Hello Fintech Friends,
Earlier this week, we dug into fintech financing activity through the end of Q1, evaluating where venture capital firms are placing their bets and which concepts are getting competitive in winning backers and building war chests.
Yesterday, it was revealed that Monzo faces a valuation drop of up to 40% in its upcoming fundraise, valuing the neobank at £1.25 billion vs. its prior £2 cap. What’s going on? There are many dynamics at play here, and any story that attributes this down-round to one misses the point:
First, coronavirus and the associated economic downturn will have an impact on business fundamentals. Fewer people are opening bank accounts, taking out loans, spending, and sending money overseas. For neobanks - and legacy banks - across the board, we’re already seeing declining KPIs and an uptick in non-performing loans.
Second, investors are understandably skittish right now. Many investors across venture capital and private equity spent the last couple years building war chests, expecting an end to the 9+ year bull market and LP appetite for venture. Still, even with these mega-funds, the projected impact of coronavirus on entire industries makes it difficult to forecast the prospects for a startup business with the same level of certainty as before, which means that investors, on margin, will relinquish less capital and sign term sheets at lower valuations.
Third, neobanks commanded hefty, growth-based valuations over the past few years. However, many are struggling to turn high growth into positive margin. Some are struggling to become unit profitable on a customer basis, and those that expanded to the US are finding very different consumer markets (more advanced legacy players, less appetite for services like FX, and higher CAC. I would expect to see more sky-high challenger banking valuations reset in the next couple years.
And fourth, neobanks are still burning through cash. As Monzo’s case illustrates, now is not a great time to fundraise - but fierce competition against incumbents (Chime, Chase Sapphire) and other entrants to the markets (N26, Revolut) means that competition for growth will continue to require the budget for high marketing spend.
Where could this lead? Given the proliferation of vertical-specific and fast-follower neobanks (which we highlighted in the last Signals), it wouldn’t be surprising to see consolidation, M&A, and wind-downs in the neobank space over the next couple years. Which brings us to this week’s focus: Q1 M&A activity.
Q1 in Review
(2) Where is there M&A activity?
In Q1, there were:
60 fintech acquisitions, totalling $75 billion of volume.
6 fintech IPOs, totalling $6.6 billion offered.
1 canceled acquisition ($120 million) and 1 canceled IPO ($2.3 billion).
1 expected acquisition ($1.5 billion), 1 recapitalization, and 1 secondary sale.
Overall Q1 fintech M&A activity totaled $85 billion across 71 deals. (*Of disclosed volume - this doesn’t account for the fact that most financial terms were not disclosed*.)
Payments made up the lion’s share of fintech M&A activity, accounting for $19.6 billion of deal volume. High profile deals included Worldline’s acquisition of Ingenico Group ($8.6 billion), SIA’s IPO ($4 billion), Ally Financial’s acquisition of Cardworks ($2.7 billion), Ant Financial and Third Point’s acquisition of Global Blue ($2.6 billion), Eurazeo’s acquisition of Planet ($2.2 billion), and WEX’s purchase of eNett and Optal ($1.7 billion).
This doesn’t even account for the megadeals of the last year in payments, when FIS acquired Worldpay for $43 billion, Fiserv bought First Data for $22 billion, and Global Payments purchased TSYS for $22 billion. Every actor, from governments to legacy financial services providers to fintech startups, is looking to participate in the rewiring of the world’s payment systems. And for good reason: as credit card networks have demonstrated, controlling payments allows companies to charge for those payments - and even a small percentage of interchange adds up quickly as networks scale.
Large-scale financial data accounted for the biggest deal of the quarter, as The London Stock Exchange received the green-light from UK regulators to purchase data provider Refinitiv. As more fintechs and incumbents grow in their sophistication, digital product offerings, and need for data, I wouldn’t be surprised to see increasing growth of M&A and new company formation focused on the aggregation and sanitizing of financial data. Also of note is Visa’s acquisition of Plaid for $5.3 billion, which indicates that more legacy financial services providers will probably take an interest in owning the plumbing (APIs) through which financial data flow.
Credit cards heated up in Q1 activity, with India’s spin-off and IPO of SBI Cards and Payment Services for $1.4 billion, Ally Financial’s acquisition (mentioned above) of Cardworks for $2.7 billion, NewDay’s acquisition of Deko for £40 million, and CompoSecure putting itself on sale or $1.5 billion.
Other major acquisitions included Morgan Stanley’s purchase of E*Trade, the online investing and trading platform, for $13 billion (a comp for fintech competitor Robinhood), Intuit’s $7.1 billion acquisition of online lending and credit customer origination platform Credit Karma, and Lending Club’s acquisition of Radius Bank for $185 million, all of which seemed to happen within a week of each other.
Fintech M&A activity has continued its torrid pace into Q2, and it won’t be a surprise given a combination of large balance sheets and economic stress when we see significant acquisition activity continuing into Q3 of this year.
