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Fintechs achieve record valuations as pandemic accelerates digital banking

As banks focus on digital capabilities, financial technology companies that can deliver best-in-class solutions are achieving record-high valuations.

nCino Inc., which provides a commercial lending operating system for banks, priced its IPO at $31.00 per share, and shares closed at about $91 on opening day. Intercontinental Exchange Inc. recently announced its acquisition of mortgage-software provider Ellie Mae Inc. at an $11 billion valuation, almost three times higher than what Thoma Bravo LLC paid for the company a year prior. And Black Knight Inc.'s valuation reached historic highs after its July 27 announcement that it will acquire Optimal Blue LLC, a provider of secondary market solutions.

Banks have been prioritizing digital innovation for years, and the recent digital surge due to social distancing measures has increased the pressure.

"There has been an absolute acceleration for the need of a lot of different products and services," Frank Sorrentino III, CEO of Englewood Cliffs, N.J.-based ConnectOne Bancorp Inc., said in an interview. "If you're a fintech that is looking to make a bank's job easier and provide some relief for the friction that's in the process of servicing a client, there's a lot of opportunity there. Those companies have become very, very valuable because the marketplace is wide open for them."

The COVID-19 pandemic has highlighted the need for fintechs that partner with banks, putting them in a stronger position than fintechs looking to take market share, said Sam Kilmer, senior director at Cornerstone Advisors.

"The fintechs that are serving banks, like nCino, Ellie Mae and Black Knight are in a much better position right now," he said in an interview. "What COVID did, it dropped a grenade in [banks'] laps. COVID forced a very quick need to adapt."

As demand for technology grows, banks will increasingly seek out relationships with fintech companies that can provide valuable products and services. ConnectOne Bancorp currently has a partnership with nCino, which provides cloud-based software to financial institutions, and recently acquired online business lending marketplace BoeFly LLC in 2019.

"We are going to be doing more of those types of things," Sorrentino said. "There is a really good combination that can go on there to be able to take advantage of the agility that a fintech may have and then partner it with the ability of banks to utilize their balance sheets to support the economy."

Fintechs are also seeing opportunity because more banks are seeking different providers for best-in-class solutions, according to Kilmer.

"More and more banks are using one provider for consumer loan origination, another for digital banking, another for mortgage loan origination, and another for deposit account origination," he said. "Those different companies are good at different things, and that is very opportunistic for a lot of these fintechs."

ENACOMM Inc., which provides customer self-service applications to a variety of industries, has seen an increase in inquiries from financial institutions since the COVID-19 pandemic came to the U.S. in March, said Michael Boukadakis, founder, chairman and CEO.

"It's a great time to be in technology if you're selling products and services to institutions," he said in an interview.

Executives at financial institutions are coming to ENACOMM with similar questions, Boukadakis said: "'Tell me what I need to manage our current demand with branches being closed and how can I expand to handle a future spike? What can we do, what can we purchase and what can we implement to help us compete?'"

Many inquiries are coming from community banks and credit unions. "For a small bank to stay competitive, it's really simple. ... You've got to make banking easy," said Shawn Hughes, president and COO at ENACOMM. "The smartest banks are going to be figuring out how to partner with fintechs."