It’s been a long, hot summer of fintech M&A activity – here’s what to expect in the final months of 2023

Posted on: September 14th, 2023 by Morgan Arnold

The second half of the year kicked off with a flurry of fintech M&A, with more than half of the $500 million+ deals so far seen in 2023 having taken place in just June and July.

In the past few months alone, money-saving app Snoop has been scooped up by Vanquis Banking Group; Visa splashed out $1bn to acquire Brazilian startup Pismo; and headlines have been dominated by rumours that Monzo is plotting to purchase Danish challenger bank rival Lunar.

The general consensus appears to suggest that the macroeconomic landscape – with sky high interest rates, widespread deceleration in economic growth and VC funding levels experiencing the biggest dip in years (to the tune of a 49% July YoY depreciation) – is leading many fintechs to seek out a speedy exit. Those companies that had high valuations just a couple of years ago are now finding themselves at the end of their runway, and struggling to raise capital without the  risk of lowering their valuations. And those with more funding to play with are capitalising on that fact, knowing they can grab a bargain in tricky market conditions.

As a result, we’re seeing an increased willingness from smaller outfits to merge with or become acquired by their larger and often better-funded counterparts. It’s something we’re increasingly hearing from our clients too, with many having acquired more boutique firms – often direct competitors located in different markets – as a means to growth and/or customer acquisition in an otherwise testing marketplace. Fintechs that have “come of age” in the last few years are flexing their M&A muscles to strengthen revenue streams and set themselves on a stronger path to profitability.

But whilst the second half of the year has started with a flurry of M&A, activity is still down on a year-on-year basis. According to S&P Global Market Intelligence, 128 fintech M&A transactions were recorded in the first half of 2023, compared to almost double in January to June of 2022, at 248.

So what does the closing third act of 2023 hold when it comes to fintech M&A?

AI M&A to rise up the ranks

The segment which is perhaps most ripe for consolidation by the fintech sector is AI. As with the emergence of any new technology, incumbents are grappling with whether to “buy or build” their generative AI capabilities. And for many, buying smaller outfits is the most efficient and profitable answer.

Take Ramp, for example, who in June acquired Cohere.io, an AI-led customer support platform, for an undisclosed sum. Or neobank Albo, who purchased Delt.ai, enabling it to become the only digital bank to offer debit and credit products for both consumers and SMBs.

This spate of acquisitions demonstrates two things: firstly, that the value of any company able to innovate and build large-scale generative models is likely to soon peak – that’s if it hasn’t already. Secondly, that many firms believe this technology will soon play an absolutely central role to their offerings and processes.

But at the same time, AI is also shaking up the fintech M&A market by (in theory) improving efficiency when it comes to deal sourcing, valuation, due diligence and post-merger processes – something to also keep an eye on.

Other segments which are similarly crowded, in which we can expect to see further M&A activity, include BNPL (think along the lines of Square’s acquisition of AfterPay) and neobanking (see MHP Group client Papara’s acquisition of Spain-based Rebellion, or Monzo’s eyeing up of Lunar).

Floodgates are opening

There is certainly a “wait-and-see” sentiment lingering in the fintech sector, as potential sellers wait on the sidelines to gauge the correct timing to make a move. On the other hand, anecdotally speaking, we’re seeing that many buyers are waiting for more favourable valuations to take hold, for example through more downrounds which we saw plenty of in Q1.

And sellers and buyers alike will want to avoid getting washed out in a crowded market once deal flow does resume to normal levels – so the benefits of being a first mover should also not be underestimated.

In that sense, the floodgates have arguably already opened and if we are to take June and July as an example, we should expect the pace of M&A activity to pick up even more towards the end of the year and beyond.

Higher interest rates will continue to dictate the market

The M&A shopping spree which characterised mid-2020 to mid-2022 was partly driven by firms wishing to take advantage of low interest rates, so it’s little surprise that activity is down compared to last year.

But most central banks are believed to be nearing the end of their most aggressive interest rate rising cycles in decades in response to soaring inflation, with the Fed hiking to 5.5% in August and markets pricing in a fifteenth – and potentially final – rise by the Bank of England this month.

Interest rates are intrinsically tied to M&A deals as many buyers finance all or a portion of their purchase of target companies with debt. So as the economic landscape stabilises, interest rates level out and monetary policy (hopefully) continues to curb inflation, it’s likely that buyers will feel more comfortable spending their money. It’s unlikely we’ll reach 2020 levels anytime soon, but should rates decrease, we can expect to see another flood of deals to the market.

+++

The reality is, as the gap between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept narrows, we can expect to see even more fintech M&A in the remaining months of this year. The next few months will prove to be a critical period in which we will be able to tell which players can thrive, and which might crumble under market pressure.

This will be compounded by continued caution from venture capital firms who are reportedly sitting on $271 billion in dry powder, as well as zombie IPO and SPAC markets – not fully dead thanks to CAB Payments’ IPO in early July and Ashington Innovation’s London float in June.

The result will be a fintech segment that looks very different in 2024, with fewer players but many with more diverse offerings and broader global reach.

The UK government’s Edinburgh Reforms – a regulatory revolution for financial services?

Posted on: December 14th, 2022 by Morgan Arnold

Dubbed “the Edinburgh Reforms”, the measures aim to “seize the benefits of Brexit” by delivering what many are touting to be the biggest shake-up in the financial sector for 30 years. The reforms mark the next stage in what Rishi Sunak termed the UK’s “Big Bang 2.0” which seeks to unlock investment opportunities, turbocharge growth and deliver a “smarter” and “home grown” framework for the UK.

The Chancellor highlighted the UK government’s ambition to cultivate a financial services sector that is “open, sustainable and technologically advanced”, and these are key themes that are threaded throughout the regulatory proposals. But will they really transform the competitiveness of the UK’s financial services sector? Is now the right time to be ripping up the regulatory rulebook? And what have business leaders and industry bodies made of the announcement?

A “major step” forwards or “a race to the bottom”?

So what has been reaction to Hunt’s announcement looked like so far? Industry figures have largely welcomed the reforms and recognised the need for the UK to enhance its status as a competitive financial services hub and foster innovation to make it a welcoming prospect for overseas investors. However, others have raised concerns that the UK was at risk of forgetting the lessons of the global financial crisis by doing away with regulation which underpins the stability of the sector.

Bank of England Governor Andrew Bailey has poured cold water on the plans, arguing the government is wrong in its belief that “we don’t need the regulations that we had post the financial crisis”. And whilst the shadow City Minister Tulip Siddiq called the proposed reforms “a race to the bottom” which would “introduce more risk and potentially more financial instability”, CEO of industry body Innovate Finance claimed the measures would “maintain UK competitiveness [and] enhance the UK as a positive investment environment”. Likewise, UK Finance chief executive David Postings labelled the package as “comprehensive” and “a major step in ensuring the sector remains strong and internationally competitive”.

It’s clear that the reforms can be described as an ambitious recalibration of the UK’s financial services regulatory regime, prioritising competitiveness and growth. By casting aside a number of unfavoured EU directives, the UK government is hoping to finally unlock a new chapter for the sector.

But despite being trailed in the media in recent weeks, it would be fair to say that these measures are more than most firms were expecting to get for Christmas. Businesses will therefore need to make sure they are on the front foot, by getting ahead of any changes they might be subject to and making sure they communicate clearly and in good time with all stakeholders about what this will mean for them individually – including customers, employees and investors. And with several of the announcements announced as proposed consultations, it remains to be seen what form they will take over the coming months once parliamentarians, regulators and the industry have had their say.

We’ve broken down the proposed changes and industry reaction to Hunt’s announcement here.

2022 In Review: Fintech’s Reckoning?

Posted on: December 1st, 2022 by Morgan Arnold

2022 has been characterised by a stark amount of change in the European tech startup sector. From mass layoffs (Meta and Twitter in the last month alone) to a boom in climate-focussed firms, VCs holding back on investment to shock takeovers of some of the world’s biggest social media platforms – there has been little shortage of news.

And it follows that as the landscape has dramatically changed, so has conversation around Europe’s fintech darlings. Where once investors pursued aggressive growth, the tide has turned and appetite is now geared much more toward implementing longevity and sustainability.

As the year nears its end, we take a look at the three conversations that have been most prevalent in the ecosystem in the last 12 months. 

In crisis comes clarity

“Crisis brings clarity to what’s really important,” said Michelle You, cofounder and CEO of climate tech company Supercritical, at this year’s Sifted Summit.

Many firms have learnt this the hard way. It’s a well-known fact that tech startups have not benefitted from the same seemingly endless flow of VC cash this year as in 2021, as the market has hardened, recession has creeped into the vernacular and investor scrutiny has increased. As a result, many have had to pivot their growth strategies in order to survive.

This pivot means that businesses are being forced to think about what works in “the real world” in the absence of external funding to keep them afloat. As a result, they have needed to become crystal clear about: who their customers are, as well as their wants and needs; what their mission and vision is, and why this really matters in the current market downturn; and how each staff member can provide impact whilst working towards this united objective.

This “clarity” has, for many, resulted in job cuts. For others, it has slowed international expansion or product rollout plans. But as we head into 2023, this clarity of mission also presents many fintech firms with the opportunity to scale efficiently and creatively, whilst clearly communicating their purpose and permission to play. Taking the internal chaos caused by Twitter’s recent redundancies as a case study, good communication with all stakeholders has one of the most important roles to play in this switch.

Investors now want to see profitability, rather than growth at all costs

Linked to a refocus of purpose, the presiding sentiment shared at Sifted Summit this year made clear that investors are now hyper-focussed on profitability and longevity as opposed to the aggressive growth witnessed in 2020 and 2021. This is to be somewhat expected in a year that has seen VC funding into European startups fall to $16 billion in Q3, when compared with the $28 billion deployed in the same timeframe in 2021.

“The promise of jam tomorrow won’t cut it in today’s market,” as Fronted CEO Jamie Campbell remarked at the Summit.

Consensus amongst CEOs, founders and executives shows investors are demanding considerable progress from the businesses they have invested in, and proof from those wanting to join VC’s portfolios that they have a clear roadmap to profitability – if not already generating sizeable profits. Many have realised that hyper growth is futile if it’s not also sustainable.

Being able to clearly communicate credibility and difference has therefore been vital and will continue to be so in the next 12-18 months.

Green is the future of tech

One tech subsector that has arguably been 2022’s outlier is climate tech. Despite the overall slowdown seen in tech, climate tech investment is seeing considerable growth across Europe and beyond. According to a recent PWC report, climate tech funding this year has so far accounted for over a quarter of every venture dollar invested in 2022.

We’re expecting to see this funding ratio close even further in the next 12 months as the luxury of time wanes and impetus for net zero solutions and sustainable reporting frameworks continues to rise. Starting in 2023, countries signed up to the Paris Agreement will be required to report transparently on actions taken and progress made towards climate change mitigation, adaptation measures and support provided or received. The potential for impact that climate tech startups have in helping governments and corporates reach their sustainable development goals has yet to be fully realised.

The robust results of climate tech funding rounds so far are encouraging, but they fall some way short of the investment needed to tackle climate change. The task for climate tech firms will therefore be building momentum, resilience and investor confidence in the months ahead. Clear, coherent positioning in an increasingly complex and competitive marketplace will prove paramount.

What remains is a positive outlook for the tech startup sector in 2023. This year has brought clarity to many and shown who has been able to shift to new demands, whilst interest and technological uptake has continued to grow in many regions of the world. This expansion, combined with the development of a number of subsectors, more investment in less “mature” jurisdictions and surging corporate interest is expected to boost investment as we enter 2023. At the same time, those that have had to undertake job cuts, product pivots and market withdrawals are likely to emerge stronger and leaner with a renewed focus for the year ahead. And with reports that VCs are sitting on $290 billion worth of committed capital, we might just see the sector re-energised in a return to its pre-2022 glory days.