Seven months into a global pandemic, the harsh lessons learned are creating a sweet spot for FinTech companies and start-ups and an expected uptick in deals involving US tech giants. And while lagging 2019 levels, we’ve seen US-based deal activity rise 3% in 2020. On the M&A side we saw big acquisitions with FIS acquiring Worldpay for $35Bn and Fiserv acquiring First Data for $41bn. Fundraising remains strong with $500m plus mega rounds(The FinTech Sector).
When the world turned upside down, organisations were unprepared for the scale of the disruption to their operations: the unthinkable became possible and a tech revolution of epic proportions began.
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Afterall, who might have predicted only a year ago that technology would become the hero in a world where ‘normal’ no longer existed?
As technology suddenly demonstrated its vital role in workforce productivity, it provided a sharp wake up call for the C-suite and dramatically accelerated the impetus for change. Now, incumbents such as banks and insurance companies are increasingly looking to accelerate digitisation. Indeed, the cost of maintaining old legacy systems is a burden and the agile offerings provided by FinTechs have become increasingly attractive, particularly those providing solutions in the following areas - Software as a Service, Infrastructure as a Service and Platform as a Service. In addition to cost reduction, these offerings bring flexibility and agility that firms need to become digital businesses, enabling them to compete with data led rival tech giants like Amazon and Ant Financial.
One large incumbent told us that they are looking to create an ecosystem of solutions providers and plan to completely replace their old costly legacy systems. The change in thinking is dramatic as they recognise the direction of travel, and they said small companies that approached them two or three years ago have now become the new well-funded Rock Stars, posing a real threat for those that don’t embrace change and revolutionise their operations.
Digital transformation is now the most important priority for business worldwide; it will drive future growth and appetite for acquisition of tech companies globally, especially those in FinTech.
FinTech & InsurTech companies are leading the way
With its unrelenting appetite for growth and innovation, the FinTech sector is becoming fiercely acquisitive. Capitalising on the latent demand for digital solutions, and pursuing the deep tech and disruptive companies that fill gaps in their product suite, we anticipate M&A activity will only grow as well funded FinTechs with huge war chests to invest in start-ups fuel investment and M&A activities. A good case in point is the recent acquisition of Canadian payments company Mobeewave by Apple, who we introduced to the global giant, initially for a Series B investment, proving that start-ups can and are being acquired by the largest players for $100m+, if they are of strategic value.
Other examples abound. In one of the largest US financings of 2020, San Francisco-based payments company Stripe raised $600m, boosting its valuation to an eyewatering $36bn, making it one of the highest-valued US start-ups. Plaid, which creates APIs that allow popular FinTech applications to connect with traditional bank accounts, raised a total investment of $309m ahead of its $5.3bn sale to VISA in 2020. Meanwhile, payments start-up Marqueta raised an additional $150m in May 2020; Lending Club became the first FinTech to acquire a US regulated bank; and Intuit reported it was to buy Credit Karma for $7.1bn to create a financial data giant.
US wealth managers are also treading new ground: Robinhood, a California-based wealth manager, ranked in the Top 5 California deals of the year-to-date after raising $1.5bn in total funding. The platform, which has 10m users in the US, offers clients commission-free investment. The smaller players with war chests of $200m plus in funding, like Betterment and Wealthfront, also continue to grow.
Across the Pond in the UK, eCommerce payment specialist Checkout.com continued its rapid growth closing a $150m round in Q2 of 2020 and tripling its valuation within in a year to become one of Europe’s most valuable VC backed companies. It was famous for being the biggest Series A ticket for a whopping $230m in May last year, which was unprecedented for a start-up.
Intriguingly, a new report released last month from Robert Walters and Vacancy Soft, shows that London is on track to house the same number of FinTech Unicorns as San Francisco, which is currently the world’s leading city for firms in the sector valued at over $1bn.
Of the 29 FinTech Unicorns globally, nine are based in San Francisco, with seven housed in London. The report predicts that London will catch up with San Francisco as early as this year. The UK also boasts the highest consumer fintech adoption rate of any western country, with 52% of British consumers using fintech services(The FinTech Sector ) against a global average of 33%. So, it’s no surprise to hear that Silicon Valley giant – and early investor in Google and Apple – Sequoia Capital is rumoured to be opening a London office.
In InsurTech, established players are looking to acquire smaller players as they use data and AI to boost revenues and cut costs. In one of the largest deals to complete in recent years, tech-driven insurance start-up Lemonade Inc IPO’d, its shares doubling overnight from $29 per share to $60, while Prudential Financial Inc acquired four-year-old online insurance start-up Assurance IQ Inc for a total consideration of $3.5bn. Such outcomes are breathtaking and demonstrate the value of tech-led digital offerings.
On the back of Lemonade, the FinTech IPOs keep coming, with Ant Financial poised for one of 2020’s biggest IPOs. Yeahka, Incino, Accolade, Dunn and Bradstreet, Select Quote and Shift4, provide further evidence of IPO deals done, and the accelerating drive for the incumbents to embrace digital transformation and deliver their customers data-led technology offerings. It’s a wake call for those that have not already embraced digitalisation(The FinTech Sector ).
Connectivity
On the US West Coast, the ‘Google effect’ is still powerful and the combined pull of tech giants Stanford University, and VC density, means international FinTech companies will need a presence there – no question. The draw of this ecosystem is one of the drivers of ICON’s decision to open an office in San Francisco. Organisations hungry for acquisition or investment, should take care in selecting an experienced cross-border adviser with deep sector knowledge, like ICON, that works with clients on international M&A and capital raising to deliver access to specialised funding from the market’s most sophisticated investors.
Global trends are driving cross-border transactions as online activity creates demand for more advanced platforms and technology solutions. Further evidence that FinTech is leading this trend, establishing it as the most connected global ecosystem, came only in June when payment provider Beyonic was acquired by African FinTech giant MSF Africa in one of the largest transactions of its type. It’s a trend that we see continuing.
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The global pandemic has changed habits for good: the tectonic plates are shifting as digital transformation drives massive change and those that ignore it face the significant risk of failure. The question is, are you willing to take that risk?
