Fintech

The pent-up energy could drive the FinTech M&A wave

Published

8 months ago

14 May, 2024

Pent-up Energy Could Drive FinTech M&A Wave

That’s not to say the FinTech market hasn’t been hit hard by the broader collapse M&A players have seen in 2023. Pitchbook data reveals a 45.8% decrease in M&A value year-over-year for the sector, with a 2023 forecast for a transaction value of $28.3 billion. , up from $52.2 billion in 2022. Some of the pent-up consolidation potential could prove to be a boon for the industry this year and beyond.

But Rudy Yang, senior emerging technologies analyst at PitchBook, shares an optimistic outlook for FinTech deals this year. “It’s been a quiet few months for FinTech mergers and acquisitions,” he says, “but there were some bright spots in the first quarter.”

These bright spots, he and other sources tell Middle Market Growth, are indicative of a more active year ahead, as PE investors take advantage of long-term growth potential and as companies prepare to increase their service offerings through strategic agreements.

Getting to a (delayed) head.

Part of FinTech’s appeal to dealmakers is its diversity. “There are many different subsegments within the FinTech space,” notes Mike Andrusko, partner at Centri Business Consulting and leader of its Digital Asset Practice. “There’s RegTech, asset tech, InsurTech which is starting to get bigger and I would say digital assets will fall into the FinTech space as well.”

In addition to these new FinTech niches, areas such as payments, banking and CFO technologies such as treasury and liquidity management solutions contribute to a prolific market that has matured since its early startup days 10-15 years ago, when many of the companies in the segment were simply “financial services companies using technology” rather than true FinTechs, according to Ganesh Rao, leader of the technology and financial services investment group at private equity firm THL.

Rao says certain FinTech niches are key to the firm’s investment strategy. InsurTech, banking technology and funds and wealth technology are some of the focuses of THL, which also seeks FinTech with the opportunity to embed additional financial services, such as payment functionality, within existing platforms.

Despite the industry’s diversity, dealmakers say FinTech has not yet reached the level of dealmaking activity that experts had predicted.

“Many analysts, myself included, came into last year expecting there to be a wave of consolidation within the industry,” says Yang, who cites FinTech startups taking advantage of low interest rates and inflated financing in venture capital in recent years (2021, a banner year for both FinTech and private equity funding, saw $121.6 billion funneled into FinTech startups). “We and many industry stakeholders expected many startups to have a greater need for liquidity and many more failures. What we’ve seen so far is that it hasn’t really materialized.

Closing the valuation gap

According to Yang, much of the stalling of mergers and acquisitions in the FinTech sector can be traced back to the dreaded buyer-seller valuation gap that has plagued so many sectors over the past year, especially tech. Fortunately, he says, the situation should ease as 2024 progresses.

And Max Heller, CEO of Centri and leader of its M&A advisory practice, says buyers are eager to jump when sellers compromise. “We see lower valuations as a plus for investors,” he notes. “Buyers are taking advantage of it and there is more of a meeting of the minds.”

Overall, industry experts are confident that 2024 and beyond will finally be the time when the long-awaited consolidation will occur.

Rao expects the second quarter to be a particularly significant period, especially when it comes to sellers’ willingness to go to market with moderate value expectations. LPs pressuring PE firms to return capital should also be a driver of deal-making activity this year, he adds.

While dealmakers don’t expect a wave of FinTech consolidation until at least the end of the year, some deals are closing. Last October, Celero Commerce, a non-bank payments processor and portfolio company of lower middle market PE firm LLR Partners, announced its acquisition of electronic payments company Finical. A month later, PE investor Advent International revealed that it had acquired British payments company myPOS, valuing the company at $500 million. And in January, technology-focused PE firm Welsh, Carson, Anderson & Stowe announced the acquisition of EquiLend, which provides technology to the global securities market processing industry.

“We are starting to see some encouraging signs,” says Sam Ryder, director of LLR, which is targeting stabilization of interest rates and expected cuts later in the year. Several LLR portfolio companies have completed additional acquisitions in 2023.

LLR targets growth-stage FinTechs with revenues between $10 million and approximately $100 million. Ryder says companies with high recurring revenue profiles and high retention rates are the most attractive, as are companies that can replace legacy systems in areas such as wealth management, banking and payments.

THL, says Rao, also looks for non-cyclical companies, ideally in end markets where software and technology penetration is in the early stages of long-term penetration. The most important thing, he observes, is the health of the end customer. FinTechs serving auto insurance or small community banking spaces, for example, have had a precarious time in recent months and deserve a little more caution right now.

The strategic advantage

But it’s not just PE sponsors who are strategizing their FinTech investments for the years to come. Strategies have historically played a particularly important role in industry consolidation, with some large transactions continuing to make headlines.

According to a recent report from Pitchbook, five of the ten largest FinTech M&A transactions from 2020 occurred in 2023 or 2024, including Intercontinental Exchange’s $11.7 billion acquisition of financial services data provider Black Knight in September, as well as Nasdaq’s acquisition of Adenza in November. a financial services risk management and regulatory reporting company, for $10.5 billion (Adenza was acquired by its previous owner, software private equity firm Thoma Bravo).

While strategic deals in the middle market are more modest, there are opportunities for synergies and partnerships, experts say.

According to Centri’s Andrusko, much of the inertia behind FinTech M&A this year and beyond will lie in identifying strategic growth potential, both from strategic and PE-backed platforms. “There are some companies that may not necessarily have a license, so instead of going through the application process, they may go through an acquisition to get into a company that already has that infrastructure in place to help them save time, effort and money “, he says.

“I bet you’ll see more strategic partnerships and identification of potential targets,” Heller predicts. “Probably a trend for 24 is where there are more strategies in play, but there may also be private equity-backed platforms doing add-ons.”

Yang similarly highlights the value of strategic partnerships within the FinTech ecosystem, not only to consolidate a fragmented market and weed out the winners from the losers, but to enable companies to improve and augment their existing offerings. As enterprise and consumer end customers demand holistic and seamless products, industry collaborations can help banks, corporations and other industry pillars expand into new geographies and add features to products, thereby bringing significant revenue to the agency.

Such demand lends itself well to mergers and acquisitions, particularly as the FinTech ecosystem matures. “We’ve gotten to this point in FinTech where banking incumbents, large corporations and startups are more ready than ever to collaborate with each other,” Yang says.

Carolyn Vallejo is the digital editor of Middle Market Growth.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

6 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

6 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

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Fintech

M2P Fintech About to Raise $80M

Published

6 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

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Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

6 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

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Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”