Investment and M&A trends in Fintech

Introduction

At the start of 2020, most industry participants predicted that FinTech M&A and investment would continue to flourish with larger transactions and increased involvement of the so-called Big Tech², helping to bring the industry into maturity. The outlook changed with the onset of Covid-19. FinTech has not been as badly affected by Covid-19 as other sectors. Indeed, some FinTech companies have thrived during the lockdowns. However, reduced economic activity (and reduced fees from processed transactions) has meant many FinTechs have experienced lower revenues. This has led some FinTechs to prioritise cost-saving measures and to re-assess their growth plans. At the same time, many investors and acquirers scaled-back their activity levels. In particular, access to funding for early and growth stage start-ups was adversely affected by the withdrawal from the market of many venture capital firms during the early months of the pandemic.

Although the number of M&A and investment transactions in H1 2020 was higher than the same period in 2019, the aggregate deal value was much lower at $25.6 billion (compared to $38 billion in H1 2019). Both the volume and value of global FinTech M&A transactions were lower during Q1 to Q3 of 2020 compared to the same period in 2019³  with the value of mega-M&A deals in 2020 also being lower compared to 2019⁴, but global VC investment activity was higher at $20 billion (compared with $16.6 billion for H1 2019). The activity level in Q3 2020 was similar to Q1 and Q2, with the deal value and volume for both M&A and fundraising transactions staying largely consistent throughout the period⁵, but Q4 2020 saw an upward movement in both the volume and value of M&A and investment transactions⁶.

North America

The volume of FinTech M&A in North America dropped sharply during H1 2020⁷, likely as a result of potential buyers re-assessing valuations of targets especially at the beginning stage of Covid-19. However, late-stage venture capital and growth equity investments remained steady with the well-established existing FinTech companies continuing to raise money successfully (e.g. Stripe raised $850 million and Chime raised $700 million in its Series E funding round). Robinhood, which became a very popular stock trading platform during the pandemic, closed both Series F and Series G funding rounds during 2020 to raise $1.26 billion in total.

The US has also seen continued IPO activity by FinTech companies⁸, many of which closed in July and August 2020 after a quiet start to the year – indicating the level of growing maturity of the FinTech industry as a whole.

Europe

Unsurprisingly, and driven by the same factors, Europe experienced a similar trend to North America with M&A activity falling significantly in H1 2020⁹  while late-stage venture capital and growth equity activity remained strong. High-profile European FinTechs such as Revolut, Starling Bank, N26, Klarna, and Qonto all successfully completed funding rounds ranging from $115.8 million to $570 million. This level of activity (fuelled by availability of venture capital and growth equity firms’ dry powder built up over the last few years) meant that, except for South America, Europe was the only region to show quarter-on-quarter increase in both funding and deal activity as at the end of Q3 2020¹⁰.

Asia

In Asia, participation of the global Big Tech in FinTech investments has been notable – for instance, Google, Tencent, Facebook, and Paypal all took part in Gojek’s $3 billion Series F round while Facebook also announced a $5.7 billion equity investment in Reliance Jio. Furthermore, consolidation has been the theme in M&A activity with Gojek and Grab actively expanding their payments services in the region via acquisition of robo-advisor Bento and offline payments and cloud POS company Moka respectively. Perhaps the biggest story, however, was the cancellation of what would otherwise have been the biggest IPO by Ant Group for $34.4 billion following the intervention by the Chinese regulators in November 2020. Although some believe this to be an isolated incident, there have also been some commentators who feel that it is indicative of the increasing willingness of the Chinese government to regulate the industry with closer scrutiny.

What next?

The approval and initiation of vaccination for Covid-19 by many countries since December 2020 led to cautious optimism for many who felt that the pandemic was coming to an end. However, the new variants of Covid-19 found in a number of countries across the world and the resulting national lockdowns gave many people a sobering reality check that we are not yet out of the woods. Many experts previously predicted that the epidemiological end of Covid-19 is unlikely to arrive before the second half of 2021¹¹, and the current rate of vaccination suggests that such prediction remains reasonable. Covid-19 (and its lasting effects) will therefore continue to be one of the main themes of the FinTech industry for 2021. The drastic change in the way of life for many people also means that the need for innovation becomes inevitable. This presents new opportunities for FinTechs. For example, the promotion of social distancing and remote transactions has helped many FinTech payment companies to gain traction. The majority of respondents to a survey on the FinTech sector we conducted in mid-2020 felt that, helped by relatively strong performance of FinTechs during the pandemic, consolidation within sub-sectors, and the likelihood of financial institutions looking to acquire FinTechs to improve or enhance their offering, M&A activity would either increase or at least remain constant over the next 24 months¹².

As long as the availability of capital is ensured (and there is no indication that venture capital and growth equity firms’ ability to invest will subside), many investors and financial institutions will be keen to seek out those FinTech companies that offer the most promising outlook in the new world. The ongoing investment activities in FinTech by venture capital and growth equity firms suggests that the industry will continue to grow and mature. The strong M&A activity in Q4 2020 suggests that we will see a return to previous levels of M&A over the course of 2021.