The uncertainty in the UK economy, as a result of coronavirus, is motivating a number of smaller fintechs to cash out and sell to bigger, traditional financial services and incumbent fintech companies.
I shared with Fintech Futures on why acquisitions by payment giants, including Visa and American Express has raised concerns with the UK competition watchdog, the Competition and Markets Authority (CMA). Click here to read the full article or read a snippet below. These fintech acquisitions are a sign that both traditional financial institutions and large fintech incumbents are embracing the need for significant upgrades to their ageing payments and credit solutions, whilst looking out for new and innovative propositions that they are now unable to generate internally. As more traditional financial services businesses and fintech incumbents buy up these challengers, there will be increased oversight over proposed acquisitions. The CMA’s fundamental concern with mergers and acquisitions is to do with the potential impact on UK customers. The CMA’s competition concerns This year alone, the CMA has raised competition concerns over a number of major fintech acquisitions, including Visa’s takeover of Plaid, ION’s acquisition of Broadway Technology and the merger between FNZ and GBST. Visa’s purchase of open banking platform, Plaid is an excellent example of the decisions the CMA has to make. Visa sought Plaid to provide enhanced payments, financial messaging capabilities and related value-added services to fintech developers. Visa (and Mastercard) remain hugely worried about a future where card networks are no longer required and direct bank payments and digital wallet usage completely bypass their payment rails. The question for the CMA, was whether the positive externalities of the deal outweighed the competition concerns they had. Ultimately, the deal was allowed to go ahead as the review process had determined that there were enough similar sized companies to Plaid in the market to offset the competition issues the acquisition could have caused. This is certainly not the case for a number of other fintech sub-sectors such as capital markets technology, exemplified by the ION and Broadway Technology tie-up, where there are very limited options outside of these two technology providers to support certain capital markets trading activities. The extent to which COVID-19 is driving acquisitions The current economic downturn, as a result of COVID-19, has left many fintechs in a vulnerable financial position. We have already seen valuations for challenger banks, such as Monzo and credit providers, such as Kabbage, fall in the last few months. This presents a unique buying opportunity for financial institutions to advance their positions in markets and buy up the innovation coming out of fintechs, potentially even leaving behind the parts they find less appealing – for example loan books of dubious quality. Challenger banks have struggled during the pandemic, largely due to the early stage of their revenue models (limited monetisation of customer base today) and relative concentration of revenue streams (focused on physical point-of-sale). Their competition – large financial institutions – have had decades to develop a much more resilient financial profile. Be that through diversifying revenue streams and extensively monetise their customer base with multiple product offerings (loans, mortgages, FX, business banking etc). It is also worth noting that the government has massively intervened to support bank credit (revenue generating) activities. The media has also played a significant part in highlighting the difficulties being faced by the challenger banks, which in turn has dented consumer confidence in them. Many challengers, however, are aggressively seeking funding to adapt and survive the downturn. For instance, N26 Secured an additional $100 million in series D funding specifically to be well prepared for the economic impact of COVID-19. Not all fintechs will have the financial backing to face market pressures, leaving them open to acquisition. A recent example being American Express’s acquisition of Kabbage’s key assets. The benefits here are mutual, as traditional financial institutions also want to modernise their offerings but don’t want to go through the time and resources of developing new products themselves. Acquiring a fintech organisation that is at the forefront of innovation becomes an effective way for big banks to gain those assets. The largest concerns here are around the potential reversal of over a decade of work done to increase competition in the financial services sector since the last financial crisis. Stricter regulations? The CMA is being vigilant about the flurry of new acquisitions but hasn’t tightened regulations. CMA chief executive, Andrea Coscelli, recently explained that the watchdog had not necessarily become more interventionist. She argued that a bigger range of evidence and changing modern markets had altered the way the body approached mergers. Research by Financial Group, Jeffries illustrates why the UK watchdog authority is concerned by the moves being made in the fintech industry. Data from the study shows that digital-only challenger banks have been losing market share of app downloads to traditional banks since the start of the pandemic. Monzo, for example, has reported a significant decrease in its main source of revenue – the transaction fees from overseas travel. With international travel more or less coming to a complete halt, Monzo has felt the financial impact and in turn has made redundancies to cut costs. These unpredicted changes to consumer behaviour and spend has left some fintechs vulnerable and more likely to sell. The increased oversight is a product of genuine concern for the CMA. The impact of mergers and acquisitions on customers The CMA’s fundamental concern with mergers and acquisitions is to do with the potential impact on UK customers. The merger of fund technology firms FNZ and GBST was provisionally blocked due to the UK competition watchdog’s worry that the deal would cause millions of UK consumers with pensions or other investments, to face higher fees and lower quality services. FNZ and GBST compete closely in an industry with limited alternative technology providers of scale. The future of financial institutions It is starting to become clear that incumbent banks will emerge from the current crisis stronger relative to fintech challengers. This is due to their more favourable funding environment and their ability to acquire highly promising but challenged fintech businesses. The increased watch over UK fintech acquisitions is unlikely to be a hindrance to growth or innovation within the fintech industry and will help defend against tempting but early sales of these businesses. With the massive upheavals that the current crisis is delivering, one thing is for sure – the fintechs that survive and thrive during this pandemic will change the way we use financial services.