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FinTech M&A

By Nihat Anwar (SSE), Mustafa Bayramli (Wharton), Gurneek Gill (UCL)

Photo: PiggyBank (Unsplash)


I. Industry Background

By innovating and using emerging digital technologies, Financial Technology (FinTech) companies are continuing to deliver financial services in a way that a growing number of people want. In general, these firms use technologies such as blockchain, AI, and data science, to increase the efficiency of financial services as well as challenging traditional banking, particularly by targeting unserved and underserved customers.

The global FinTech industry was valued at $5.5 trillion in 2019, and the fast-growing market is expected to register a CAGR of 23.58% during 2021-2025. To put this into perspective, and to showcase the successful push into traditional banking, the market caps of Visa, PayPal, Square, and MasterCard, collectively at $1.3 trillion, beat the “big six” Wall Street banks with market caps worth less than $900 billion in total. Apart from the aforementioned payment companies, other major players include Ant Group, Robinhood Markets, Inc., and Google Pay (Alphabet Inc.). Based on geographical sectors, the FinTech market can be segregated into North America, Europe, South America, the Middle East and Africa, and Asia-Pacific. Among these regions, Asia-Pacific undoubtedly dominates (market share of 49.45% in 2019), and the region is expected to maintain its position in the near future mostly thanks to rapid adoption and high consumer usage rates. Regarding the core areas, the FinTech industry can be dissected based on a range of factors, including technology, service, application, and regional analysis. Based on technology, the market can be further segmented into, inter alia, AI, and blockchain. Among these, AI is the market leader and the trend is likely to continue in the forthcoming years due to its increased importance.

Some of the main growth factors of the industry include major advancements in technology and increased demand for innovation. Furthermore, the market growth is positively impacted by an increasing number of financial firms moving into digital finance and payments, for instance by M&A. In addition, the major tech companies (Big Tech) are all accelerating their focus on financial services, which positively impacts the market growth. Moreover, FinTech firms, and start-ups, in particular, have benefitted from a high capital activity thanks to the many investors that have recognized the need for digital finance. Thus, there is a noteworthy investor appetite from both financial investors and strategic players. Many industry experts predicted that FinTech M&A and investment activity would continue to thrive with larger transactions and increased involvement of Big Tech which helps the young and highly fragmented industry to mature. However, due to the pandemic, this outlook has slightly changed. Nevertheless, M&A activity is still high, and several notable deals have taken place in recent months.


On April 22nd, Fintech start-up Social Finance Inc. (SoFi) revealed that they will be merging with Social Capital Hedosophia Corp V, a special purpose acquisition company (SPAC) who are supported by venture capital investor Chamath Palihapitiya. Chamath will be delighted to see a fourth company taken public by his SPAC’s as he hopes to build upon the 47% shareholder return that his 12 SPAC deals averaged in 2021.

Social Finance, Inc. is an American online personal finance company, based in San Francisco. Founded in 2011, they now offer a range of financial products, the firm has grown extensively from initially only providing student and personal loan refinancing to now aiding mortgages, credit card, and banking services via mobile and desktop user interfaces. However, since then, SoFi has indicated that they are looking to broaden their product line to more traditional banking services, most notably via their 2020 acquisition of payments and bank account infrastructure company Galileo for $1.2 billion which almost hinted towards a FinTech exit.

Consequently, the financial company saw a strong year during the coronavirus pandemic, largely down to SoFi’s strategically advantageous mobile-first service mentioned. What’s more, this SPAC merger will build upon the profitable conditional approval SoFi received for a National Bank charter application. Whilst SoFi had intended to complete this reverse merger with the ‘blank-check’ company by April this year, they missed the date due to the deal having regulatory issues when originally filing with the SEC which has since been resolved.

Furthermore, the merger values SoFi at $8.65 billion, which is a huge improvement having last been valued at only $5.7 billion in 2020. Thus, the appeal for Social Capital Hedosophia Corp V is evident and they hope that SoFi will continue its growth as both parties have clear targets in mind. From the filing, it is understood that by 2025, SoFi’s loan volume and adjusted net revenue are forecasted to increase 25% and 43% respectively. Hence, it is clear that a bright future is ahead as the joint entity will look to effectively utilize the financial benefits of SoFi being publicly listed.

Nonetheless, many were wary of this deal’s completion due to its failure to pass SEC regulations in April. This plays into the larger trend where SPAC listings came to a slight halt in 2021, compared to 2020, due to investment ambiguity but more so due to the SEC heavily censuring deals, as they did with this merger; specifically scrutinizing financial projections. However, SPACs were heavily frequent in Fintech M&A of 2020, and SPAC deal volume rose steeply from a minor number in 2019 to over 20 in 2020. This deal looks set to remove concerns and the plateau surrounding SPAC deals so many more similar reverse mergers are to be expected in 2021 as fintech companies will continue utilizing this as a way of going public instead of consolidating.

III. Payoneer SPAC

On February 3rd, Payoneer, a cross-border payments provider based in New York working with marketplaces such as Airbnb and Fiverr, announced that it would go public through a SPAC (Special Purpose Acquisitions Company) merger with FTAC Olympus Acquisition Corp., taking advantage of a hot trend that has redefined the US capital markets for much of 2020 and early 2021. The transaction valued the FinTech startup at $3.3 billion, including a $300 million in PIPE – i.e., private investment in public equity – from investors such as Wellington Management, Fidelity Management & Research Company, and many others. With the deal, Payoneer hopes to enlarge its operational footprint.

Although transferring money internationally has taken a big hit during the pandemic-induced recession, the boom in eCommerce has kindled an explosive growth in cross-border sales. Indeed, Payoneer projects a CAGR of 25% in the FinTech sector, echoing the optimistic forecasts of its counterparts such as PayPal or Square. According to some sources, Payoneer has been largely profitable thanks to the aforementioned growth in eCommerce and forecasts to rack up $432 million in revenues in 2021. With the subsequent reorganization, the combined entity is expected to hold a cash reserve of $563 million, which will be crucial to driving organic and inorganic expansion in the long term.

The merger deal is expected to close in the next few months.

IV. Avant - Zero Financial

On April 7th, Avant announced the acquisition of Zero Financial and its core banking product, Level. Though the acquisition was reportedly completed with a combination of stock and cash, the financial terms of the deal have not yet been disclosed.

Avant is a high-growth FinTech company that aims to deliver digital banking services through a combination of analytics and technology. Since its founding in 2012, the Chicago-based company has raised over $600 million of equity capital, and over the last two years, Avant has connected more than 1.5 million customers to $7.5 billion in loans. With its powerful data infrastructure, as well as its robust AI-driven technology, Avant is leading the industry at the intersection of technology and banking, particularly within online lending. The target, Zero Financial, is backed by prominent Silicon Valley venture capital investors, including New Enterprise Associates (NEA) and SignalFire, and it is the creator of a range of financial products such as Zero and Level. The latter, and the most well-known, is a digital neobank that allows customers to experience a wide variety of services such as creating a bank account, depositing money, making purchases, and even earning awards.

The acquisition will allow Avant to offer more innovative products outside of its main area, online lending, with the inclusion of Level in its financial ecosystem. This gives Avant a larger footprint in the digital financial services space and strengthens the company’s position in the highly competitive industry. Thus, the new strategic partnership expands Avant’s current product portfolio in addition to widening their customer base to better reach unserved and underbanked people. The deal is another example of the increased M&A activity in the sector due to the increased demand for innovation. This acquisition also showcases the attractiveness of financial products focusing on digital payments, in this case, Level, in addition to highlighting the importance of diversified portfolios and strengthened digital capabilities to remain competitive and further catalyse growth.

V. Visa - Plaid

On the 12th January 2021, Visa announced they would not be acquiring Plaid, despite being in talks for over a year. The deal was originally revealed in January 2020 and was expected to close not so soon after, however, the US Justice Department filed a suit to block the amalgamation over concerns of antitrust more specifically, on basis of Section 2 of the Sherman Act, the US’ anti-competition legislation. The claim centered around the fact that Visa, a leading credit and debit purchasing US network, had astutely immoral intentions when acquiring the new and budding startup, Plaid. The Department of Justice is quoted to have said that Visa was looking to “eliminate a nascent competitive threat that would likely result in substantial savings and more innovative online debit services for merchants and consumers.” Despite Visa’s battles against these claims, they soon gave in and mutually called off the agreement alongside Plaid to avoid a lengthy, extortionate and complex legal battle.

Whilst Plaid’s services would be complementary to Visa’s, it is easy to see why Visa would view Plaid as a competitor. Plaid is a San Francisco-based financial services company that builds data transfer networks, powering fintech and digital finance products. The CEO of Visa, Al Kelly, claimed that the addition of Plaid’s services including greater innovation for developers, financial institutions, and consumers, and so it is easy to see why Visa was willing to pay $5.3 Billion for Plaid, an amount that was double that of a private valuation. Nonetheless, the two companies will still work together in a partnership and concentrate on developing the infrastructure to support fintech and Plaid even claims to have grown its customer base by 60% in the past year since the deal’s news broke out.

Ultimately, this reporting does not augur well for many startup Fintech companies, especially those that are approaching “unicorn” status as they are more likely looking to reap the benefits of integrating with an incumbent bank like Visa. This is not the only fintech M&A deal that has fallen victim to the amplified scrutiny from worldwide competition authorities. In essence, the Department of Justice has most likely heavily dented any potential similar M&A exit opportunities for many of these fintech-centered startups and there will now be even more uneasiness from companies considering this type of deal. This leaves traditional Fintech M&A hanging in the balance, since, this will no doubt severely decrease company valuations and so the rising trend of SPAC deals from venture capitalists, such as Chamath Palihapitiya, will look to exploit this situation. Subsequently, this could in turn help such companies raise necessary funding so that they can develop enough to legally undergo M&A in the distant future and at even higher valuations than before.

VI. Future Outlook

There is ample room for innovation in the FinTech space at least in the near term, especially given the dramatic shift in the lifestyle due to the COVID-19 pandemic. The high pent-up demand in remote transactions and FinTech payment solutions is a shining example of this post-pandemic reality. We observe a strong trend of sub-sector consolidation within the FinTech sector, with financial institutions looking to M&A opportunities to enrich their offering and capture more demand. M&A activity carried out by venture capital and private equity companies will likely stay strong, further helping the early-stage FinTech companies accelerate growth and increase market penetration. With the major shift from cash to cards and digital payments globally, FinTech companies specializing in payments, in particular, will remain attractive investment prospects. The race to digitizing payment service, which was a major theme in 2020, will continue to facilitate widespread innovation in the sector and pose significant growth opportunities for companies offering new payment methods.

Despite the interest in the sector, the coronavirus-induced uncertainty will lead financial institutions to stay cautious in their deal-making, according to some analysts. Many lenders operated under significant volatility in the 2020 fiscal year and forecast a bleak economic outlook for 2021, which will constrain their capacity for larger deals. However, M&A remains an attractive way for financial institutions to broaden their geographic coverage and unlock potential benefits of scale. Buying up small, innovative FinTechs can be a faster and more effective way for banks to improve their tech offerings and the infrastructure that supports them, than building their solutions. Overall, with the global rollout of coronavirus vaccines and a corresponding jump in consumer confidence, the FinTech companies, and financial institutions are expected to recover from COVID-19’s operational impacts, and large companies will turn to deal-making to pursue scale efficiencies, enhance product portfolios, and bolster digital capabilities.

VII. Sources


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