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Record pace of fintech M&A, funding in Q1'21 has legs


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Record pace of fintech M&A, funding in Q1'21 has legs

M&A and fundraising activity in the fintech sector has started at a torrid pace in 2021 and shows no signs of slowing.

That was the message that Greg Smith, managing director and director of research at fintech-focused investment bank FT Partners, delivered in the latest Street Talk podcast. In the episode, Smith discussed recent M&A and fundraising trends in the fintech sector and activity from special purpose acquisition companies in the space. He also offered his view of fintech valuations, the subsectors the have garnered the most interest and the outlook for dealmaking activity, including between banks and fintechs.

The first quarter of 2021 set a record for fintech funding and the number of M&A transactions in the sector, according to FT Partners. Deal volume stood at a third highest level ever recorded, trailing only the fourth quarter of 2020 and the first quarter of 2019, according to the firm.

While such strong number stand out, particularly when transaction activity lagged in other sectors such as the bank and thrift space, Smith expects fintech dealmaking activity to continue at a healthy clip given the breadth of financial services that could benefit from enhanced technology.

"We're still in the early innings of this. Believe it or not, there's still a long ways to go," Smith said on the episode. "We're eventually going to see more M&A from traditional financial services companies acquiring fintech. It's sort of difficult right now given the valuation disparities. And as long as the capital markets are as strong as they are, we'll continue to see IPO and SPAC activity. But if valuations were to come in, we'd probably see some of the traditional guys get a little more aggressive. So it feels a little crazy to say it, but I think we're going to continue to see kind of this strength persist."

Smith said the payments subsector within the fintech arena has historically been the most active but interest and activity in the banking subsector — which includes banking technology, fintech lenders, new challenger banks, and real estate technology, according to FT Partners — has taken the baton as the new leader in transaction activity.

Smith said the banking subsector has attracted the most attention because the pandemic has accelerated digital adoption among banking customers. He said every single bank needs to rethink their digital strategy and complete an "incredible" amount of work from the front office all the way back to the back office.

With that in mind, Smith said there is a particularly strong case to be made for business-to-business fintech players, which offer products and services that facilitate the automation of many operations. Those B2B operators do not have customer acquisition costs nor do they need to spend money to build a brand like other fintech players, Smith said.

"Investors like this space broadly because it's so big. It's a huge space," Smith said. "Lots of incumbent banks are going to survive. A number of new entrants will be successful. And then if you're just powering everyone from a B2B perspective, you can win no matter which way the wind blows."

A number of fintech players have been assigned lofty valuations in recent transactions. Some challenger banks like Chime Financial Inc. received a post money valuation of nearly $15 billion during their last fundraising. That puts Chime's valuation in the ballpark of market caps of large regional banks like Huntington Bancshares Inc. and Signature Bank. Chime reportedly has more primary banking customers than regional banks of that size, but the traditional banks appear to carry far larger asset bases.

Smith said the market is clearly suggesting that challenger banks like Chime will be big winners and ultimately become much larger institutions. If those challengers stopped growing at such a fast rate, then the underlying business would not support the valuation, he said.

Still, he noted that challenger banks would not have to take dramatic market share to build a fairly large organization.

"You don't have to take 20% of [JPMorgan Chase & Co.]'s customers, you just have to incrementally aggregate enough customers," Smith said. "And you can do that without putting any other bank out of business, frankly. If you think about it, if you're attracting a younger demographic, attracting some others that are maybe disillusioned by their traditional relationships, you can put together a very large bank that, again, doesn't put anyone out of business. That's why it can be such an attractive space."

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"Street Talk" is a podcast hosted by S&P Global Market Intelligence.

Listen on SoundCloud, iTunes and Spotify.