FinTech is disrupting the finance industry to the point where we’re likely to see quite a bit of M&A activity as a result. That activity could take several different forms, but one likely possibility is that FinTech or tech companies could acquire traditional finance names.
It appears the transition for banks to really utilize FinTech has been difficult. I wrote earlier how banks are stuck with their legacy organizations, processes and IT. Traditionally, mergers and acquisitions are a way to help that transition. However, many M&A activities fail to bring any real transition or realize results.
The finance business is also a brand business. Retail banking, wealth management, private and investment banks have many well know traditional brands. Sooner or later, some new FinTech players will want to link themselves to old brands. They will also target licenses and regulated businesses, and one way to get them through acquisitions.
We will see different kinds of M&A activities when FinTech really starts to have an impact on the finance business:
- Finance institutions acquire FinTech companies to get technology, new services and competence
- FinTech companies acquire traditional finance institutions to get licenses, regulated business and brands
- Traditional finance companies are forced to merge to cut costs and get better economy of scale
- Larger FinTech companies acquire smaller FinTech companies to get more services and technology to offer a full scale of services
- Many mid-size finance firms (including regional banks, mid-size asset management and broker firms) are forced to sell whoever is ready to acquire them because they cannot compete anymore
- Non-financial (e.g. software) companies acquire small to large FinTech companies to position themselves in financial services.
The hot question in the market is: will big finance institutions or technology companies survive the M&A frenzy and be the winners in the end? There are still too many variables to know the final score, but it looks like on average banks are not well suited to adapt to the new situation. The most likely scenario at the moment is that banks lose a significant part of their business, and they’ll be left with some basic heavily regulated business. Most of the value added businesses, e.g. lending, wealth management and investment services, will go to the new FinTech actors.
Who will be the tech and FinTech companies that will be big in the finance market? The easy answer is Google, Apple, Amazon and Facebook, all of which have a lot of users and many of them already offer some finance functions like payments, money transfer or lending. But the global picture is more complex. China is the leading FinTech country right now, and companies like Alipay and Tencent are already significant FinTech companies. Alipay processes up to 120,000 transactions per second, more than 10 times the numbers of Visa.
Most probably we’ll also see new companies becoming significant players in the finance industry. Data, AI, and finance back-office services will become an important part of the market. This could mean that the consumer interface is quite fragmented, but there are important technology companies that empower many of those services.
These services are also going to the cloud, which means that AWS, Microsoft, Google, IBM and Oracle will play a role in the finance ecosystem. FinTech can be one of the biggest new opportunities for cloud providers. They also might become interested in offering more back office functions for different consumer and end-user services.
The finance market will probably see a lot of niche services. At the same time, there could be a few FinTech backbones that enable most those services. In principle, banks could emerge as those backbones with PSD2 and open APIs. But in practice, considering their capacity to adapt and current use of obsolete technology, it is hard to see how banks could win that game.
The most probable scenario at the moment is that some bigger FinTech and technology companies will make acquisitions to offer more technology services to different finance end-user services. They want to expand their technology offerings to all finance services. End-user FinTech services will acquire brands and licenses of traditional finance that are valuable in their business.
What that ultimately means is that banks are on the path of the telco – they can keep some heavily regulated finance services, but their margins will go down and soon you’ll be seeing some bank mergers.