M&A activity in the fintech sector has declined and it may be well into 2024 before things get better. Here’s why it’s not all bad news.
“People are waiting for the next shoe to drop in the economy,” according to Alan Bickerstaff, a partner at Shearman and Sterling who works on fintech, referring to the possibility of a recession. “They don’t know what to expect.” There is a general reluctance to commit given the uncertain prospects for growth and interest rates.
Recent turmoil has raised questions not only 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,” Bickerstaff says. “And they have a deposit outflow problem.”
Both of those issues led to the SVB failure, and now First Republic Bank has become the second-largest bank failure in U.S. history as regulators closed down the San Francisco bank for similar problems and sold deposits and assets to JPMorgan Chase.
The uncertainty about banks has effectively sidelined them on the fintech front. Crypto, meanwhile, faces a lot of headwinds, Bickerstaff notes. The sector has seen numerous failures and regulators seem to be cracking down.
Even though valuations have come down, Bickerstaff says, “there is a disconnect – sellers want to see more than buyers want to pay.”
That said, there are bright spots. “Investments are more strategic generally,” says this legal expert. Those lower valuations can tempt well-established fintechs to make some acquisitions, especially if they can pick up a weaker company that has raised some money but is not able to deploy it.
B2B is one area that is seeing some activity, especially where an acquisition can help a company with consumer interaction. Payments firms and things like know-your-customer apps are two notable examples.
This will only accelerate when 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 doesn’t need physical branches. This creates an opening for M&A activity in the fintech and digital-only space.
Meanwhile, innovations in artificial intelligence, machine learning, natural language processing, and programming are increasing the rate of change and innovation across multiple technologies and will likely have an impact on the fintech space as well.
M&A in the Web3 space, based on blockchain technology, may be challenging on the other hand as many Web3 companies are focused on particular verticals and use incompatible technologies, Bickerstaff says. On top of that, there are regulatory challenges, at least in the U.S.
One of the goals is to create a system where customers are rewarded for using the network, enabling businesses and individuals to tap new sources of capital outside the existing banking structure.
Bickerstaff cites Helium as an example of a company aiming to create a decentralized network of hotspots making for worldwide wireless coverage. T-Mobile has partnered with Helium to create Helium Mobile using the cellular company’s 5G network.
For all the ferment and innovation, however, a significant surge 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 put themselves in the market,” he says. “The question is – have we hit the bottom?”