While global M&A has suffered in 2023, the Fintech sector saw M&A activity rise sharply this year, with 591 deals recorded. This represents a 46% increase on numbers, and a whopping 70% increase on pre-pandemic figures.
According to Hampleton Report, valuations have remained steady: 2023 saw the trailing 30-month median revenue multiple reach 3.1x – broadly in line with the levels seen in the past two years. The trailing 30-month median EBITDA multiple came in at 14.2x, firmly within the 13x to 15x range monitored since 2015.
The slashed valuations of some publicly traded financial technology companies will continue to prompt M&A interest from strategic and private equity buyers.
Many fintech companies went public with lofty valuations during the latest peak around 2022 only to see their share prices plummet in 2023.
The market correction developed as public market investors shifted their focus to profitable companies and away from those growing at all costs.
Many high-growth but break-even or unprofitable businesses valued off of revenue multiples have faced a material valuation cut, which in some cases could be by nearly half, while the valuations of profitable businesses are less impacted.
The global M&A market saw a sizeable spike in 2023 across all industries, leading many analysts to question whether such highs would be short-lived.
Their skepticism proved correct: early into 2023, broader market confidence deteriorated as several geopolitical and macroeconomic events made headlines, including post-pandemic inflationary pressures, armed conflict in Ukraine, broken supply chains, and central banks hiking interest rates in an attempt to curb inflation.
Driving this year’s sharp increase in Fintech M&A are many deals in the Payments, Crypto & Blockchain, and Banking & Lending segments
- Fintech is poised for a surge in M&A deal activity
- The fintech sectors likely to see most deal activity include: open banking, neobanks, regtech, greentech, paytechs (including embedded finance and buy now, pay later) and central bank digital currency and its digital infrastructure providers
- In part, this activity will be characterized by the consolidation of fintech companies, in order to strengthen finances and speed up growth strategies and scale
- Recent events in the global banking sector will make it harder for some fintech companies to raise finance and achieve significant growth organically. This will also drive M&A as a growth strategy
- Fintech companies will also look to form strategic partnerships with larger corporations, in order to leverage their wider customer bases and brands and drive up scale and customer acquisition
Total number of deals & valuation multiples in Fintech
In many developed jurisdictions only companies authorized by a financial regulator are allowed to access financial data or to initiate payments on a customer’s behalf. This access to data allows those third parties to develop new products and services that customers can use to manage their finances in new and innovative ways.
The objective is to simplify how financial information is retrieved, shared, processed and presented.
A good example of this is the use of open banking data to deliver an efficient and streamlined credit application process, whereby lenders are able to analyze a potential borrower’s financial standing based on multiple data points such as income and outgoing payments to run an affordability assessment on the proposed loan.
This sector has faced challenges related to public awareness and market perception and is likely to experience M&A consolidation.
With economic uncertainty remaining persistent, targets in recent deals are locking in the market premium offered by the buyer instead of waiting for a rebound of stock prices.
This sentiment among sellers has the potential to pick up in 2023, and there is no shortage of smaller publicly traded fintech companies — particularly in the payments sector — that private equity firms or larger corporate players can covet, according to equity analysts.
Customer uptake of payment initiation services in particular has been low, often due to a general lack of awareness and understanding of the products themselves.
Since payment card fees are charged to the merchant and not to the customer, there is little direct incentive for customers to switch payment methods.
Fintech M&A will display resilience in a stormy market
A potential recession won’t dampen Fintech M&A as it did in 2008
While global M&A has suffered, Fintech M&A is expected to remain robust despite concerns of a possible market downturn.
Analysts point to a determining difference between now and the 2008 recession: deployable private capital (buyout, VC, growth, real estate, etc.) has reached its highest ever level at $3.6 trillion, representing around three times that of 2008.
The availability of capital drives buyers and investors to increase their acquisitions at a time when their pockets are full and high-growth Fintech companies are being sold at affordable prices.
In addition, a survey conducted by Bain Capital shows that deals completed during recessions tend to deliver healthy returns, something executives learned in the wake of the 2008 financial crisis.
Share of PE fintech acquisitions stable
The number of private equity acquisitions of fintech targets has increased, while the share of PE acquisitions as a percentage of total number of deals remains in line with prior periods at 31%.
Following recent turmoil across the broader tech sectors in Europe and North America, investors saw risk in deploying capital in Q2. Interest rate hikes also justified greater caution in making acquisitions.
Such hesitation is dissipating, however, as PEs rush to utilise available capital to prevent inflation from eating into their purchasing power. Overall, 2022 PE investment into Fintechs is on track to outpace prior years.
Paytechs cover a wide range of services in the payments value chain, including payment service providers and payments facilitators (PayFacs), networks creating new payment solutions and payment technology suppliers.
Embedded payments and embedded finance form an important feature of the evolving payments industry. The concept of embedded finance has been around for a while in different shapes and forms, but continues to be one of the fastest growing sectors in fintech.
Top recent Fintech acquirers organised by the geography of their latest target
Top deals in FinTech
Neobanks have seen a rapid expansion in recent years and offer huge appeal to tech-saavy customers seeking easy, hassle-free banking options. Sometimes referred to as “challenger banks,” they have been compared to digital disruptors in other industries.
Neobanks are a type of digital financial institution that operate exclusively online, without traditional physical branch networks.
They often start life as non-bank financial institutions (engaged in payment services and/or electronic money), before evolving over time to secure a full banking license. The customer appeal is usually in the modern marketing messaging and social media interactions, user-friendly apps and a seamless digital experience.
Usually there are no account fees, no monthly balance requirements and account opening is a quick and easy process. Some of those neobanks that go on to obtain banking licenses are able to offer higher interest rates on savings due to their lower operating costs compared to High Street lenders.
Top acquirers in FinTech
Norway-based Visma graduate to top acquirer with 17 deals closed over the past 30 months, 6 of which in 1H2022. Visma has been expanding its geographic reach in the EMEA region by swiftly acquiring targets. Most recent targets operated in the Benelux region, Poland, Spain, Denmark, and Sweden.
American-based Payroc LLC inked 9 deals in the period, focusing mostly on various merchant solutions and payment processors.
With 7 acquisitions, MRI Software, Global Software, and CBOE Global Markets, have also been highly acquisitive of Fintech targets.
Serial acquirers including Thoma Bravo, Main Capital Partners, Volaris (operating group of Constellation Software), and HG Capital continue to prove appetite for Fintech as they actively purchase vendors within the sector.
Top trends in Fintech
Data breakdown – geography and subsector
36% of all Fintech deals targeted a firm in the Financial Management Solutions segment and 22% related to Payment solutions. Interestingly, Wealth & Capital Markets Tech now only represents 11% of all deals, whereas it was the most important subsector a few years ago, accounting for one third of fintech M&A activity.
Just over 50% of all deals in the past 30 months targeted a North American firm. European targets were involved in 29% of the transactions during the same period. While over two-thirds of these were purchased by acquirers on the same continent, 32% of the European fintech sellers ended up transacting intercontinentally.
Financial Management Solutions
The Financial Management Solutions segment has continued to experience a surge in M&A activity, with a record 211 deals recorded in 1H2022 and 416 in the past year. This is a 44% increase from the prior 12 months.
The trailing 30-month median revenue multiple reached a recent high of 3.7x in 1H2023 – a level unseen since 2015. Half of the disclosed transactions were valued between 2.1x and 6.3x revenue. The trailing 30-month median EBITDA multiple came in at 13.6x, with half of the disclosed transactions valued between 6.6x to 16.9x EBITDA.
Software development companies with a focus on finance are creating software robots that mimic human actions to streamline and quicken repetitive tasks such as data entry, management of financial information, generation of financial reports, handling of insurance claims, and evaluation of business risks.
Robotic Process Automation (“RPA”) will be a key determinant of Fintech players’ success; analysts predict growing demand for RPA and 400% revenue growth in the industry by 2023.
US-based OMEGA Processing Solutions – a provider of AI and RPA-based transaction processing, payroll solutions, dashboards and analytics – was acquired by US-based Celero Commerce for an undisclosed amount. The acquisition highlights buyers’ increasing interest in targets with key RPA and financial management SaaS capabilities.
The Payments subsector has seen reasonable growth especially in the past 12 months. The number of deals in the space rose with a total of 130 deals inked, representing a 19% increase relative to the prior half-year period.
The 12-month period deal volume reached a record high of 239 deals, showing a 20% increase year-over-year. The payments category is the second largest Fintech subsector and continues to attract investor interest.
Though the market benefitted greatly from a boost at the height of Covid-19, certain players especially within the Buy Now Pay Later (“BNPL”) category have recently faced major headwinds.
These challenges are evident from its slightly depressed valuation multiples. Transactions closed at lower average revenue and EBITDA multiples in comparison to its previous 24-month average.
The trailing 30-month median revenue multiple stood at 2.9x with half of the disclosed transactions valued at a multiple between 1.6x and 5.5x. Meanwhile, the trailing 30-month median EBITDA multiple came in at 14.8x, with half of the disclosed deals showing an EBITDA multiple between 7.4x and 17.4x.
The online BNPL trend that allows users to spread payments into interest-free installments has seen huge popularity, particularly with Gen Z and millennials.
On the business side, online merchants cite BNPL as having improved customer acquisition, customer loyalty, and average order value. Across Europe, adoption has been robust: 74% of European retailers now offer the service at checkout.
Yet, criticism of BNPL mounts as more people worry it encourages young consumers to become embroiled with debt. Companies now fear that regulators may implement strict requirements limiting operations. Key players, Klarna and Affirm, recently saw their shares drop 85% and 77% respectively. Still, as the market evolves, analysts foresee growing opportunities for M&A activity as BNPL becomes mainstream.
Banking & Lending Technology
The Banking / Lending Tech segment continues to attract investor attention with a strong 115 deals recorded in the space in 1H2022. The total number of deals recorded over the past 12 months amounted to a record of 202 transactions, indicating a 38% rise year-over-year.
The trailing 30-month median revenue multiple stood at 3.8x, with half of disclosed multiples between 1.9x and 5.5x. Meanwhile, the trailing 30-month median EBITDA multiple came in at 12.9x, with half of disclosed deals valued at an EBITDA multiple between 7.8x and 22.5x.
Yapily Limited acquired finAPI, a provider of open banking, data intelligence, KYC and payment SaaS worldwide. Yapily has focused its efforts on official API integrations covering thousands of banks. With its acquisition of finAPI, Yapily consolidates its position in Germany and Europe.
The European PSD2 regulation, effectively in force since September 2019, requires banks to offer APIs so that customer data can integrate more effectively with third-party services (under user consent). Users are beginning to realise the benefits of working with open data as smooth information exchange improves user experience and quality of financial services.
Crypto & Blockchain
The Crypto & Blockchain segment experienced a significant jump in the number of deals in the past 12 months, with a total of 107 transactions recorded, representing 75% growth year over year. In the latest period 1H2023, a record number of 69 transactions were logged, representing a 82% increase over the prior period.
The improved transparency offered by distributed ledger technology and growth in venture capital investments are key factors driving the growth of the market
The online realm of the metaverse now occupies the attention of companies and investors worldwide. The operation of the metaverse, however, is fully reliant on blockchain technology for recording transactions, often as part of a decentralised public database known as an encryption-secured ledger.
As blockchain technology enables monetisation in the metaverse, companies are now piling in to create a wide array of digital assets. In February, investment firm Republic Realm paid a record $4.3 million for land in Sandbox, currently the largest metaverse platform. Similarly, technology enterprises are expanding their online platforms allowing people to work, play, and socialise.
US-based Descrypto Holdings acquired OpenLocker, a provider of an online NFT trading portal and marketplace for $11 million.
OpenLocker enables the sale and trading of racing prospect collections. The transaction is the latest in a string of investment activity within the cryptocurrency space as the metaverse becomes monetisable and the popularity of NFTs increasingly propel the adoption of crypto.
Wealth and Capital Markets Technology
The trailing 30-month median revenue multiple stood tech subsector has remained relatively stable since at 2.4x, with half of all disclosed deals valued between 2020 but has seen a gradual slowdown in recent years 1.8x to 5.1x.
The trailing 30-month median EBITDA the segment saw 68 transactions in 1H2022, and a multiple was 13x, with half of all disclosed deals total of 144 transactions over the latest 12-month period valued between 11.1x to 15.4x.
With covid came a surge in retail investment activity: the emerging investor class propelled trading platform revenues from $4 billion in 2017 to $11 billion in 2020. This growth has shown no sign of stopping.
Consumer-focused trading platforms have become less costly, and more user friendly, but also because:
- Fractional investing features allow investors to seamlessly purchase even fractions of shares
- AI-based investment recommendations by robo-advisors help amateur investors make decisions
- Access to a variety of ESG, value-based, and sector-specific funds allow investing that matches perfectly with an investor’s preferences
Robust global M&A expected to slow
Inflation rates rise and a recession looms
Inflation rates have risen to 40-year highs in countries across North America and Europe amid mounting fears of an impending recession. While economists do not foresee a recession striking in 2023, persistently high inflation and increasing interest rates may substantially dampen consumer spending in the new year, making a recession increasingly likely in 2024.
Gloomy outlook unlikely to stifle M&A activity “in the near term”
The expected impact of the current economic climate on M&A is counterintuitive. Although worries of a possible recession has escalated, appetite for deal making has hardly disappeared according to an elaborate survey conducted by KPMG. In fact, quite the opposite.
80% of executives signaled their appetite for deals is stronger. 61% indicated they expect M&A activity in their sector to increase over the next 12 months.
Despite the highly unstable market, the fundamental drivers of M&A remain in place. Companies use M&A to remain competitive, expand, acquire new capabilities, enter new markets, and dispose certain assets to cut costs and sharpen their focus. Such operational initiatives remain as vital, if not more, during recessionary periods. Indeed, if a recession does occur, economists foresee a decline of deal activity.
Currently though, companies have been using M&A to prepare themselves for a transformed economic atmosphere. They intend to acquire competitive capabilities through acquisitions before interest rates rise even further and dispose of non-core assets to cut unnecessary costs before the economy considerably declines.
A more encouraging outlook for tech M&A
Buyers’ strong appetite for technology acquisitions has remained strong in 1H2022. As competitive pressures increase in a battle for market share, the ever-growing need for digital transformation and technological advancements has fueled M&A activity. Covid-19 intensified such competitive pressures in the sector and a looming recession has enticed technology companies to act quickly.
Technology businesses such as software and internet companies can scale easily, allowing them to quickly reap the benefits from M&A activity (e.g., realising improved customer reach, product breadth, and enhanced data). Analysts expect a robust level of technology M&A activity to continue and potentially accelerate in the near term.
M&A relating to financial management, payments, banking, lending, crypto, defi, digital assets, trading and investing, broadly categorised as Fintech, has maintained its record levels of activity and high valuations during these uncertain times.
Despite record inflation, supply chain and geo-political risk, and concerns of a recession – or perhaps precisely because of these factors – deal-making in Fintech has been particularly robust thus far: we tracked nearly 600 acquisitions – the highest volume for a six-month period on record.
Many Fintech companies raised significant investment capital recently. Some will grow and mature to serial acquirers in their niches. Many other Fintechs will be sellers in what continues to be an attractive M&A market.
Analysts foresee a continued rise in related M&A as increasing numbers of private Fintech companies run out of money needed to fuel and maintain their operations.
Their options will be to
- raise capital from venture capital firms (although VCs have become increasingly selective amid heightened uncertainties);
- sell to private equity or strategic acquirers;
- entirely shut down business operations.
These options make a sale appear attractive.
At the same time, public companies with massive capital and PE with large amounts of dry powder, well financed late-stage high-growth private companies, and traditional financial services companies who look to remain relevant, are on the lookout for good assets in the sector.
AUTHOR: Miro Parizek – Principal Partner Hampleton
Fact-checked by Oleg Parashchak – Editor-in-Chief Beinsure Media, CEO Finance Media Holding.