two deals herald a broader trend of US firms expanding into the European fintech market via acquisitions?

Banks, especially JP Morgan and to a lesser extent Goldman Sachs, have been fintech’s biggest M&A drivers in recent years. But as the two aforementioned agreements illustrate, other larger fintechs can also be the source.

There are also large piles of “dry powder” waiting in the wings, with investors pulling money out of risky assets due to inflation concerns. Eventually, that money will be needed to find a home.

A weak pound against the dollar could certainly also help. The dollar has been on a tear this year as the Fed has increasingly increased its aggressiveness on monetary policy in its bid to combat high inflation.

The strength of the dollar means that UK stocks are arguably “cheaper” now than they were at the start of the year.

So far in 2022, the dollar is around 20 percent stronger against the pound. The euro has followed a similar pattern and is trading at a 20-year low against the dollar.

In the years following the 2016 Brexit referendum, when the pound began to fall in currency markets, a similar pattern emerged of US firms churning out UK assets.

There is reason to expect further weakening of the pound.

Of course, M&A is not only driven by currency prices. Mark Barnett, Mastercard’s Europe president told me in a recent interview that the American payments giant does not strictly have an M&A strategy.

“If there’s part of our strategy where we need to develop something … a capability, then we do the normal build, partner or buy process. Sometimes the answer is to buy. And sometimes the answer is to partner where we do a minority investment or just a commercial arrangement Sometimes we build the capacity ourselves, he said.

“We didn’t adjust [that] based on down rounds and all that sort of thing. We are not adjusting our strategy, but we are always in the market for good commercial deals, or minority investments or even sometimes acquisitions,” he added.

Whether M&A comes to European fintech in the form of rival US-based startups, incumbent banks or other financial companies, there is every reason to expect more of it.