In recent years, the FinTech industry has seen a massive surge in growth and popularity.
However, with the recent decline in shares of high-growth, low-profit public FinTech companies, many are now questioning the future of the industry.
According to Pitchbook, shares of these companies are down 60% to 80% from their peaks, which is far steeper than the overall market decline.
FinTech lenders on the lookout
This presents a unique opportunity for traditional banking institutions to acquire their once-competitors and accelerate their innovation strategies to better position themselves for competition in the coming years.
For years, financial institutions have preferred to build their own customer-facing technology solutions internally, but with increased technology spending becoming less attractive to shareholders, M&A looks like a more viable option.
Banks looking for attractive FinTech targets should consider nonbank lenders, neobanks with strong customer bases, and specialized software solutions. FinTech lenders have also been hit hard by rising borrowing costs and deteriorating credit conditions, making them valuable acquisitions for larger banking platforms.
Acquisition of neobanks
In addition to FinTech lenders, neobanks offer another acquisition opportunity for banks. However, buyers must be cautious as the future of many neobanks as independent players are uncertain and the interchange-driven neobank business model has yet to prove profitable, even at scale.
Reaching an agreement on price will also be challenging, as most of a neobank’s value comes from access to the bank’s platform.
When considering a neobank acquisition, buyers must also be mindful of the potential risk of customer attrition and the terms of the partner bank’s contract.
There may also be questions about who truly owns neobank deposit accounts and relationships, as well as the obligation of the partner bank to support an account and deposit conversion after the deal is closed.
In conclusion, the bursting of the FinTech bubble presents a unique opportunity for traditional banking institutions to acquire their erstwhile competitors, accelerate their innovation strategies, and position themselves to compete in the coming years.
However, banks must be mindful of the potential challenges and risks involved in acquiring FinTech companies, especially neobanks.