Several sectors have evolved much faster than others as a result of the COVID pandemic. Even Brexit, and the challenges and uncertainties it throws up, have accelerated the adoption of certain types of technology. The velocity of change in the world of fintech is particularly apparent.
Financial technology was a growth industry even before the pandemic. The M&A market for fintech was super-active back in 2019, and although there was some slowing down in 2020, as soon as it was clear that deals could be done remotely, activity picked up again.
M&A deals have largely involved financial services incumbents investing in fintech, but plenty of private equity deals have also been taking place. A range of factors has driven these deals, from an acceleration in digitalisation, to the growth of ‘Regtech,’ which can help businesses comply with an ever-evolving regulatory environment in the wake of Brexit.
What does the fintech M&A market look like?
In 2019, deal volumes in the fintech market were healthy and there was an overall deal volume fall of around 25 per cent in 2020, when compared with 2019. However, by the final quarter of 2020, volumes were showing signs of serious resurgence, back close to the volumes recorded in the same quarter of 2019.
More interestingly, perhaps, is the fact that 56 per cent of the deals carried out in 2020 were carried out by trade and financial institutions, up from 43 per cent in 2019. This trend reflected the growing appetite among financial institutions to update their digital offerings, in response to the demand for enhanced user experiences.
In 2021 this appetite for acquisition doesn’t seem to be waning. New research from Lloyds Bank found that 46 per cent of financial firms are planning to increase their fintech capabilities through partnerships and acquisitions over the coming 12 months. This is up from 32 per cent who said the same in 2020.
Digital engagement boosted in locked-down UK
This growing need for established financial services giants to rapidly update their digital offerings reflected growth in digitalisation in 2020. The impact of the pandemic and the fact that we were all having to deal with life in lockdown, working and living remotely, led to an increase in digital engagement.
2020 saw financial institutions re-evaluate their priorities when it comes to their technology, reassessing their legacy tech with a view to meeting new consumer demands and expectations post-COVID.
Incumbents were seeing greater digital engagement among their customers, who were looking for enhanced user experiences. Banks have been losing their grip on their data monopoly with technology like Open Banking becoming mainstream. In turn, consumers have become empowered and open to digital financial experiences and tools.
In order to ensure they are able to provide what consumers want, financial institutions are investing in, acquiring, and partnering with fintechs who can enable them to pivot and diversify when required. It’s generally cheaper for them to buy up fintech firms and teams than it is to develop their own technology.
Regtech helping incumbents to comply with ease
With Brexit and the ongoing uncertainties about the deal with Europe and trade with the rest of the world, financial firms are having to adapt to an ever-changing set of regulations. The growing influence and size of the fintech sector will result in it becoming more heavily regulated. However, it will also have a role to play in helping incumbent financial services businesses to comply with regulations by selling or becoming acquisition targets for its own ‘Regtech’.
Grant Thornton explained: “As the various regulators continue to provide additional focus on data collection, regulatory reporting, financial crime prevention, data protection, advances in tax data collection and reporting; regulated firms need to develop an effective Regtech strategy to respond to the challenges and indeed opportunities this creates".
The Financial Conduct Authority (FCA), which regulates consumer financial services in the UK, defined Regtech as “new technologies to facilitate the delivery of regulatory requirements.” Quite simply, Regtech is a form of fintech that has been developed specifically to help businesses comply with growing regulatory requirements. Regtech that financial incumbents can integrate with their legacy technology is particularly attractive, as is Regtech that is fully scalable to ensure it can cope with growing demands in the coming years.
In a deal that reflects the appetite among banks for fintech that gives them a unique advantage over their peers, Aion Bank acquired ETFmatic in March 2021. Aion Bank is a full service digital bank that started working with ETFmatic in March 2020. ETFmatic provides an end-to-end service to investors in exchange traded funds (ETFs).
Aion Bank charges a monthly fee for a range of banking services, including extra tools for those who need multi-currency accounts, currency exchanges at interbanking exchange rates and international transfers. The acquisition of ETFmatic now helps Aion customers to access superior investment guidance and advice. Their customers fill in a questionnaire, which helps Aion establish their preferred level of risk. They are then offered a portfolio of investment put together by ETFmatic.
Peter Deming, the MD of Aion Bank explained, “In today’s very low interest rate environment, Banks must find additional ways to help customers make their savings work hard. Aion Bank has always operated with this mindset, which is why we offered ETFMatic’s low-cost investment portfolios from our launch. We expect ETFMatic to grow into a leading provider in this space as other European banks follow Aion’s lead.”
Another FinTech sub-sector in rapid growth phase is DeFi (decentralized finance) - a destructive technology that uses blockchain and cryptocurrencies to eliminate financial intermediaries from transactions. We are likely to see a very fast evolution of this technology in the coming months and years, matched no doubt in time by regulation of the sub-sector, the current lack of which has led to it being referred to as ‘cowboy country’. Which is not to say the sector won’t eventually present itself as fierce competition to the more entrenched financial institutions (CeFi - centralised finance), which, unlike DeFi, have considerable overhead and operating expenses to factor into pricing.
This growth in DeFi will naturally be followed by acquisitions, and we are only starting to see evidence of this now in deals like the UK’s Accru Finance being snapped up in an £8.7m deal by Dispersion Holdings. Accru runs https://aqru.io/ which enables investors to earn interest on their crypto holdings.
The ongoing strength of the UK fintech market and the appetite among larger incumbent financial institutions to grab their own slice of the pie is clear to see. We’re emerging from a period when we all learned to appreciate digital tools more than ever. Now, consumer demand is likely to continue to lead the finance industry into a brave new era and it’s those with the technological tools to compete that will find their place at the top.
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