The steady deal flow of banks acquiring financial technology companies continues to blur the line between traditional definitions of banks and fintechs.
This year has already seen several announcements for banks buying fintechs, including BNP Paribas SA's acquisition of HedgeMark International LLC, UBS Group AG's $1.4 billion acquisition of Wealthfront Corp., Veritex Holdings Inc.'s $89.5 million acquisition of StoneCastle Insured Cash Sweep LLC, and Western Alliance Bancorp.'s acquisition of Digital Settlement Technologies LLC, according to data compiled by S&P Global Market Intelligence.
That convergence will continue as banks gain access to the talent, technology and products catering to a digital-savvy customer base through fintech investments and partnerships.
Banks expect to drive organic growth amid rising interest rates, which "should provide additional earnings capital ... they could put to work to potentially expand into new capabilities for customers, or new asset generating concepts or product lines," said Matt Hutton, partner at Deloitte & Touche's M&A transaction services practice.
Two-way street
Meanwhile, fintechs are moving into the banking space to benefit from the cheap deposits and licensing exemptions, said Gregory Lyons, a corporate partner at Debevoise & Plimpton and co-chair of the firm's financial institutions group. Five fintechs announced plans to buy banks in 2021 and more have attempted to apply for a bank charter to tackle the regulatory hurdle that fintechs view as a limit to their scalability.
"Will fintechs completely replace banks? The more likely outcome is that traditional banks will adapt to compete. This means further investing in digital native capabilities, as well as adopting a more customer-centric mindset — something that fintechs naturally do well," industry experts at Deloitte wrote in the firm's 2022 banking and capital markets M&A outlook.
A surge in large M&A between banks in recent years has led to longer and more complex regulatory reviews. Banks are now looking for other avenues for growth, such as bolstering their fintech capabilities, Lyons said. "I think you'll also see that become more and more prominent as the environment continues to evolve from a Biden administration perspective," he said.
Banks' M&A appetite in fintech small yet steady
Though steady, this trend is not a rush: Acquisitions by banks still make up a small but significant percentage of the overall fintech M&A marketplace. In 2021, banks were on the buyside of eight of the total 484 fintech M&A deals, on pace with recent years.
The steady deal pace is in part because the deals tend to be purpose-based acquisitions, said Dan Allred, senior market manager for Silicon Valley Bank. It means bank buyers often seek to fulfill a niche capability by tuck-in deals, as opposed to racing with other bidders to chase strategic transformations.
Banks' acquisitions of fintechs also skewed toward the smaller side, with only three such deals surpassing $1 billion in deal value since 2012. In comparison, in 2021 alone, there were 16 M&A deals where fintech firms or private equity investors spent above $1 billion acquiring a fintech target.
Wealth tech seeing banks' interest
Fintech applications in wealth management have attracted bank buyers in the past year. UBS' planned acquisition of robo-adviser Wealthfront announced in January is one of the largest bank-fintech deals since 2012, and The Goldman Sachs Group Inc. on March 29 said its asset management arm has entered an agreement to buy NextCapital Group Inc., an enterprise digital investment advice firm. JPMorgan Chase & Co. also announced in 2021 its plans to acquire investment management solutions provider Open Invest Co., as well as U.K.-based consumer-oriented online investment manager Nutmeg Saving and Investment Ltd.
Direct-to-consumer fintechs in wealth management bring a different customer base, which is often comprised of slightly younger users, Allred said. Banks benefit from adding different types of products and customer experiences through acquisitions and can capture customers' other financial needs as they grow their wealth over time.
Wealth tech firms joining forces with banks reflect another aspect of the convergence between banks and fintechs in terms of the combination of banks' edge in building personal connections and fintechs' specialty in technology enablement.
"[Wealth management] is still a people-oriented business to a large extent," Lyons said. "I think fintech can take a larger role there because you don't have that same kind of personal connection."