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Fintech M&A 2020 Deal Tracker: Mastercard goes on shopping spree

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Fintech M&A 2020 Deal Tracker: Mastercard goes on shopping spree

Even in the teeth of the pandemic, there has been a steady flow of financial technology mergers over the $1 billion mark. Intercontinental Exchange, Inc. announced the $11 billion acquisition of mortgage software provider Ellie Mae Inc. in August, completing the deal earlier in September, while software firm Roper Technologies Inc. announcing its $5.35 billion purchase of insurtech company Vertafore Inc. in August, also going on to finalized the deal in September.

Global card networks, and Mastercard Inc. in particular, have been important drivers of M&A activity this year. Mastercard and its peers are using fintech acquisitions as a way to reinvent themselves and to signal to the market that they are more than just a set of payment rails, industry observers say. In some cases, this is motivated by a desire to stay relevant in a world where an increasing number of transactions bypass credit and debit cards entirely.

Reinvention by M&A

Visa Inc. set the tone with its $4.9 billion cash acquisition of California-based Plaid Inc. in January. Plaid provides application programming interfaces, the technology that sits at the heart of Open Banking. Not to be outdone, Mastercard bought Salt Lake City-based Finicity Corp., also an API specialist, for up to $985.0 million in June.

For Mastercard, the deal follows hot on the heels of its deal to acquire a unit of Danish-based payments company Nets Holding A/S for $3.19 billion in August 2019. The company's acquisitive streak has continued, with an agreement earlier this September to buy Australian payment services firm Wameja Limited for $126.1 million.

American Express Co. struck an agreement during August to buy Kabbage Inc., a digital lender focused on small and medium-sized enterprises. The deal value has not been disclosed publicly, but American Express is understood to be buying Kabbage's tech and platform, but not its loan book.

For Jordan McKee, research director at 451 Research, an S&P Global Market Intelligence company, the recent flurry of deals by Mastercard and its peers is a sign of payment network companies future-proofing themselves amid a period of rapid change.

"I see these deals primarily as diversification plays," he said in an interview.

With deals involving companies in the APIs and payment-processing space, Mastercard and its peers are "assuming a new role as a connector of banks and fintechs," he said.

Ysbrant Marcelis, development partner at Commerce Ventures, a VC fund, also sees the recent streak of M&A by Mastercard in particular as a sign of a company redefining itself.

"Payment networks are deliberately looking to expand to become platform providers, not just card networks," he said in an interview.

A spokesperson for Mastercard confirmed that the company is broadening its vision.

"Mastercard aims to be an active participant in all types of electronic payments and payment flows. That means showing up in all types of payments — account-to-account, card or other. The Finicity acquisition fits well with our strategy and accelerates our efforts to deliver a deeper and sustained shift from the use of cash and checks, while also enhancing our services offering to benefit issuers, businesses, governments and, ultimately, consumers," the company said in an email.

While Mastercard declined to comment on whether it plans to continue its streak of acquisitions, the company is "always engaged in conversations with partners and customers," the spokesperson said.

Outside of payment networks, other significant deals this year include online personal finance company Social Finance Inc.'s, or SoFi's, $1.20 billion purchase of Galileo Financial Technologies, which, like Finicity, is a Salt Lake City-based API specialist.

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API's growing appeal

While industry observers agreed that the rationale for Mastercard's recent API purchase was clear, the SoFi-Galileo deal left some scratching their heads. 451 Research's McKee said that he "struggled to connect the dots" when it came to understanding why SoFi — which offers student loan refinancing, mortgages and other educational loans — would want to buy an entire API company.

Galileo offers card issuing and digital infrastructure services to household names such as digital bank Chime Financial Inc. and Robinhood Markets Inc., and had counted SoFi as a client ahead of the merger.

Lex Sokolin, chief marketing officer and global fintech head at Consensys, a blockchain technology firm, said the motivation behind the deal is obvious.

"For SoFi, the core reasoning is to acquire a vendor that powers payments and credit functionality within its app," he said in an email.

The deal speaks to two trends that are on the ascendant in the fintech world, according to Sokolin. These are so-called embedded finance and the rising importance of the API.

"Plaid's acquisition by Visa was the big signal that API-based fintech was valuable," he said.

Embedded finance, an increasingly popular buzzword in fintech, is a business model in which consumer financial services are increasingly distributed not by financial institutions, but are "embedded" into products provided by nonfinancial companies. An example of this could be a tech giant such as Amazon providing consumer loans, or a ride-hailing app providing a bank account or a card to its drivers.

Other deals of note announced during the pandemic include Australian-based Zip Co Ltd.'s acquisition of U.S. installment payment provider QuadPay Inc., and Bouygues Telecom SA's agreement to buy Euro-Information - Européenne De Traitement De L'information, a fintech company belonging to Crédit Mutuel Group.

The latter deal comprises an exclusive distribution partnership between Crédit Mutuel, Crédit Industriel et Commercial SA and Bouygues Telecom, which will boost Bouygues Telecom's customer base by more than 2 million.