Fintech M&A is slowing down on macro doubts, but innovation is promising in the longer term
M&A activity in the fintech sector has decreased and it may be well into 2024 before things improve, according to Alan Bickerstaffpartner at Shearman and Sterling who work with fintech.
“People are waiting for the next shoe to drop in the economy,” says Bickerstaff, referring to the possibility of a recession. “They don’t know what to expect.” There is a general reluctance to commit given the uncertain outlook for growth and interest rates.
Recent turmoil has raised questions not just about the macro environment, but what regulators are going to do about everything from bank failures to crypto.
Banks have been hit by the collapse of Silicon Valley Bank. “Banks have a duration mismatch problem,” says Bickerstaff. “And they have a deposit withdrawal problem.”
Both of these problems led to the SVB failure, and now First Republic Bank has become the second largest bank failure in US history as regulators closed the San Francisco bank over similar problems and sold deposits and assets to JPMorgan Chase.
The uncertainty surrounding the banks has effectively sidelined them on the fintech front. Crypto, meanwhile, faces plenty of headwinds, notes Bickerstaff. The sector has seen many failures and regulators appear to be cracking down.
Although valuations have declined, Bickerstaff says, “there’s a disconnect — sellers want to see more than buyers want to pay.”
That said, there are bright spots. “Investments are generally more strategic,” says this legal expert. These lower valuations could tempt well-established fintechs to make some acquisitions, especially if they can pick up a weaker company that has raised money but is unable to distribute it.
B2B is an area that is experiencing activity, especially where an acquisition can help a company with consumer interaction. Payment companies and things like know-your-customer apps are two notable examples.
This will only accelerate as the macro contours become clearer. “In the longer term, optimists want alternatives to legacy systems,” says Bickerstaff.
The younger generation is comfortable handling financial matters via the web or mobile apps and does not need physical branches. This creates an opening for M&A activity in the fintech area and only in digital.
Meanwhile, innovations in artificial intelligence, machine learning, natural language processing and programming are increasing the speed of change and innovation across multiple technologies and are likely to impact the fintech space as well.
M&A in the Web3 space, based on blockchain technology, can be challenging, on the other hand, as many Web3 companies are focused on specific verticals and use incompatible technologies, says Bickerstaff. On top of that, there are regulatory challenges, at least in the US
One of the aims is to create a system where customers are rewarded for using the network, so that companies and individuals can tap new sources of capital outside the existing banking structure.
Bickerstaff cites Helium as an example of a company that aims to create a decentralized network of hotspots that provide worldwide wireless coverage. T-Mobile has partnered with Helium to create Helium mobile using the mobile company’s 5G network.
However, for all the fermentation and innovation, a significant increase in fintech M&A activity will probably have to wait until the second or third quarter of next year, Bickerstaff believes. “Companies are reluctant to enter the market,” he says. “The question is – have we hit rock bottom?”
–Darrell Delamaide
