How mobility has contributed to the explosive rise in Fintech M&A

Introduction

  1. No industry has seen rapid change in their businesses as Financial services industry.The Financial services industry has been strong adopters of using technology as an enabler to deliver better customer services.From core banking solutions to online banking, Financial services has used technology to automate their backoffice operations, streamline their processes and increase productivity.
  2. Advent of digital has contributed to the rise of Fintech companies, which use technology as a business model to provide better customer experience.Rise of mobility due to availability of multiple devices like laptop, tablets and mobile to connect customers with the bank and do transactions has completely changed the way customers are interacting with the bank.
  3. Customers need not visit bank/contact bank representatives for any services.Traditional call center operations and IVR are replaced by chatbots which are acting as virtual assistants to support customers in their service request.Fintech companies use latest Technologies like Artificial Intelligence and Machine learning to increase productivity by automating the backoffice manual operations.In addition, Fintech are also providing personalized services to customers through offers, value added services and pushing right product to customer at right time, thus improving customer experience.Due to the usage of technology as a business model, the overall cost of transaction is cheaper for a Fintech compared to a legacy financial institution.The Fintech transfers this low cost of doing business to customers.Payment companies like Square and PayPal have disrupted the payment business model by capturing more customers through their efficient business model.
  4. Rise of Blockchains as a model to authenticate transactions using cryptocurrency has revolutionized the banking services.

Rise of Fintech M&A

  1. Demand for Fintech has resulted in legacy companies investing in Fintech through M&A, Strategic partnerships to protect themselves from digital disruption.More banks are having strategic partnerships with Fintechs to automate their backoffice operations, integrate their silos businesses by modernizing their legacy applications through usage of technology.Some banks have been hiring employees from fintech and leverage their skillsets to build a digital strategy and modernize their technology landscape.
  2. Disruption of Fintech have also resulted in consolidation of legacy companies to protect their market share.The rationale behind consolidation seems to be protecting their market share, reduce costs by consolidation.Savings realized due to the cost synergies from the acquisition can be used by legacy companies to invest in startups doing tuck-in acquisitions.Recent examples of FIS acquisition of Worldpay, Fiserv acquisition of First Data and Global Payments acquisition of TSYS are based on the sound rationale of scale acquisitions by protecting customers/market share, defend against digital disruptions from Fintechs like Paypal/Square and save costs due to consolidation.

Impact of Regulatory and Compliance on Fintech boom

  1. Regulations and Compliance play a major role in Financial services.With implementation of Second Payments Services directive (PSD2), account providers in Europe can share the personal data of customers to third party to increase competition.This has affected intermediaries like PayPal which acts an interface between merchants and banks.With PSD2, the merchants can directly communicate with banks.Fintech are using this opportunity to build technology interface to enable this communication.Banks are using Fintech to support them in building a technology infrastructure to directly interface with merchants.This has resulted in Fintech acting as partners to bank as against competitors before.

Issues in Fintech acquisitions

  1. Fintech companies use technology as an operating model to generate revenues.These companies are entrepreneurial and have a different cultural fitment against legacy companies that are more bureaucratic in culture.
  2. Hence integrating fintechs post acquisition is a challenge to realize synergies.

Conclusion

  1. With customers demanding digital experience, more banks and payment companies are partnering/acquiring fintech companies to modernize their legacy systems and increase transparency between systems to deliver rich customer experience.
  2. Data is becoming the biggest asset for every bank and each banks looks to leverage data to gather insights to deliver personalized services to customers.
  3. As corporates look to innovate and use Technologies to reduce its operations cost, improve productivity and increase customer experience, Fintech M&A/Strategic partnerships would continue to increase in near future.


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