5 reasons why fintech M&A is hitting new highs

March 3, 2022 3:46 PM

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The most active year yet for fintech mergers and acquisitions was 2021, and enthusiasm for such deals is still strong in 2022.

Announced deals totaled $348.5 billion in 2021, according to FT Partners, an investment banking firm focused on financial technology. This was partially driven by a record number of exits in 2021, which left venture capitalists flush with cash that they could recycle back into fintechs, as well as record levels of funding, with U.S. fintechs raising $50 billion in 2021 — more than twice what they raised in 2020.

Fintechs are motivated to engage in M&A for several reasons, including broadening the services they offer, overtaking the competition, or covering more geographic territory.

“We had a number of fintechs in single-product areas that have matured into more fulsome platforms or businesses, so now they are at a scale where M&A makes sense,” said Sara Elinson, fintech and payments mergers-and-acquisitions leader at EY Americas. “As they want to add additional products or capabilities they are in the same position as some of the incumbents where it is quicker to go out and buy.”

Here is a deeper look at five trends underlying fintech M&A.

Buy now/pay later providers seek market share

Deal: Block (formerly known as Square) acquired Afterpay

Announced: August 2021, closed January 2022

Amount: $29 billion

The BNPL and installment lending space is rife with activity as providers forge partnerships and add features to fend off competition from each other and from larger institutions. In September, Goldman Sachs announced it would buy point-of-sale loan provider GreenSky. Australia-based BNPL provider Zip is snapping up U.S. rival Sezzle. PayPal even used its acquisition of a Japanese BNPL firm as a way to further its reach globally.

“Fintechs are still trying to position themselves,” said Robert Le, senior analyst in emerging technology at PitchBook. “If you look across any segment, they are not a market leader. In buy now/pay later you’ve got Klarna, Affirm and Afterpay trying to jostle for market share.”

The fifth-largest fintech deal on record, according to FT Partners, and a marquee deal of 2021, was the sale of buy now/pay later lender Afterpay to Block for $29 billion.

Block, which rebranded from Square in December, will be able to access a wider range of buy now/pay later merchants and extend such loans through its consumer-facing Cash App without building out its own service. Block competes in the U.S. with PayPal, which benefits from strong name recognition and wide reach among merchants, as well as several other BNPL providers.

“The addition of Afterpay to Cash App will strengthen our growing networks of consumers around the world, while supporting consumers with flexible, responsible payment options,” said Brian Grassadonia, lead of Square’s Cash App business, in a news release announcing the acquisition.

Neobanks aim to differentiate themselves

Deal: Walmart’s Hazel acquired One Finance and Even

Announced: January 2022, expected to close in the first half of 2022

Amount: Not disclosed

Most neobanks do many of the same things: They prioritize a mobile experience, promise low or no fees, abolish overdraft penalties and deposit their customers’ earned wages two days early.

This is one sector of companies “still trying to figure out, if we want to become the market leader, how do we get there?” Le said.

Walmart’s startup Hazel is taking an unusual approach by drawing on the strengths of two companies, the challenger bank One Finance and the early wage access provider Even, to form a combined entity called One.

The original One is a challenger bank where users organize their spending and saving around “pockets,” a form of sub-accounts. Even lets employees access their earnings on demand, which raises the potential for point-of-sale financing based on paycheck information in the combined company. Finally, Walmart brings brand power and name recognition to the table. Hundreds of millions of customers visited Walmart in 2021.

“There's certainly a very long list of neobanks, and there is a growing list of earned-wage-access providers,” David Baga, the CEO of Even, acknowledged in a January interview. But he says that no existing competitor has combined digital banking with an app for employees that includes earned-wage access.

Challenger banks buy traditional banks to gain control

Deal: SoFi Technologies acquired Golden Pacific Bancorp

Announced: March 2021, closed February 2022

Amount: $22.3 million

Pursuing a national bank charter is an expensive and time-consuming process. A handful of fintechs have gone a different route: buying a bank instead.

Gaining a charter gives fintechs more control over their customer relationships and eliminates the need to partner with (and pay fees to) a licensed institution on the back end. It also opens the door to lower-cost funding and to offering other products customers would find at a traditional bank.

SoFi Technologies started down one path before taking the other.

In October 2020, it received preliminary conditional approval from the Office of the Comptroller of Currency on its de novo bank application. The following March SoFi announced its purchase of Golden Pacific Bancorp and its subsidiary, Golden Pacific Bank in Sacramento.

SoFi completed the acquisition in February, stating that it would soon roll out a more user-friendly interface, automated savings, and refreshed checking and savings accounts. SoFi said it plans to keep Golden Pacific’s community bank business and three branches under the renamed SoFi Bank, which will have $5.3 billion of assets and be a division of SoFi Technologies.

Concurrently, SoFi has pursued other deals in its goal to become a full-service bank. In 2020, SoFi purchased Galileo, a firm that helps challenger banks with payments and digital banking. Last month, it brought Technisys, a digital and core banking platform provider, into the fold.

Other examples of fintechs buying banks in recent years include LendingClub’s acquisition of Radius Bancorp, Jiko’s pursuit of Mid-Central Federal Savings Bank and BM Technologies’ purchase of First Sound Bank.

Fintechs broaden their geographic reach

Deal: PayPal acquired Paidy

Announced: September 2021, closed October 2021

Amount: Approximately $2.7 billion

One of the fintech M&A trends on the radar of Niall Williams, a senior analyst at CB Insights, is geographic expansion.

PayPal has made a raft of acquisitions over time, including Venmo in 2013 (as part of its payments processor Braintree deal), money transfer company Xoom in 2015 and discount-hunting browser extension Honey in 2019. In 2021, it added another business to its roster that would strengthen its presence internationally: Japanese buy now/pay later firm Paidy. Previously, PayPal had only made one other acquisition to expand to another country, with its purchase of Chinese payments firm GoPay in 2019.

PayPal states in a press release that the deal “will expand PayPal's capabilities, distribution and relevance in the domestic payments market in Japan, the third largest ecommerce market in the world, complementing the company's existing cross-border ecommerce business in the country.” In April 2021, PayPal was the first digital wallet to integrate with Paidy Link, a service that lets users connect their digital wallets to their Paidy accounts. That let Japanese users shop at PayPal-connected merchants around the world.

Paidy, which has more than six million users, pioneered buy now/pay later in Japan, according to an investor presentation. It lets customers pay for their purchases each month in a consolidated bill, using proprietary technology to score creditworthiness and underwrite transactions.

Maturing cryptocurrency firms are ready to scale

Deal: Galaxy Digital acquired BitGo

Announced: May 2021, expected to close in Q1 2022

Amount: $1.2 billion

“Crypto, blockchain and digital assets are heating up because we are just starting to see businesses that are of scale, where it makes sense to fill in some of the gaps through acquisitions,” said Sara Elinson, fintech and payments mergers-and-acquisitions leader at EY Americas.

Galaxy Digital, a merchant bank that invests in digital assets, cryptocurrency, and blockchain technology, illustrates this trend by seeking a company that could help it become a full-service crypto platform. It will soon close its purchase of BitGo, which develops digital asset infrastructure, wallet and custody technology. Together, the two will offer trading, custody and asset management, investment banking, prime lending and tax services, according to the Wall Street Journal.

"The acquisition of BitGo establishes Galaxy Digital as a one-stop-shop for institutions and significantly accelerates our mission to institutionalize digital asset ecosystems and blockchain technology," said Mike Novogratz, CEO and founder of Galaxy Digital, in a news release announcing the acquisition. BitGo also brings more than 400 new clients to Galaxy Digital.

A report from FT Partners last May stated that the acquisition represented the largest strategic acquisition of a cryptocurrency firm.