Fintech M&A: the terrible teens?

By Fady Abdel-Nour, Global Head of M&A and Investments at PayU

Having been locked down in Toronto for the past few months, over 12,000 kilometres from home, the news that fintech deals have dropped to 2016 levels wasn’t a considerable surprise. So many people and businesses are, quite literally, at a standstill in the current crisis. M&A behaviour has already started to shift, but there are more changes yet to come.

Funding was already on the decline at the end of last year, and we know from the previous two economic crises that private funding dries up in times of uncertainty. The snowballing success of fintech M&A in the last decade had started to create the feeling fintech might be invincible. With venture capital funding growing from $2 billion in 2012 to $50 billion in 2018, fintech has enjoyed a booming adolescence. But now it faces a grown-up reality.

Is remote working?

It’s clear that the logistics of investing have changed. Remote working has moved from an employee perk to a necessity for so many areas of business. Building new relationships and fostering existing ones now happens exclusively over conference lines, rather than in person. The world of fintech M&A and investment has moved from the boardroom to the chat room, and building chemistry between parties is much more difficult.

As part of a company whose investment strategy is heavily built on identifying companies who share our vision and principles, this new way of working is not without challenges. That said, the ecosystem has rallied. Founders and CEOs are working hard to share meaningful pitches and investor updates over intermittent Wi-Fi. We’re now using calls not as placeholders until the next meeting, but as an important channel of communication where everyone has to engage and share insights.

A change in weather

Fady Abdel-Nour

Beyond the physical limitations the industry is facing, M&A behaviour is already transitioning. Broadly we are seeing the tightening of purse-strings and increasingly high standards for investment. The fail-fast attitude that has seen fintechs and challengers secure both funding and customers over the last few years is no longer attracting investors in the same way. Further, those companies that were looking to “buy” market share are finding fewer friends in the market.

On top of this, market volatility naturally stifles deal volume. Both sides of the ecosystem are carefully monitoring the landscape and, given how difficult it is to identify longer term trends, decisions are harder to make. Some investors are conserving capital while many fintechs are waiting until their valuations edge closer to pre-virus levels.

It’s understandable that investors will be more risk-averse with their capital and, while this makes the outlook difficult for start-ups, it will concentrate the fintech industry’s attention on long-term sustainability and growth.

It may even open up new opportunities for these challengers as they pause on their plans for expansion and instead look more widely at what potential the future holds. Financial services has been through a distinct period of unbundling, most commonly represented by the emergence of consumer debit offerings through the likes of Monzo and other fintechs. Over the last year, both challengers and larger players have been working to become a one-stop shop for customers. Challenger banks quickly expanded into credit; at PayU, we broadened into wealth tech for the first time.

Maturing into M&A

These trends are now picking up speed. New approaches are suddenly being considered as we have to adapt to a changing market. Revolut, for example, has already earmarked $500 million from investors to acquire competing firms suffering in the crisis. Challenger banks have typically avoided M&A activity in the past, but it’s likely to increase as they explore new ways to grow.

It might seem unclear why firms would embark on M&A in this tumultuous environment. But those who are struggling will be attractive propositions to those that are well capitalised – the “buy” option becomes more enticing from an ROI perspective. Deal makers are, after all, looking for a deal.

 Moving forward, fintech will need to be more focused than ever on responding to market needs and creating valuable solutions in a time when consumers will be paying ever more attention to their finances. There is certainly hope that financial services will be reminded of its focal role: to support consumers and economies. As the vulnerable are hit worst by economic downturn, financial services will be critical to keeping these people connected to government support and offering financial solutions. With the last decade’s progress in financial inclusion, the industry’s priority should be keeping people within a financial ecosystem that supports their prosperity.

Room for more than doom and gloom

What we should not expect is the end of the fintech buzzwords we’ve all become so fond of using. Customer-centricity, consolidation and digital transformation will still be priorities, but with a different edge behind them. It would be easy to say fintech M&A has been completely disrupted by the crisis, but in reality we’ve seen the sudden acceleration of trends that were already starting to emerge.

While there’s no doubt that there are difficult times ahead, there are also opportunities. The fintech industry, excited and anxious to grow, has been forced to pause and reflect. Where we invest our time, resources and capital will be considered with a longer-term view. I’m hopeful that out of this crisis the landscape will become more transparent, collaborative and focused on the people we serve.