Securing the perfect digital partnership

Jack Whitt

Jack Whitt

Principal, Advisory Strategy, KPMG US

+1 703-286-8807

Marc Bromstad

Marc Bromstad

Director, Deal Advisory and Strategy, KPMG US

+1 404-222-7226

What’s going on with fintechs?

M&A activity continues to surge

M&A activity, including cross-border deals, will likely grow as corporates look to expand their capabilities and offerings.

Big techs and fintechs embrace partnerships

Partnership models remain a critical means for companies looking to expand their service offerings.

Cybersecurity gains greater prominence 

With the explosion in digital transactions, fintech investors are focusing increasingly on cybersecurity. Fraud management, KYC, and password-less security also require attention.

B2B services rising across fintech sectors

B2B services such as banking-as-a-service are showing up on investor radar. We expect to see more embedded finance offerings as nonbank organizations strive to integrate financial services.

Digital behaviors of consumers accelerated sharply during the pandemic, especially within financial services. A recent KPMG survey found that 77 percent of CEOs across industries recognize this change and have been adopting aggressive digital investment strategies. So, banks are looking to fintechs to help transform existing business models, automate, and bring invaluable specialist and technological knowledge to the table.

In many cases, banks are opting for partnerships with fintechs rather than acquisitions. This is a particularly useful approach for midsize banks (with assets of up to $200 billion), which are unable to match the digital investments of larger banks or the agility of a fintech. These banks find partnerships to be both faster and more cost effective than building or buying the digital capabilities they need. Whether through partnerships or acquisitions, deals with fintechs require careful diligence. The Federal Reserve, OCC, and FDIC recently issued guidance for community banks on how to conduct due diligence for assessing a fintech’s risks and qualifications. This guidance focuses on six topics:

  • The compliance culture of a fintech and its ability
  • Business experience and qualification
  • Financial condition
  • Legal and regulatory compliance
  • Information security
  • Operational resilience

Based on our experience in building bank-fintech partnerships, KPMG believes these additional factors should be considered to increase the likelihood of a successful relationship:

  • The compliance culture of a fintech and its ability or willingness to adapt to the regulatory environment of a bank
  • Current data repositories (structured and unstructured data) of a fintech, to determine if an appropriate level of detail exists to perform full reporting and management of risks to the bank partner
  • Cybersecurity and operational resiliency, with tabletop testing of professed capabilities to identify any issues and potential remediation needs
  • Structure of the operating model, as well as conversations with a fintech management team about its role and potential to remain in case of an acquisition