2021 was a massive year in terms of fintech mergers and acquisitions. But so far, 2022 looks to be even more important.
According to FT Partners, a major investment firm specializing in financial technology, approximately $348 billion worth of deals were announced in 2021 alone. Why? In many cases, this was because of high exits among investors. These exits then led the investors to recoup their initial expenses, giving them extra capital for new acquisitions, mergers, and other deals.
However, 2021 was also a year of record levels of funding, partially because of stimulus checks and other economic conditions brought on by the COVID-19 pandemic. Fintech adoption is on the rise, meaning major mergers and acquisitions are on the horizon. 2021 saw fintech companies raise approximately $50 billion in just the US, which was more than twice as much they raised in 2020.
What’s driving all of these mergers, acquisitions, and other economic activities? Today, let’s break down five main reasons why fintech mergers and acquisitions are increasing with time.
Neobank Differentiation
Firstly, so-called “neobanks” are attempting to differentiate themselves from traditional financial tools and services. Of course, many modern neobanks offer primarily the same services or tools to their users, such as mobile banking experiences, no or low fees, and no overdraft penalties. Many also deposit customer wages about two days earlier than other financial institutions.
Lots of companies are merging or acquiring competitors. For example, challenger bank One Finance and Even, an early wage access provider that helps employees get their money fast, have merged into a single company called One. Besides that, the merger was bolstered by the involvement of Walmart, which itself brings in billions of dollars of capital each year.
This neobank/combined early payment access service will let employees get their earnings on-demand or much more quickly. It’ll also provide the other benefits of neobanks to a wider population of users than ever before. This is just one example of how neobanks are looking to cement themselves as major fintech tools for the financial markets of the future.
Market Share Pursuits from Buy Now/Pay Later Providers
Buy now/pay later providers are popular fintech services and tools. But these companies are increasing their activity as they forge partnerships and add new features to their services and apps. Why? Simply put, to reduce competition from larger institutions and each other.
For example, in September, Goldman Sachs announced that it would purchase the point-of-sale loan provider GreenSky. For another example, the Australian-based buy now/pay later provider Zip announced the purchase of its main US rival, Sezzle. Even companies like PayPal have decided to pursue greater chunks of global market share – this electronic payment firm purchased a Japanese BNPL company to improve its global reach.
All of this is because fintech companies are still attempting to position themselves for long-term success. Capitalizing on major market share is one way businesses can ensure their competitors have little maneuvering room. This trend is unlikely to taper off anytime soon.
Since fintech companies like buy now/pay later providers must compete with each other and with older financial institutions, any company that wants to thrive can’t rest on its laurels.
Challenger Banks Seek Control
In this day and age, much merging and acquisition activity comes from challenger banks (i.e., banks that do not have a major market share but are challenging traditional institutional firms). To further their market stability, many challenger banks are purchasing traditional banks rather than going the normal route of buying a national bank charter, which is very expensive and time-consuming.
Fintech companies that purchase charters have additional control over customer relationships. On top of that, they no longer have to partner with or pay fees to established, licensed institutions. One great example of this trend is seen with SoFi Technologies.
In October 2020, SoFi got preliminary approval for its bank application from the Office of the Comptroller of Currency. In March 2021, SoFi then announced its acquisition of Golden Pacific Bancorp and its Sacramento-based subsidiary bank.
The acquisition was finished in February, granting SoFi Technologies about $5.3 billion worth of assets. It is just the first step in SoFi’s march to become a traditional banking institution. We expect other fintech organizations to follow these steps to one degree or another as they cement themselves as major financial tools.
Cryptocurrency Scaling
Cryptocurrency’s popularity has been increasing wildly, especially during the COVID-19 pandemic of the last two years. As maturing cryptocurrency firms stabilize, they also look to scale and grow, which requires additional resources and capital. These needs, in turn, have led to more mergers and acquisitions.
For example, Galaxy Digital, a merchant bank investing in cryptocurrencies, blockchain technology, and digital assets, has been looking for a company that would assist its transition into a full-scale, full-service cryptocurrency platform.
To that end, it’s looking at a partnership and purchase of BitGo. BitGo develops a lot of digital asset infrastructures, such as crypto wallets and custody tech. Between the two companies, Galaxy Digital will be able to offer trading, crypto custody, and even crypto asset management. They’ll also be in a prime position to offer crypto investment advice and services, lending and tax services, etc.
This is part of a broader trend as cryptocurrency becomes a major part of finances worldwide. In the future, we may see the speculative part of the crypto market take a backseat to the practical benefits that crypto tokens bring to worldwide finance and money transfers.
Growth of Fintech Geographic Reach
Last but not least, fintech companies have been trying to grow their geographic reach. PayPal demonstrates this trend better than any other company.
Over the last decade, PayPal has acquired tons of companies, such as Venmo in 2013, Xoom in 2015, and Honey in 2019. 2021 saw PayPal add a new business to its conglomerate in the Japanese buy now/pay later company Paidy.
Why the sudden rush of acquisitions? It all stems from PayPal’s desire to become the global go-to choice for electronic wallets or funds transfers. They’ve made many other movements and acquisitions over the last few years to facilitate this. For instance, PayPal now accepts and facilitates the transfer of Bitcoins between certain users.
PayPal also became the first digital wallet to integrate with the Japanese Paidy Link in 2021. Through this service, PayPal can allow its users to connect digital wallets to Paidy accounts. For now, this primarily benefits Japanese users, who can shop at PayPal merchants worldwide. But it indicates a greater trend and focus on enabling easier, more flexible payment options for worldwide customers.
Summary
Ultimately, fintech mergers and acquisitions are speeding and heating up. In many ways, this is a side effect of the fintech industry’s maturity and the final steps of many of the tech evolutions we’ve seen over the last two decades. Time will tell which companies benefit most from these mergers and acquisitions and what new players emerge in the future.