In 2016, we recorded a low-volume of mergers and acquisitions involving Fintech startups and established juggernauts in the finance industry. Fintech startups also had to grapple with a low-funding environment as VCs became more skeptical about putting money into Fintech. In fact, by the third quarter of 2016, fintech startups saw the volume of deals dropping to $900M, which marks the lowest inflow into the fintech startup market in five quarters.
It is easy to assume that fintech startups are in dire need of funding and VCs might leverage the desperation to swoop in for juicy deals. However, the reality is that traditional financial firms are desperately in need for fintech products even though they may not admit it freely. This article seeks to provide insight on why traditional finance firms might be keen on increasing their merger and acquisition appetite for fintech firms in the remaining part of this year.
Forget about the past, here’s what the future holds for fintech
Many people still hold the fallacious notion that the fintech industry is another passing fad. Some investors are erroneously assuming that the loud buzz about Fintech is akin to the dot-com hype which eventually ended in a burst bubble that bankrupted many investors.
However, one of the main factors that differentials fintech and dead dotcom firms is that the Fintech firms of today actually have tangible products and services. Fintech startups now offer a wide array of innovative financial products and services such as Peer-to-Peer Lending, Cryptocurrency, Robo-Advisor, and automated savings among others. Traditional financial firms are slowly losing their customer base to smaller and nimbler fintech startups.
The first couple of months in 2017 is setting the stage for renewed interest in VC-backed funding and increased stakes from traditional financial firms in Fintech. To start with, traditional financial firms are getting a jarring awareness to the meteoric rise of fintech firms. Wall Street investment managers haven’t still understood how a Robo-Advisor firm such as Betterment could boast $7 billion in assets under management within such as short time.
Increased M&A activity in Fintech will become the norm
Traditional finance houses are becoming more open to the idea getting on the fintech bandwagon because they know that they can’t fight the trend – they’ll eventually become obsolete if they remain entrenched in the traditional models of the finance industry.
Interestingly, traditional financial institutions are also developing increased appreciation of the volume of insight, resourcefulness, data, and hard work required to build successful fintech products. In the years gone by, traditional financial institutions have mostly looked at fintech startups with a measure of amused indifference. The banks erroneously assumed that they could leverage their strong financial positions to turn out amazing fintech products overnight when the need arises.
However, banks and other old financial institutions are learning the hard way that it takes more than money to build compelling Fintech products. Hence, traditional financial firms will be more open to snapping up fintech startups in 2017. Banks now think that it is smarter to own a stake in the disruptive fintech products instead of pitching tents to fight a lost battle.
Somesh Khanna, head of financial services at McKinsey aptly sums up the reason for growing interest of traditional finance firms in the fintech market using the following words – banks “have been humbled by the speed it takes [companies like Betterment] to get to $7 billion in assets. I see more humility creeping in, and more interest in partnering.”