Banks are increasingly aware of the threats and opportunities from the Financial Technology (FinTech) sub-sector, first quarter 2019 financial services report by John Allison, Partner Hogan Lovells London has shown.
The report said that globally, FinTech investment more than doubled to US$111.8 billion last year, with cross-border activity totaling US$53.5 billion, according to KPMG.
Deals like the US$38.4 billion tie-up between payment services providers Fiserv and First Data, announced in January 2019, demonstrate how more traditional providers of financial technology and payments infrastructure are consolidating in the face of growing threats of losing market share to start-ups like Square, which was founded in 2009 and listed on the New York Stock Exchange in 2015, and iZettle, founded in 2010 and acquired by PayPal for US$2.2 billion in 2018.
The largest cross-border deal in financial services of 2018, the US$14 billion Series C investment in Ant Financial, was one among a flurry of FinTech deals. Investors in that round included Carlyle, Warburg Pincus, General Atlantic, Temasek, and the Canada Pension Plan Investment Board (CPPIB), among others.
Investment rounds of Ant’s size are rare, but deal values are not the only indication of a significant transaction. First quarter saw London-based open banking app Bud raise US$20 million from investors including HSBC, an example of how large traditional banks are seizing opportunities offered by regulatory changes. Bud is one of several FinTech startups taking advantage of the UK’s Second Payment Services Directive (PSD2), which allows consumers access to their financial data and gives them the ability to share it with other financial institutions.
Large banks have been actively investing in and acquiring FinTech startups. Other financial institutions also see the value in using technology to offer wealth management services to consumers who previously could not afford them. With populations in many European countries growing older and governments shifting the onus for retirement planning and pensions onto individuals, FinTech startups in the asset management space are attracting interest. Robo-advisory startups like SigFig and Betterment have developed software to automate investment advice and have received investments from UBS and Citi, respectively.
Cross-boarder deals/Merger & Acquaition
it said that cross-border financial services deal value in first quarter was up both year-on-year by four per cent and quarter-on-quarter by 17 per cent, despite total volume falling over both time periods,
The report said that in the years after the 2008 financial crisis, banks mainly focused on restructuring, including through strategic disposals of non-core assets. UBS and HSBC, for example, exited their respective Brazilian businesses.
More recently, 10 years after the crisis, banks have begun to focus on mergers and acquisition as a channel for growth, in order to gain scale, or leverage synergies or new technology. In the United States, BB&T’s planned US$28 billion acquisition of domestic peer SunTrust is the first significant banking merger in a decade, and is unlikely to be the last. In the United Kingdom, the Financial Times has reported that Barclays has been, among other possible options, exploring a potential merger with Standard Chartered in response to activist investor Edward Bramson building a 5.2 per cent stake in the bank through his fund Sherborne.
Japanese banks look abroad for growth
Aging populations, along with ultra-low interest rates, are among the reasons Japanese financial institutions have increasingly looked abroad for avenues of growth.
The largest first quarter 2019 cross-border deal in the financial services sector saw Japan-based MUFG Bank acquire Germany-based DZ Bank’s aviation finance business for US$6.3 billion. MUFG, Japan’s largest financial institution, has been leading the way in outbound activity in the financial services sector, acquiring Australian asset management group Colonial First State from the Commonwealth Bank of Australia for US$2.9 billion last year and building up a 40 per cent stake in Indonesian-listed lender Bank Danamon for US$2.4 billion, with the goal of eventually taking over the bank.
Outlook
At the beginning of the year, regulatory changes requiring “ring-fencing” — the separation of investment banking from retail banking — came into effect in the UK. Financial institutions spent much of 2018 focused on internal restructuring to prepare for this change, as well as for Brexit, leaving little focus for mergers and acquaitions. But with financial institutions in a better, more stable position than they’ve been at any point in the past decade, many feel confident to undertake M&A. Increasing consumer demand for more convenient and user-friendly digital products should only further encourage deal activity.
