Fintech Rising: Innovation attracting attention from investors

Though it’s actually not all that long since a mention of the word ‘Fintech’ caused confusion, if not a jargon-inspired-eye-roll, its huge and undeniable impact on finance means that Fintech now very much feels like it’s been around forever. Which is just about the point that it becomes massive in the M&A industry. 

Obviously the M&A industry is always on the lookout for the next big sector, but the sheer scale of the Fintech boom means that more and more companies are hitting the market every day. As funding options for Fintechs have weathered vast waves of boom and bust, there’s always another company looking to buy, sell, raise funds, or just consider their options. So what’s the word on the M&A street when it comes to Fintechs?

What types of companies are getting people talking? 

• Digital Payment Platforms – Obviously, companies like PayPal, Square, and Stripe are leading the charge in digital payments, offering streamlined and secure transaction processes. These services are attractive to traditional banks looking to enhance their digital capabilities and offer more convenient services to customers, so scaling up-and-comers in this area have a real opportunity to differentiate themselves and attract big valuations.

• Lending and Credit – Offerings like Funding Circle’s have revolutionized personal and business lending with online platforms that simplify the application and approval processes. These companies are attracting attention from traditional financial institutions looking to modernize their lending processes and provide faster, more accessible loans, especially to small businesses who still struggle to find loan options with the speed and convenience now commonly available to consumers.

• Wealth Management and Robo-Advisors – There’s increasing interest in digital wealth management services providing automated, algorithm-driven financial planning. Traditional banks and investment firms are interested in this flavour of AI-driven tech to expand their digital wealth management services and attract younger clients, as well as reducing costs and improving customer service.

• Blockchain and Cryptocurrency – These components of decentralised finance (DeFi) are gaining attention for their potential to enhance security, transparency and efficiency in financial transactions. Traditional institutions are exploring acquisitions to stay ahead in the evolving digital currency landscape, and this tech can even streamline the M&A process itself by boosting the speed and accuracy of financial due diligence.

• RegTech – Firms offering regulatory compliance solutions, like ComplyAdvantage, are crucial for managing the increasingly complex regulatory environment, and are therefore super attractive to traditional banks aiming to make life easier (and safer) for their compliance and regulatory teams.

At this stage, talking about the benefits of Fintech acquisition for big banks is a little redundant. From improved customer experience, to streamlining and cost reduction, it’s almost always easier for the big players to buy in capabilities rather than build from scratch. This isn’t the only option for Fintechs looking to fundraise though, with Private Equity investment another avenue that can boost growth, improve market reach, and expand capability. But that doesn’t mean it’s always plain sailing, so let’s look at some of the risks Fintechs can mitigate to make themselves more attractive ahead of any potential investment or sale.

• Valuation Challenges – Accurately valuing Fintechs can be difficult due to the frequency of intangible assets like intellectual property and human capital. Getting ahead of the game by ensuring you have the necessary data to articulate and support your value drivers to a potential acquirer or investor can give them the KPIs they need to drive overall valuation and make a huge impact on the bottom line.

• Integration Challenges – Post-acquisitions, merging the operations, cultures, and technologies of Fintech companies with traditional financial institutions can be incredibly complex, especially when modern, agile Fintech cultures clash with ‘but it’s always been done this way’ tradition. Ahead of any potential deal, Fintechs should look to clarify and document their processes wherever possible, and make sure they’re clear on their non-negotiables to avoid wasting time on a partnership that may be doomed to fail. 

• Regulatory Compliance – Fintechs often operate in a different regulatory environment compared to traditional banks, and can also have vastly different risk appetites. Ensuring compliance with all relevant regulations can be a significant hurdle, so it’s a good idea to get ahead of the game and understand exactly what might need to change, when and how, before considering investment or sale.

• Cybersecurity Risks – The integration of new tech and platforms increases the risk of cybersecurity threats, so ensuring robust security measures are in place is critical to protect sensitive data and maintain customer trust, something which is, unsurprisingly, incredibly important to some of the biggest acquirers and investors.

The best innovations in this sector are those that solve real-world problems and enhance financial equality for all. Companies with a good market fit will naturally attract investor interest, but entrepreneurs should also perform their own due diligence when selecting advisors to ensure they’re getting the best advice. The best outcomes are created when both parties prioritise the company and its customers, ensuring the business stands the test of time for generations to come.