FinTech M&A

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

 

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.


II. Sofi SPAC


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-g