FinTech has been a bit bruised in the last few quarters: funding has declined, and the percentage of mega rounds is lower than last year. But M&A deals have continued to rise with transactions to Q3'22 up 27% over full year 2021. But as in the capital markets, the number of mega deals has dropped off. While deal volume has continued to increase, deal value is being impacted by fewer blockbuster transactions. Instead, buyers are shifting their focus to lower middle market companies with point solutions that address unique challenges or provide enhanced usability or market expansion to a buyer's existing solutions.
Digital transformation and the rapid change in technology over the last few years has shaken up the relatively conservative and slow-to-move banking, financial services, and insurance markets (BFSI), and is having a significant impact across all tech segments here, including:
- Wealth management
- Real estate and Mortgage technology
- Payments and Billing
- Money transfer and remittance
- Insurance tech
- Capital markets
- Regulatory technology
Companies are moving from legacy systems to newer cloud-based technology solutions that provide more flexibility and the option to work with more point solutions.
To meet market demand more rapidly for new digital cloud solutions, many tech companies are opting to "buy" vs. "build", with acquirers primarily interested in adding complementary or newer products along with teams. Newer solutions are utilizing AI (AI is expected to power 95% of all customer interactions in the next decade according to Gartner), machine learning, big data, mobile, and other technologies to provide customers with far more enhanced, secure, and powerful solutions.
As the market has evolved, Fintech companies are maturing into bigger, more robust platforms and many are at a scale where M&A is now an option. Founders of fintech companies in the lower middle-market have recognized that timing might be favourable to capitalize on the interest here by acquirers, and many are opting to de-risk and take some or all their chips off the table and ensure a smooth transition for their teams and customers with a buyer who appreciates what they have built. Merging with a larger organization can also help to insulate smaller firms from market volatility and increased competition resulting from continued market consolidation.
Having greater resources at their disposal and increased opportunities for career mobility creates an optimal outcome for the seller's management and team and helps to preserve the founder's legacy and support the ongoing success of the company. Becoming part of a larger entity with an existing customer base, infrastructure, and market reach provides the seller’s team with the resources (and sometimes executive leadership) needed to accelerate growth. In some cases, founders are rolling equity as part of the deal structure with a view to participating in a much larger transaction in the future.
For acquirers, buying technology to meet their objectives is faster than taking a year or more to build it and makes a lot of sense in a market with rapidly changing dynamics and customer demands.
These strategic transactions usually have a better outcome, as both sides benefit from the deal with more selling opportunities, skilled people, and strong management teams that together, can better combat competitors and create a bigger market influence, as well as allow them to broaden the services or solutions they offer, modernize legacy systems, or cover more geographic territory.
According to S&P 451 Market Research, 70% of consumers use at least one financial service from a financial technology provider, and fintechs appear well-positioned to earn a greater share of consumers’ financial interactions over the next 12 months. Flexibility and convenience are cited as top experience trends and offering users a variety of options from payment methods to omnichannel experiences is critical for a streamlined customer experience. However, leaders are hyperaware that they cannot sacrifice security for convenience and flexibility. Ensuring systems are secure without creating barriers to users can be a challenging path that many companies are still navigating. Consumers are increasing their use of newer technologies, but many are still hesitant to embrace them due to security and risk concerns. Earning users' trust is paramount.
Payments, banking, and wealth management sectors have all seen a huge uptick in new digital technologies. Banks and asset managers are more frequently entrusting software with back-office tasks and investing in the next generation of wealthy clients, making wealth and investment management software one of 2022's hotter M&A market segments. The payments market has undergone a radical shift in technology with the emergence of mobile payments, buy-now-pay-later (BNPL), and electronic real-time payment (RTP) platforms.
Two of the blockbuster deals announced in the last year were in payments and banking: the acquisition of Afterpay by Block (fka Square) for 42.7x revenue in a deal valued at $29 Billion, and the acquisition of Tink AB by Visa for 58.2x revenue in a deal worth $2.1 Billion.
Looking ahead, KPMG US reported in August that macroeconomic headwinds are creating some caution but predict that as pricing and valuations stabilize, we will see deals continue to increase here. Fundamental trends that have been driving activity remain in place, but market sentiment is now more pessimistic and the outlook for interest rates and inflation has created challenges that have dampened the confidence we saw last year. As a result of changing market conditions, most buyers are now looking for stronger, more profitable performance or a path to profitability in the near term. 2023 will likely see more conservative, long-game strategies across M&A deals.
The fintech capital marketplace for 2023 looks strong but isn't likely to repeat 2021's record-breaking results. Many of the same drivers are in place for growth, but more buyers and investors are looking for earlier-stage deals that require less investment for each opportunity.
Fintech has a market share of slightly over 1% of the global financial industry. According to CB Insights' Global Fintech Report, the global financial sector will be worth $26.5 trillion in 2022; in 2019 it was worth about $187 billion. In a market showing this kind of growth, it's inevitable that M&A activity will be solid.
Embedded services, DeFi (decentralized finance) solutions, and ESG focused fintech products will all be big growth trajectories in 2023. Additionally, as the tech space in these markets continues to evolve at such a rapid pace, there will be a lot of opportunities for strategic buyers and investors, as well as founders who recognize that the timing is good to explore being acquired.
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