25 Jul Allen & Overy review M&A trends in the fintech sector
In a newly released publication entitled The best way to deal with disruption? Embrace it!, Allen & Overy delves into recent developments in the world of fintech. In particular, the publication explores up and coming trends around mergers and acquisitions, and lays out predictions for the future of the sector.
The past half-decade has brought unprecedented growth to the fintech sector, with some estimates putting total investments between 2010 and 2016 at upwards of USD 130 billion. In this community, it almost goes without saying – fintech is the future. And although 2017 has seen a balancing in the volume and value of investments, the sector is still on a healthy path ahead.
Allen & Overy, Holland FinTech member and leading European legal minds, argues that while disruption poses challenges for companies, it also creates opportunities.
For example, recent estimates by PwC predict that at least half of all financial institutions will have acquired a fintech start-up within the coming three to five years. Start-up acquisitions can assist larger financial institutions to unbundle services, innovate more efficiently, and provide a wider range of solutions to their customers.
How finance is funded is also changing. Newly established corporate venture units are on the rise among the major incumbents and gaining considerable traction. According to Allen & Overy, “The particular subsector of the fintech market that potential targets are operating in has a significant bearing on the nature of the M&A, investment or collaboration chosen.”
Long-established functions of financial services, such as payments, are quickly becoming the object of merger and acquisition deals, and activity in this space tends to be motivated along the same lines as traditional mergers & acquisitions. For novel technologies such as the blockchain, on the other hand, attention tends to garner more often along the earlier (read: riskier) stages of investment.
Key drivers of fintech M&A
Although most investments of this nature are backed by a complex range of motivations, fear of obsolescence seems to have become the dominant driver. Many financial services incumbents now recognise that expansion of technological capabilities can be best achieved by minimising or even completely eliminating the cycle of R&D. This allows for a greater degree of agility and innovation throughout the organisation.
Financial services players are also facing a steady rise in the threat of competition from previously irrelevant sectors. Tech companies in particular are well aware of opportunities for diversification, and this is evident in the increase in payments services being offered by the likes of Facebook, Google, Samsung, and so forth.
When incumbents join hands with fintech start-ups – whether through a merger or takeover – both parties generally enter into unfamiliar waters. Typically in these settings, sellers opt for a low-cost model; however, Allen & Overy assert that, ultimately, this approach may negatively affect the long term value of the business:
“Leanly financed start-ups may not prioritise legal and regulatory advice, but in a highly sophisticated and regulated environment like financial services this can have a significant impact down the road…. There are dangers for buyers too. Big banks – even the most active in the transactions market – may have little or no experience of making small investments.“
With so many colliding factors to consider in this rapidly growing fintech M&A space, many questions still remain. Yet despite all of the uncertainty that lies ahead, one thing certainly seems clear – to see success in the future, established financial services players must continue to fully embrace disruptive innovation.
To read the full publication – The best way to deal with disruption? Embrace it! – by Allen & Overy, click here.