Fintech M&A activity hit a fever pitch in 2021, and venture capitalists expect the momentum only to accelerate in 2022.
But this year things will be a little different. Deals won't just be defined by big banks, payments giants, and established fintechs scooping up smaller players in an effort to compete.
The market will also see consolidation between mid-sized fintechs — those that have been around for five to 10 years and have recently raised big rounds — according to top investors from Bain Capital Ventures, Financial Technology Partners, Oak HC/FT, and QED Investors.
The investors, who all spoke on a panel hosted by FT Partners on January 6, detailed several reasons mid-sized fintechs are expected to start gobbling up each other this year instead of getting bought out by bigger players.
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For one, there was a deluge of venture capital that flooded the market in 2021. Global fintech funding hit $131.5 billion last year, leagues ahead of 2020's $49 billion, according to CB Insights data released Wednesday. It's created a market filled with fintechs that are well-capitalized to strike a deal.
And at the same time, the allure of going public — long considered a desirable exit — is not as appealing as it once was. Many of the fintechs that went public last year have since fizzled out in the last few months of 2021, deflating valuations.
"A sense of reality's seeping in now to the valuations, particularly the public stocks — we have SoFi, and FlyWire, Remitly, Avid[Xchange], now Nubank — that have all gone public in a pretty short period of time all taken very significant hits in the last two to three months," said Nigel Morris, managing partner at QED Investors.
And the durability of how long this downward pressure will persist is hard to suss out.
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"This is by no means a floor. It could keep falling," said Matt Harris, partner at Bain Capital Ventures.
"There's widespread carnage across the board," Morris added, and that's serving as a cautionary tale for fintechs considering going public. The prospect of getting a big payday via acquisition has become rosier.
Meanwhile, there's a strategic shift occurring in the world of fintech. Technology companies that cut their teeth specializing in one aspect of finance — be it lending, personal finance, or buy now, pay later — have begun expanding into other banking functions with the goal of becoming a one-stop-shop or "super fintech."
And while one way to grow is to develop new features internally, buying up competitors with complimentary products has become a growing trend among both consumer-facing and behind-the-scenes fintechs.
Fractal, an AI and analytics fintech, announced plans to acquire Neal Analytics, a cloud- and data-focused firm, on January 11, a week after the former raised $360 million. Sift, a fraud-prevention startup, acquired biometrics firm Keyless in November after adding $25 million to its $50 million Series E in April.Digital bank MoneyLion has a pending acquisition of Even Financial, a fintech that builds APIs, in addition to its $75 million deal for digital-media firm MALKA.
Fintechs have become "strategic buyers themselves," as S&P Global Market Intelligence put it in a January 10 research paper.
To put it simply, there's a mass of fintechs flush with cash from a year of easy funding. They now have the capital to buy up other fintechs to expand and become a one-stop-shop. And the appeal of going public has lost its lustre.
"Capital in 2022 is going to be also very strategic: who can get it, who can get it quickly, who can deploy it," Steve McLaughlin, founder, CEO, and managing partner at FT Partners, said of fintechs' spending strategies.
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Bigger fintechs are poised to snap up smaller ones, but legacy players won't be far behind
Even though fintech M&A broke records in 2021 (906 deals compared with 540 in 2020, per CB Insights), activity is anticipated to only ramp up in 2022.
Some of the biggest or most notable 2021 fintech deals came from incumbents. Block (formerly Square) announced its $29 billion plan to acquire buy now, pay later fintech Afterpay. PayPal announced it would buy Paidy Inc. for $2.7 billion. Goldman Sachs is setto purchase installment-lender Greensky for $2.2 billion.
But don't expect that trend to continue.
"The legacy players are not going to be as active as you think just because it takes longer for them to gear up. They're not feeling completely threatened yet — they will be," said Annie Lemont, co-founder and managing partner of VC firm Oak HC/FT.
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Still, there will be some deals from bigger players. While there are only a few banks that are active in fintech M&A today, the "vast sea" of firms that haven't been engaged will start to be this year, QED's Morris said.
Smaller and regional banks are likely to join the ranks of JPMorgan, which has snapped up at least 10 fintech and consumer-focused startups since 2020. Meanwhile, Bank of America, Capital One, and Fifth Thirdhave used fintech acquisitions in the past year to push further into the healthcare space.
And core providers, technology firms that provide back-end banking technology to financial institutions, are also likely to wade back into the M&A frenzy after a brief retreat during the pandemic.
"Who have been the most active acquirers? It's been FIS, Fiserv, and Global [Payments] if you go like last decade, and not that much recently right?" Bain Capital's Harris said. "That to me feels like valuation mismatch causing inertia in a trifecta of companies that, otherwise, were the bid. And so I could see that bid coming back."
