The Summer Slowdown and the Return of M&A
As the annual summer slowdown comes to an end, founders and investors are returning from their holidays and looking ahead to what the closing third act of 2023 will bring for the fintech industry. One burning question on everyone’s mind is whether we will see a surge in mergers and acquisitions (M&A) in the coming months. Historically, M&A activity in the fintech sector has been hampered by rising interest rates and a challenging funding environment. However, recent months have shown signs of a pickup in M&A deals, indicating potential opportunities for consolidation and growth.
The Rise of Mid-Sized Acquisitions and Mega Deals
While mega fintech deals have been relatively scarce this year, there have been notable exceptions. One such deal was Visa’s $1 billion cash acquisition of Brazilian payments scale-up Pismo, which counts Revolut, N26, and Nubank among its clients. However, it is the mid-sized acquisitions that have been steadily increasing over the summer months. Aman Behzad, founder and managing partner at Royal Park Partners, notes that M&A activity has intensified across the global fintech scene, with 58 transactions worth a total of $12 billion disclosed in July 2023 alone. These acquisitions are driven by fintechs seeking to bolster their revenue streams and expand their tech or product set, as well as earlier-stage businesses looking to merge with better-capitalized players in a more challenging funding environment.
The Trend of Fintech-on-Fintech M&A
What sets apart some of the recent M&A deals is that it is other fintech companies, rather than banks, that have been the buyers. This trend is exemplified by Acorns’ acquisition of GoHenry and Pixpay, as well as the rumored deal between Monzo and Lunar. Fintechs are increasingly keen to buy each other, seizing the opportunity to acquire valuable technology or talent at a discount. As the consolidation story continues to unfold, fintechs that can unlock economies of scale and drive growth will emerge as the winners.
The Funding Slowdown and the Challenge for Founders
While the frothy days of 2021 are behind us, the full extent of the funding slowdown is becoming a pressing issue for fintech founders and their financial backers. Layoffs and a focus on profitability over growth have helped many startups extend their cash runways, but for some, this can only go so far. Venture capital investors and market participants anticipate a showdown in the coming months for fintech companies that are still operating at a loss but hold valuable businesses. The choice for these companies is to accept new funding on potentially unfavorable terms or face going out of business.
The Impact on the UK Fintech Sector
The UK fintech sector has seen a significant decline in investment, with a 57% fall in the first half of 2023 compared to the previous year. Despite this, there were still 215 M&A, PE, and VC fintech deals completed in the UK during the first half of the year, indicating ongoing M&A activity in the market. Globally, total fintech deal activity volume has shown signs of a summer pickup, with the second quarter of 2023 seeing a rebound in M&A deals.
The Future of Fintech M&A
While IPOs have traditionally been the dream exit for fintech founders, the changing landscape and investor interest are driving increased M&A activity. Fintech companies will face the ultimate test in the coming months as they navigate the pressures of funding, consolidation, and growth. Only time will tell which players will thrive and which will crumble under the pressure of this ongoing transformation in the fintech industry.