Here come the fintech consolidators

Recent falls in funding from venture capitalists alongside reported down rounds spell trouble for the fintech space but also the likelihood of a period of mergers & acquisitions. A post-consolidation reboot could follow.

The global fintech scene looks increasingly primed for mass consolidation. 

This statement has been touted for several years, but could the reality finally be upon us? 

With venture capital volumes under pressure and valuations being reduced, it seems that a number of firms may start to look to grow by hoovering up their rivals.

Banks and Big Tech have traditionally been the likely actors in consolidating the fintech industry. But could some or even a significant part of this consolidation come from fintech's biggest behemoths? 

Firms such as Klarna, Checkout.com, Revolut, and Stripe all pulled away from the pack in the past few years in terms of their valuations which swelled to the tens of billions of dollars in 2021. Klarna, of course, more recently reportedly saw its valuation reportedly slashed by two-thirds from $45bn to $15bn. Others may follow.

Nonetheless, could this group become fintech’s Big Consolidators?

Lucy Demery, managing director at Barclays said at the Money 20/20 conference in Amsterdam recently that consolidation in this kind of environment is likey.

Demery says that the M&A activity could well come not just from the usual suspects such as large banks but rather some of the largest fintech companies operating today such as Stripe, Checkout.com, Klarna and Revolut.

“These guys now have M&A teams, they have an appetite to be the consolidators. And that consolidation does make sense strategically. So I think they will be doing deals soon,” she said.

If so, it would mark a significant change in tempo. Owing to the racy valuations and the capacity for rapid growth associated with the fintech space, M&A has not been a normal way to grow in recent years. Businesses avoided paying billions of dollars for other businesses when growth could come in a leaner, less risky way,

These sorts of fintech firms won’t just be scooping up struggling competitors unable to raise new cash, however, she says. Instead, it will see large firms want to bolt-on expansion into new markets rather than shut down competition. Or add missing parts to their existing platforms so as to quickly bring in new products in a bid to boost revenues.

Dwindling funds?

Valuations in the public markets for fintech have already been hit hard with a number of newly listed firms seeing strong falls in their market capitalisation.

Demery says she doesn’t see private markets entirely converging with public markets.

“There's a lot of strategic capital. Particularly in Europe looking to consolidate the sector. And there's real synergy there for them to drive and so they can afford a premium to current lower multiples in the public market. So hopefully, that'll be an upside catalyst for the sector."

Fintech’s M&A truly started in 2021 with a number of high profile mega deals such as Square buying BNPL Afterpay in a deal worth $29bn and Visa’s purchase of open banking provider Tink for $2.2bn. There were at least another eight or so deals worth over $1bn.

Although the fintechs buying other fintechs - putting aside the Square deal - was rarer with the likes of Starling Bank’s $58m purchase of Fleet Mortgages and Bunq’s $168m deal to buy Captial Flow the exceptions.

Much recent fintech commentary though has centred on whether venture capital funding is drying up or at least taking a pause after years of growth.

The jury is still out on what happens to venture capital funding for fintech though. In the first three months of 2022 fintech companies raked in $29.3bn across 1,233 deals, according to global data from PitchBook. Not bad, but the quarter was down 7.3 per cent on the previous three months but up 13.8 per cent on the same period in 2021. 

Not all of the thousands of loss-making disruptive fintech companies surviving seems like an uncontroversial outlook if quarter on quarter trend were to persist. In an era where the macroeconomic bottom feels increasingly like it has fallen out of the market that process could well be speeded up.

Demery says larger fintechs will want to be doing deals in order to boost their investment profile ahead of now likely delayed exits.

“They'll be doing deals and they'll be doing them soon because they'll want to get investor credit for it in advance of their own IPOs when they eventually go to market. Hopefully, that'll start to convert and be a broader uplift for the sector,” she said.

Deep pockets

Jaideve Janardana, the CEO of Zopa, recently said in an interview with AltFi that the company was seeing strong growth, with the business expected to operate at or above breakeven from here on. 

As Zopa recently raised a substantial amount of capital, a £220m round from Softbank in October of 2021, any future capital markets activity would be driven by an M&A strategy. 

“Having raised a lot of capital last year, our capital needs are more determined by our ambition rather than us actually burning capital. That's an incredibly powerful position to be in,” Janardana said.

Zopa’s primary focus though is organic growth and is looking to launch a number of new products over the next six months or so which it is hoping will help it grow. 

“We don't have to be a consolidator to continue to grow and drive growth. But there will be an opportunity… and where there are businesses where we can combine but they bring complementary skills or access to customers will be something that will be really excited to look at and explore,” Janardana said. 

“I think…we have capital, we also have a set of investors who are very supportive of the business and have the dry powder to actually support us further,” Janardana added.

Zopa’s revenues look set to have increased more than five times since 2020 when they stood at c.£30m, with Janardana telling AltFi he expects that full revenue for 2022 to “be more than £150m”. 

Not least it could help that its valuations have never been “frothy”, according to Janardana. 

The capital markets, he adds, though are currently “ tough” but he emphasises that there's a lot of money across public and private markets sitting in cash. 

“These guys [investors] are not paid to keep money in cash. They have to make the investments.”

In particular, these investors will pay a premium to invest and/or fund firms where cash flow is strong. 

“If there were to be an opportunity to consolidate something in a sensible fashion, then I'd be very surprised if our existing investors didn't provide it or we're not able to find it externally.”