Over the last few years, banks have been increasingly acquiring fintech companies.
In this article, we will explore:
- Why these acquisitions are happening
- Benefits and risks for banks
- Case studies of successful fintech acquisitions by banks.
Why Are Banks Buying Fintechs?
Banks have long been the primary way for people to access financial products and services. However, with the rise of technology, fintech companies have emerged and are changing the way people interact with money.
We are going to show you 6 reasons why banks are buying Fintechs:
1. The Importance of Fintech Acquisitions for Banks
According to Reuters, falling valuations of fintech firms and rising interest rates have presented an opportunity for banks to acquire these companies and improve their technology for digital banking and other financial inclusion services.
Fintech acquisitions allow banks
- To meet the demand for digital financial products and services
- Revitalize their brands
- Offer customers faster and more convenient ways to manage their finances.
2. The Problem of Banks buying Fintechs
Despite the potential benefits of fintech acquisitions, banks need to be cautious when partnering with fintech companies. According to KPMG, banks should identify candidates that align with their strategic ambitions and pass a strict set of 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.
Banks must also choose the right integration model and avoid losing track of their original deal thesis to maximize the value of fintech acquisitions.
To understand why banks are buying fintechs, we will explore the reasons behind it, the process of acquiring fintech companies, and the benefits and risks for banks.
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3. Falling Valuations of Fintech Firms
According to Reuters, US banks are now looking to acquire fintech companies due to falling valuations and rising interest rates. The valuations of listed fintech firms have fallen 70% in 2022, while the valuations of banks in the S&P 500 are down 33%.
This presents an opportunity for banks to buy companies and improve their technology for digital banking and other financial services. This is a contrast to previous years when finance chiefs were hesitant to acquire companies they deemed too expensive.
4. Revitalization of Bank Brands
According to ITeChart, fintech acquisitions allow banks to revitalize their brands and offer customers faster and more convenient ways to manage their finances. By acquiring fintech companies, banks are able to keep up with the fast-paced nature of the fintech industry and remain relevant to their customers.
5. Meeting the Demand for Digital Financial Products and Services
As people become increasingly digital-savvy, the demand for digital financial products and services has skyrocketed. According to ITeChart, banks are acquiring fintech companies to meet the demand for these products and services.
By doing so, banks are able to offer customers a wider range of services while also staying competitive in the market.
6. Healthy Competition in the Industry
According to ITeChart, fintechs are also acquiring banks to challenge established players and innovate new products and services, leading to healthy competition in the industry.
As a result, banks are also acquiring fintech companies to stay ahead of the curve and remain relevant to their customers.
In the next section, we will explore how banks are acquiring fintech companies and the importance of choosing the right integration model.
How Are Banks Acquiring Fintech Companies?
According to KPMG, banks must identify candidates that align with their strategic ambitions and pass a strict set of criteria when acquiring fintech companies.
Due diligence should focus on determining whether candidate companies are a good match for the bank in terms of:
- Strategic fit: is important to ensure that the acquisition supports the bank’s strategic ambitions.
- Organizational culture, : to ensure that the fintech company’s culture aligns with the bank’s culture.
- Compatibility of operations an and technology infrastructure,
- Geographic location. : to ensure that the acquisition is compliant with local laws and regulations.
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Integration Model for Banks to acquire Fintechs
Choosing the right integration model is crucial for the success of fintech acquisitions by banks. According to KPMG, there are several options for integration models, including:
- Full integration: The fintech company is fully integrated into the bank’s operations.
- Partial integration: The fintech company operates as a standalone subsidiary of the bank.
- Joint venture: The bank and the fintech company create a new entity to operate in a specific market or with a specific product.
- Strategic partnership: The bank and the fintech company collaborate on specific products or services without fully integrating.
Due Diligence and Strict Set of Criteria
Due diligence and a strict set of criteria are important for banks when acquiring fintech companies. The criteria should ensure that candidate companies are a good match for the bank in terms of the bank’s strategic ambitions.
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Benefits of Fintech Acquisitions for Banks
1. Improved Technology for Digital Banking and Other Financial Services
One of the key benefits of fintech acquisitions for banks is the improved technology for digital banking and other financial services.
According to Reuters, acquiring fintech companies allows banks to improve their technology and offer customers faster and more convenient ways to manage their finances.
This is particularly important as more people are turning to digital banking and other financial services.
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2. Revitalization of Bank Brands
Another benefit of fintech acquisitions for banks is the revitalization of bank brands.
According to ITeChart, acquiring fintech companies allows banks to revitalize their brands and offer customers faster and more convenient ways to manage their finances.
By doing so, banks are able to keep up with the fast-paced nature of the fintech industry and remain relevant to their customers.
3. Meeting the Demand for Digital Financial Products and Services
As people become increasingly digital-savvy, the demand for digital financial products and services has skyrocketed.
According to ITeChart, acquiring fintech companies allows banks to meet the demand for these products and services.
By doing so, banks are able to offer customers a wider range of services while also staying competitive in the market.
Risks of Fintech Acquisitions for Banks
1. Integration Challenges
Acquiring fintech companies can present integration challenges for banks. According to KPMG, banks must choose the right integration model to ensure the success of the acquisition. Banks must also ensure that the fintech company’s operations and technology can be integrated with the bank’s operations and technology.
2. Regulatory Scrutiny
Acquiring fintech companies can also attract regulatory scrutiny. According to S&P Global, bank regulators remain cautious about the risks involved in fintech acquisitions. While recent approvals have shown that such deals can be executed quickly,
Banks regulators are still cautious about the risks connected to fintech acquisitions, according to S Banks must make sure that the acquisition complies with local laws and regulations, even though recent approvals have demonstrated that such deals can be completed quickly.
banks must ensure that the acquisition is compliant with local laws and regulations.
3. How to Integrate Different Cultures:
Integration of various cultures is one of the biggest challenges that banks encounter when buying fintech businesses. KPMG asserts that it can be challenging to successfully integrate various cultures between banks and fintech businesses.
While fintech businesses are more agile and cutting-edge, banks are typically more traditional and hierarchical. The culture of the fintech company must be preserved while also being incorporated into the bank’s culture.
4. Compatibility of operations and technology infrastructure
Making sure that operations and technology infrastructure are compatible is another challenge that banks encounter when buying fintech businesses.
The operations and technology infrastructure of the fintech company must be integrated into the bank’s operations and technological infrastructure.
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How do banks buy and integrate Fintechs into to their system?
1. Finding the Best Integration Model is important.
Finding the ideal integration model is one way banks can overcome the difficulties of acquiring fintech businesses.
Integration models come in a variety of forms, KPMG claims:
- Full integration
- Partial integration
- Joint venture
- Strategic partnership.
Banks must select the integration model that best suits their strategic objectives and guarantees the acquisition’s success.
2. Making a Common Vision
Creating a shared vision is another way that banks can overcome the difficulties of acquiring fintech businesses. Banks and fintech businesses, according to KPMG, need to share a common vision for the acquisition to succeed.
To develop a shared vision for the future, banks must convey their strategic objectives to the fintech company.
3. The pursuit of cultural compatibility is important.
By ensuring cultural compatibility, banks can also overcome the difficulties of acquiring fintech firms. KPMG asserts that banks must find a way to preserve the fintech company’s culture while also integrating it into the bank culture.
To create a culture that is compatible with both organizations, banks must communicate their culture to the fintech company and collaborate.
Successful Fintech Acquisitions by Banks
Visa’s Acquisition of Plaid
In January 2020, Visa announced its acquisition of Plaid, a fintech company that connects financial apps to users’ bank accounts, for $5.3 billion.
According to CNBC, the acquisition was aimed at expanding Visa’s business beyond card payments and into the fast-growing fintech industry.
Plaid’s technology allows users to connect their bank accounts to apps such as Venmo and Robinhood, making it easier to manage their finances.
Goldman Sachs’ Acquisition of Clarity Money
In April 2018, Goldman Sachs announced its acquisition of Clarity Money, a personal finance app that helps users manage their finances and save money, for an undisclosed amount.
According to Business Insider, the acquisition was aimed at expanding Goldman Sachs’ business beyond trading and investment banking and into the fast-growing consumer finance industry.
Clarity Money’s technology allows users to track their spending, create a budget, and save money on bills.
Lloyds Banking Group’s Acquisition of MBNA
In June 2017, Lloyds Banking Group announced its acquisition of MBNA, a credit card business, from Bank of America for £1.9 billion.
According to The Guardian, the acquisition was aimed at expanding Lloyds Banking Group’s credit card business and increasing its share of the UK credit card market.
MBNA’s technology allows users to manage their credit card accounts and earn rewards.
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Fintech Companies Latam
Defi bank focus on improving the financial inclusion for the GenZ. Financial industry doesn’t know anything about Genz and there´s a 2.5B billion market worldwide.
Ubanku, starts being the first step of the financial life for them, with a frictionless marketplace that can save money with a cashback of products and services of the university life, access to micro loans, all this, while they learn about finance, this allow us to create an innovating score system to connect GenZ with other financial products.
Creditop is a loan aggregator that processes any credit request by centralizing lenders and connecting customers with their ideal loan.
We have disbursed +$7.5M in mortgages, car and personal loans with a profitable pricing model in each transaction.
Our mission is to improve life quality through credit efficiency in LatAm. Founders:
Ini, a SaaS and white label fintech platform that allows any -wannabe fintech-company to scale their own payment network and expand their ecosystem into new markets and territories without losing the core focus of their businesses even when there is no connectivity access.
Inipay ́s IP tech (POS terminals + alternative connectivity) is also an enabler to reach new markets and niches such as events, concerts, stadiums, national parks, tourism and hospitality.
Aviva is an AI startup following a unique approach to unsecured and productive credit for the underserved communities in Mexico.
Now imagine you are an unbanked person and all that you need to do for getting your first loan is having a face-time call. They have a great experience building Konfio (Mexican Unicorn). Founders:
A digital financial services platform for Bolivia, Paraguay, Ecuador and Peru; where the vast majority don’t have access to financial services or are drastically underserved by traditional banks.
Koban allows users to perform an array of financial services including online and offline payments, money transfers, budgeting tools and credit solutions, among other services for consumers and SMBs in the region.
Zenpli is an infrastructure focused SaaS working on putting a stop to the KYC and fraud challenge in LatAm.
Through 1-single integration, LatAm fintechs and other digital innovators seamlessly onboard more good customers by accessing best-in-class data across all domains and running accurate end-to-end identity decisions supported by advanced models that are hard to spoof.
We’re rolling our product with Mastercard in Mexico in Q4 2022 with the potential to generate ~500k in ARR over the next 12-months.
We’re backed by The Fintech Fund, Ralicap, Amador, Newtopia and world-class angels and advisors from C-level and VPs at Socure, EPAM, Konfío, R2 and Bureau.id.
Kashin (YC S22) is Square with working capital for micro-merchants in LATAM.
We control risk with collaborative credit scoring and our vision is to become the primary financial platform for the masses.
Before Kashin, the founders led Cabify, the largest regional Uber competitor, and grew it from 0 to $50m in annual revenue.
Buy now, pay later without credit cards.
WIBOND is a digital payment method to pay in small installments and without the need of a credit card.
It shows the best payment options according to each customer’s possibilities so they can enjoy their favorite products.
Tapi is a Fintech B2B. Next-generation API-first network for billers, partners and their clients to re-envision the way bills get paid in LATAM.
Z1 is the Brazilian Gen Z neobank, where teenagers and young adults can begin their journey to financial independence.
Through Z1’s banking app, users can send and receive money from parents, employers or clients from their side gigs, as well as spend the money through a physical and virtual card.
BOTIN is an investment super app and a one stop shop to trade traditional and non-traditional assets; its vision is to make the wealth generation tools of the 1% available to all.
Through its Neo broker stock trading app gives users a simple and direct access to invest in different assets across multiple industries and territories (e.g., ETFs and stocks from USA, real estate, crypto, tokens, and others).
BOTIN is focused in helping 300 million people in Spanish speaking Latin America to protect their savings and have an option for retirement.
YUNO wants to bring to Latin American companies an easy online checkout solution that solves the pain point of managing multiple payment methods, as well as fraud detection tools, which can be costly and painful to manage.
Why Banks are buying Fintechs FAQ
Who is buying fintechs, and why?
Banks are buying fintechs to improve their technology for digital banking and other financial services.
What challenges do banks face when acquiring fintech companies?
Banks face challenges such as integrating different cultures and ensuring compatibility of operations and technology infrastructure.
How can banks overcome the challenges of acquiring fintech companies?
Banks can overcome the challenges by finding the right integration model, creating a common vision, and ensuring cultural compatibility.
Why are fintech acquisitions by banks expected to increase in the coming years?
Fintech acquisitions are expected to increase due to rising demand for digital financial products and services.
How do fintech acquisitions benefit banks and customers?
Fintech acquisitions allow banks to offer customers faster and more convenient ways to manage their finances while revitalizing their brands.
What is driving the appeal of banking-as-a-service?
The appeal of banking-as-a-service is driving many fintech acquisitions of banks, allowing fintechs to enter the banking industry without building their own infrastructure.
What should banks be cautious of when partnering with fintechs?
Banks should be cautious when partnering with fintechs and must identify candidates that align with their strategic ambitions and pass a strict set of criteria to avoid risks involved in fintech acquisitions.