The FinTech industry, long seen as a threat by some to the established banks, are increasingly becoming acquisition targets for traditional US banks as rising interest rates and falling valuations affect expansion plans.
The valuations of listed FinTechs have plunged 70% in 2022, analysts at Jefferies Group said in a note last week, and which Payments Cards & Mobile reported on.
In the same period, the valuations of banks in the S&P 500 are down 33%, while valuations for the S&P 500 are down 23%, 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 is one such bank. The 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 said.
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.
“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 in an interview with Reuters.
The renewed interest contrasts with previous years, when finance chiefs balked at acquiring companies they saw as too richly valued.
The year’s losses have been steep. For example, shares of Affirm Holdings, which offers buy-now pay-later services, have fallen about 85% this year. Personal finance firm Dave has plunged almost 97%.
Start-up 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, a cloud-based payments technology company, the latest in a string of deals worth $5 billion over the past 18 months.
PNC Financial Services 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.
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.
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.
One bank looked at over 50 potential acquisitions this year and finally landed on one firm, however, as the CEO of the bank said, “valuations have come way down, our activity level might be higher.”
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