By Yizhu Wang, with analytics by Elizabeth Lim
Banks are energized by financial technology companies' innovation, but remain cautious when pulling the trigger on M&A.
Top officials at banks have trouble gauging fintech targets' earnings power, and many find that there may not be a cultural alignment. What’s more, some technology solutions of the firms viewed as “disruptors” do represent fresh approaches, but may not suit the highly regulated large institutions.
Regulators haven't seen many banks propose to acquire nonbanking organizations, based on M&A applications received this year, says Doreen Eberley, a director at the Federal Deposit Insurance Corporation, and William Haas, a deputy comptroller at the Office of the Comptroller of the Currency, speaking at the Clearing House's Annual Conference in November in New York.
Nevertheless, the US fintech sector has been hot among acquirers in financial services, with 58 deals valued at $4.3 billion this year, compared with 53 deals valued at $2.6 billion last year, according to Mergermarket data.
Shifty Metrics
In some cases, targets may just be starting to generate revenue and still have negative EBITDA, which hurts financial returns for acquirers, says Ken Gavrity, executive vice president at KeyCorp.
KeyCorp acquired the personal finance management firm HelloWallet from Morningstar in May. The Ohio-based regional bank keeps sourcing fintech companies for partnerships, equity investment and M&A.
USAA, meanwhile, has a $330 million evergreen fund for fintech equity investment, and the firm, which provides banking, insurance and investments to the military community, is using about half of its portfolio companies' products, says Neff Hudson, vice president of corporate development.
Like USAA, Bank of America counts revenue among its top criteria when it seeks fintech investment targets, along with the targets' ability to reduce expenses and improve customer experience, says Hari Gopalkrishnan, managing director of client facing platforms technology at BofA.
Cultural Divide
How to integrate innovative, nimble fintech operations into large, hierarchical organizations is a problem that banks are still working to solve, Gavrity says.
Meanwhile, fintech firms are expected to appreciate the larger institutions' scale and complexity, says Gopalkrishnan.
BofA expects its fintech partners to provide solutions that can be plugged into its existing architecture, as opposed to replacing it, Gopalkrishnan says. Compliance with regulations; applicability across demographics, and the ability to handle heavy traffic on its network are also necessary to BofA but sometimes ignored by fintech companies, he adds.
"Oftentimes people say we're slow, but we'd rather be the best in the market -- not necessarily the first in the market in some cases," Gopalkrishnan says.
Active interactions
Executives pointed to JPMorgan Chase's acquisition of WePay as a sizable fintech deal among banks. The deal, which closed in December, was valued at up to $400 million, according to TechCrunch.
Rather than acquiring fintech companies outright, many banks are making minority investments or financing startups.
HSBC, for example, has a $200 million fintech venture fund, and Spanish banking group Santander has a $100 million fund. Banco Bilbao Vizcaya Argentaria invested $250 million as a limited partner in San Francisco-based fintech venture capital firm Propel Venture Partners.
Barclays has set up four accelerators for early-stage fintech companies in New York, London, Cape Town and Tel Aviv. But Barclays US hasn't made any equity investment or acquisitions of fintech companies, says Paul Wilmore, chief marketing officer at the US subsidiary.
"To be honest with you, we haven't found one yet," Wilmore says.
If Barclays US were to make an equity investment, the targets would need proprietary data or technology that would give the bank a competitive edge in the consumer or retail market, and ideally have patents or pending patents, Wilmore says.
After testing the market for years, fintech companies have found that to substantially disrupt the industry and establish a financial network from scratch is not easy. To leverage banks' existing networks is more practical and benefits both sides, according to industry executives.
"If you asked me this five or six years ago, I would say we were competing with the fintechs. I'd say the mood now is very much that we're partnering with the fintechs," Wilmore says.
Yizhu Wang is a financial technology reporter for Mergermarket and Dealreporter based in New York.
Elizabeth Lim is a research editor and senior analyst for Mergermarket covering the Americas M&A market from New York City.
