5 min read

Is the COVID-19 crisis creating fintech M&A opportunities?

Simon Taylor

2020 has seen plenty of fintech M&A - LendingClub buying Radius Bank, Intuit acquiring Credit Karma and of course with Visa buying Plaid. You might think the current crisis would reduce activity but it could create more opportunities.

Just a few weeks ago we saw Galileo acquired by SoFi in what is surely the first of many fintech mergers and acquisitions. Galileo, a payments processor whose customers include Chime and Robinhood, was acquired for $1.2 billion. This is a unicorn exit for the founders, but the timing is key. Why sell now and why to SoFi?

Since the Coronavirus crisis has hit, the world of fintech has changed dramatically. The sudden change in economic outlook created by the pandemic has rapidly closed down some of the exit options for VC investors, forcing a realistic assessment of every fintech's prospects of profitable growth.

Just a year ago we were talking about all time high investments, unicorns and the long term threat to incumbents. Companies that just three months ago may have been out raising for a larger round to grow their business suddenly have to switch to survival mode.

Whether you’re a fintech firm or a potential investor the game has changed for a number of reasons.

The one-way travel of valuations has ended

For the last half decade, as a fintech company with growing users or transactional volume, you were all but guaranteed to have a supply of Venture Capital firms who were looking to invest. The goal was to keep growing, keep adding users and keep expanding.

The IPO market is now effectively closed in the current environment - start-ups looking for a soft landing or an exit now have fewer options

To a strategic investor (e.g. a potential acquirer) fintech companies looked overpriced. Loss-making companies achieved multi-billion dollar valuations. It was not always clear from the outside which ones had good fundamental unit economics (i.e. they made money per customer) vs which fintechs just had bad business models propped up with hype and VC cash.

The IPO market is now effectively closed in the current environment, start-ups looking for a soft landing or an exit now have fewer options.

Exit opportunities have significantly decreased

When the market turns different investors will react in different ways. The nature of VC investment isn’t as straightforward as it seems. Most venture capital firms invest knowing it’s a 10 year journey before they see a return. However, VCs run a series of funds where the first 3 to 4 years are the invest phase, with the last 3 to 4 years being the harvest phase.

A fintech that is now 5 to 7 years old may be entering the harvest phase of some VC funds meaning the VCs are looking to sell. They may be asking themselves, has this company reached its potential? Is now the best time to sell? Remember too that VCs have investors (LPs or limited partners), who may have put pressure on the VC to sell.

This market has changed the dynamics of who’s making money and who’s in trouble almost overnight.

If many fintechs have many VCs who are now looking to exit, the pressure to sell to an acquirer could be quite high.

How is this market impacting fintech firms?

This market has changed the dynamics of who’s making money and who’s in trouble almost overnight.

  1. Struggling. Payments or cards businesses that are younger often rely on transaction volume for revenue that extends their runway. Payments volume is down dramatically with most bricks and mortar retail now closed. Whilst larger payments businesses likely have the balance sheet to weather the storm, younger ones may struggle.

    Specialist lenders who could not lend off balance sheet and relied on securitisation may also struggle (e.g. P2P lenders). Many may pivot to SBA or CBIL lending to support small businesses but this is no guarantee of survival.
  2. Growing massively. Savings and investment products are doing exceptionally well. Robinhood has struggled to cope with volume of retail transactions and across the market robo-advisors and savings products are seeing a surge in demand as investors either flight to safety or to trade in a more volatile market. But that seemingly had little effect on its brand, as it recently announced it is closing in on a funding round worth between $200 million and $250 million, at a valuation of $8 billion.

    TC Equity recently noted certain types of specialist lending is seeing significant demand and volume (e.g. SoFi and Thrive who help with student debt, which has a much longer repayment period).
  3. Struggling now but potentially strong longer term. Challenger banks paint a mixed picture, customer growth appears to be limiting as does transaction volume, but different organisations have different levels of runway. Organisations that had shorter runway and were pre-profit may look exposed now but could have assets of significant value (e.g. strong brand, strong tech). There are the early B2B fintech providers (e.g. specialists in fraud prevention, identity, invoice processing etc) who sell to fintechs or banks. They are facing a market where taking on a new supplier is challenging. Those who have longer contracts or established client relationships are better placed, but may be re-evaluating growth vs resilience.

What’s next for fintech?

The acquisition of Galileo by SoFi may have been pure opportunism, a strategic master stroke, or simply capturing an upstream supplier to reduce cost.

But, one thing is for sure, this won’t be the last fintech M&A deal we see in the next few weeks.

According to Pitchbook data, in the first quarter of this year, 62 venture capital funds raised a total of $21 billion, so there is plenty of funding available and firms looking for acquisition opportunities.

At 11:FS we're close to the emerging trends in fintech. Talk to us if you’re considering what you need to do, need to understand the fintech landscape and what you should be doing to execute.

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About the author

Simon Taylor

Simon leads client engagements for 11:FS , building teams and delivering new products and services to market. He is an expert at making the fintech approach work inside a large banking environment.

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