The coronavirus outbreak could spark consolidation in Europe's financial technology sector, but forget big deals involving unicorns, industry experts said. "Unsexy" fintechs that offer nuts-and-bolts solutions such as antifraud, know-your-customer and Open Banking tools could become the hot ticket, as big banks scramble to buy up small companies that provide technologies they need.
With much of Europe under lockdown due to the new coronavirus, lenders need to improve their digital capabilities to keep serving customers. Not only are most branches closed, but customers increasingly need to get in touch with their banks for reasons such as arranging business interruption loans or mortgage holidays. Banks that have claimed to be fully digital are being put to the test, and with many found wanting, buying tech and expertise may be the fastest way of filling the gap, according to the experts.
Another M&A driver could come in the form of Chinese fintechs Ant Financial Services Group and Tencent Holdings Ltd., which are on the international acquisition trail and could take advantage of low valuations amid the downturn.
The pandemic has revealed some uncomfortable truths about incumbent banks, according to Radboud Vlaar, co-founder and partner of venture capital firm Finch Capital. Many banks that purported to be "end-to-end digital" are nothing of the sort, he said in an interview. The pandemic and accompanying lockdown mean that banks need to ramp up their digital capabilities, and fast. For some, M&A might be the most expedient way to do this.
"We could see banks buying companies that make enabling technologies, rather than trying to build the technology themselves," he said.
Examples of "enabling" technologies are artificial intelligence and chatbots, which could help banks dealing with a spike in customer calls, an April 1 research report from Finch Capital said. Tools that help with customer onboarding and remote working will also be in high demand with bank branches and offices closed, according to the report.
Prior to the outbreak, one of the most talked-about fintech deals of 2020 involved Visa Inc. buying startup Plaid Inc., an "enabler" that specializes in application programming interfaces, or APIs, for $4.90 billion in January. APIs are a critical piece of technology in Open Banking, acting as a middle man between bank accounts and third parties, such as fintechs. Open Banking, and its European counterpart, the second EU Payment Services Directive, are directives that enable customers to access products and services from third parties via their primary bank account.
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The pandemic is likely to be a catalyst for deals involving banks buying "enablers," according to Finch Capital. But we should not expect anything of the same size as the Plaid acquisition, and most M&A will be below the $250 million mark, Vlaar said.
Sarah Kocianski, head of research at London-based fintech consultancy 11:FS, also foresees big banks buying up fintechs.
"Large banks' push towards digital servicing should be accelerated exponentially by the combination of more customers needing to get in touch with them about more things, and the fact that social distancing will likely continue for months," she said.
To launch "truly digital" products, banks will need to sort out back-end processes and figure out how to integrate new products into existing systems, Kocianski said.
"To do all of that quickly and efficiently, they will need help, and it makes sense to buy some of that help," she said.
Isabelle O'Keefe, principal at VC fund Sure Ventures PLC, said the fund is "bullish" on fintechs specializing in AI, especially those providing solutions such as chatbots and KYC tools.
Trade sales will start to look like a more likely exit for young fintechs than IPOs, she said.
China's fintech giants seem to be emerging from the pandemic in a position of strength, and could be in the market for buying up European fintechs at low valuations, according to Vlaar.
Consolidation and M&A could happen in the crowded challenger banking market amid an economic downturn, Vlaar said. Big banks are not natural buyers for challengers, since most already have a digital banking arm, for example, Kinetic in the case of HSBC Holdings PLC, but a big Chinese fintech looking to grow its footprint in the European market could be, he said.
Tencent and Alibaba Group Holding Ltd., which is Ant Financial's ultimate parent, were some of the steadiest performers among publicly listed Chinese companies in the first quarter of this year, according to an April 3 note from S&P Dow Jones Indices. The two companies' share prices fell 1.58% and 11.5% in the first quarter, mild declines by comparison to other large Chinese companies.
Chinese fintech giants are likely candidates for international M&A, Kocianski said.
"They have money to burn and will especially be looking for what they can do to expand reach outside of China, most likely in Southeast Asia but also potentially Europe," she said.
Richard Turrin, a Shanghai-based fintech consultant and former banker, said Tencent and Ant Financial had already set their sights on fintech M&A before the pandemic.
"It is certainly possible that companies they may have liked but rejected last year will come back with cheaper prices this year and they'll snap them up. So I agree that they'll be buying but I see it as part of an existing plan," he said.
Ant Financial bought a stake in Swedish fintech unicorn Klarna Holding AB in March this year, a deal industry insiders say shows the growing appetite of Chinese fintech giants for a slice of the European market.