Financial technology companies, long seen as a threat by the likes of JPMorgan Chase & Co (JPM.N), are increasingly becoming acquisition targets for traditional US banks as rising interest rates and falling valuations crimp their expansion.
The valuations of listed financial technology firms have plunged 70 per cent in 2022, analysts at Jefferies Group said in a note last week. In the same period, the valuations of banks in the S&P 500 are down 33 per cent, while valuations for the S&P 500 (.SPX) are down 23 per cent, according to data from Refinitiv IBES.
The decline presents an opportunity for Main Street banks to buy companies and beef up their technology for digital banking, online payments and other financial services and diversify beyond lending.
Huntington Bancshares Inc (HBAN.O) is one such bank. The Columbus, Ohio regional bank is scouring for more targets after it bought Torana, a payments fintech, in May.
“We may buy more on the payments side,” Huntington’s Chief Executive Officer Steve Steinour told Reuters in an interview.
Investors have dumped fintech stocks this year alongside other technology shares, which perform better when economic growth is strong. With the US tipping toward a potential recession and interest rates rising, the outlook for fintechs has eroded. The high-profile blowup of crypto exchange FTX last week has also shaken confidence.
“With valuations coming down, and the IPO and SPAC markets all but dried up at the moment, there’s certainly a lot more room for acquisitions by traditional banks into fintech,” said Dan Goerlich, a partner at PwC who focuses on financial deals.
The renewed interest contrasts with previous years, when finance chiefs balked at acquiring companies they saw as too richly valued, he said.
The year’s losses have been steep. For example, shares of Affirm Holdings (AFRM.O), which offers buy-now pay-later services, have fallen about 85 per cent this year. Personal finance firm Dave Inc (DAVE.O) has plunged almost 97 per cent.
Affirm declined to comment. Dave did not immediately respond to a request for comment.
Startup founders could come under more pressure to do deals as it gets more expensive to run their companies. Investors have become intensely focused on rising funding costs, Jefferies analyst John Hecht wrote in a note.
JPMorgan CEO Jamie Dimon has warned for a decade that Silicon Valley is coming to eat banks’ lunch. In that time, fintechs have blossomed as customers and businesses embraced digital financial services. Pandemic lockdowns supercharged the trend as everyone moved online. Even so, the price rally stalled this year as the economic outlook darkened.
Aiming to meet the challenge, the largest US lender has been buying. In September, JPMorgan agreed to acquire Renovite Technologies Inc, a cloud-based payments technology company, the latest in a string of deals worth $5 billion over the past 18 months.
PNC Financial Services Inc (PNC.N) in September bought Linga, a fintech focused on restaurant operations and sales.
“You will see an explosion of deals” over the next year and a half, said Michael Abbott, global banking lead at Accenture.
ON THE MENU
Big lenders have plenty of reasons to strike deals. The slide in fintech valuations coincides with banks earning more from traditional lending businesses as interest rates rise.
Fintech transactions may be easier to clinch compared with bank mergers, which have been delayed by scrutiny from regulators.
“Management teams and boards have redirected some of their focus to non-bank opportunities,” said Brennin Kroog, a managing director in the financial institutions group at Lazard. Those include digital tools for wealth or treasury management and point-of-sale financing.
Fintech deals enable banks to buy new technology or products instead of developing them in-house. Acquisitions can also be defensive moves into other businesses outside of lending, like travel services.
Not all sellers will find a buyer. Some banks have shunned buy-now, pay-later companies amid concern over their lending portfolios and the possibility of regulation. Crypto providers were already considered unattractive because of regulatory uncertainty, even before FTX’s collapse.
Even with better conditions, striking deals isn’t easy.
PNC, based in Pittsburgh, Pennsylvania, looked at over 50 potential acquisitions this year and finally landed on one firm, CEO Bill Demchak told Reuters. However, as “valuations have come way down, our activity level might be higher,” he said.