Fintech wreckage spells opportunity for bargain

Following a challenging year for the fintech sector, enterprising banks may be able to acquire startups whose previous valuations put them out of reach in prior years, said Klaros Group’s Jonah Crane.

The mergers and acquisitions landscape in 2023 could be promising for banks on the hunt for fintech deals, experts say.

Following a challenging year for the fintech sector, which has experienced a global drop in funding and mass layoffs, enterprising banks may be able to acquire startups whose previous valuations put them out of reach in prior years, said Jonah Crane, a partner at regulatory advisory firm Klaros Group.

“We were for years in what appears to have been a bubble in fintech stocks. We've now come through that and had a major correction and just on price alone, it could be an interesting opportunity [for banks],” he said.

According to PitchBook, valuations of publicly traded fintechs plummeted 60% to 80% in 2022, a stark contrast to prior years when the fintech sector’s soaring price points were a source of frustration for some banks that were eager to make deals in the space, said Dan Goerlich, PwC's banking and capital markets deals leader.

“Over the past five years, fintech valuations were extremely high because it was such a sought-after property. Everyone felt like they were disrupting the sector,” he said. “As a result, there really weren’t price points that were attractive — you'd be way overpaying. And then to integrate it with the rest of your products and services, or even just operate it, you probably would never realize the value that you paid for it in the long run.”

Amid last year’s drop in valuations, fintech funding on the global stage also fell 46% from the previous year to $75.2 billion, according to CB Insights.

M&A, initial public offering and special-purpose acquisition company activity also dried up in 2022 compared to the prior year, according to the research firm.

There were 742 fintech mergers or acquisitions in 2022, a 20% drop from the previous year. Fintech M&A was at its lowest level all year in Q4, with 143 deals.

There were 23 fintech IPOs last year, down 72% from 2021, and nine SPACs in the sector, a 53% decline over the prior year.

“Now that those markets have shut down, if [fintechs] still want exits, they will have to seek it through sales to more traditional financial institutions,” Goerlich said.

Firms eyeing fintech deals should seek more descriptive information on valuations, Goerlich said.

“They should reinvigorate their corporate development teams to determine what the value propositions would be in their portfolio to fit in a fintech,” he said.

While fintech M&A may be within reach for some banks this year, firms will still need to contend with rising interest rates and market liquidity strains, he said.

“You also don't want to get into a situation where you're doing a merger in a not-so-hot market and are unable to execute the game plan to realize the synergy,” Goerlich said. “I think there's still a fair bit of planning that you'll have to do.”

Not all fintech deals will be bargains for banks, Crane said.

“Payments is really popular, so I don't think that's where the real bargains are going to be,” he said.

Lending-focused firms, however, may face more challenges in the current environment and could be attractive acquisition targets for traditional firms, he added.

“Some of the more lending-focused fintechs may get bought by a bank for their technology, or potentially for access to their customers,” he said.

Neobanks could also emerge as prime targets for traditional banks, amid the challenging fintech environment, Crane said.

A traditional bank could serve as a built-in distribution for a neobank that has struggled to become profitable on its own, as well as cross-sell offerings, such as lending and insurance, to a neobank’s customers, Crane said.

“Neobanks have been one of the biggest beneficiaries of the endless availability of venture capital to fund marketing and growth initiatives, and many of them haven't really become profitable,” he said. “We'll have to see if they can survive this current funding environment, and if they can't, whether they have attractive technology or products or even customers to bring to a bank.”

Bank-fintech deals are hard to do, and hard to do well, Crane noted.

“They're hard to execute in a way that everybody gets out of it what they expected on the front end,” he said. “They require really thoughtful approaches to integration and bringing in a fintech team and giving them a meaningful role within the business so that they stick around and help you grow, innovate and bring the best of fintech into your banking organization. That is much easier said than done.”

Also, Crane noted, the macro environment that is creating opportunities for banks, is also making it challenging for them to capitalize on it.

“It’s going to take a brave bank to see through the near-term economic uncertainty and try and accelerate their innovation strategy through acquisition,” he added.