Fintech companies are disrupting the banking industry, notably in payments and other digital services. Banks have long recognized the considerable value that Fintechs offer—via cutting-edge technologies, lower operating costs, faster speed to market, top-quality talent and entrepreneurial mindset—and continue to aggressively acquire or partner with them. The volume and value of bank-fintech acquisitions hit all-time highs in 2021, with value skyrocketing 500 percent from 2020 and doubling the previous high in 2018.
2021 was a record year for bank-fintech deals
Bank acquisitions of fintech, 2016‒2021
Despite banks’ enthusiasm for fintechs, however, acquisitions and partnerships frequently don’t meet expectations. There are a number of reasons why:
- Banks’ belief that fintech technology and processes are highly scalable often proves wrong.
- Many banks tend to see their fintech acquisitions as one-off deals instead of as building blocks for product or service platforms.
- Organizational cultures—a key determinant of any deal’s success—are dramatically different for banks and fintechs.
- Too many buyers get stuck in the integration process and lose track of their original deal thesis.
- Regulation is problematic both for fintechs (which aren’t highly regulated while independent) and government regulators, who typically don’t understand what fintechs do and how they work.
How to do it right
When acquiring or partnering with fintechs, banks must strive to avoid the kinds of pitfalls that have limited the success of so many deals. A series of proactive steps will help to boost banks’ odds of success.
The first step is to identify fintech deal candidates. Rather than simply a matter of analyzing financial statements and deal comps, this is about finding candidates that align with the bank’s strategic ambitions and pass a strict set of qualitative and quantitative criteria.
Due diligence should focus on determining whether candidate companies are a good match for the bank in terms of strategic fit, organizational culture, compatibility of operations and technology infrastructure, and geographic location.
During the pre-acquisition period between when the parties agree to a deal and when it closes, banks must pay special attention to making sure that fintechs both understand how the integration process should work and feel that the bank will be the right partner.
Post-acquisition, banks must choose the right integration model. We see three fundamental models differentiated by the level of autonomy granted to the fintech by the bank. These are full autonomy, in which the bank lets the fintech function independently while providing the necessary level of financial and resource support; a hybrid approach in which the fintech starts on a standalone basis and the bank later steps in and implements full integration; and the immediate model, where there is no period of fintech autonomy.
To maximize value, plan carefully—and watch out for common traps
Much can go wrong when banks acquire or partner with fintechs. Cultures often clash; desired scalability might not work; banks can think of deals as isolated rather than part of a broader strategy; buyers can lose track of their deal thesis as integration proceeds; and regulatory concerns may prove overwhelming. In other words, the road to creating and maximizing deal value can be bumpy or even impassable.
Fintechs won’t necessarily solve all the problems that bank acquirers want to solve. That said, banks can get the most out of their fintech transactions by adopting a tough, private equity-like mindset. They must know what the problems can be and conduct thorough due diligence with those problems in mind. Careful planning—and avoiding the common traps—can go a long way toward realizing full value.