Financial technology (fintech) companies like Square, Wealthsimple and Mint are already having disruptive effects in their respective industries, changing the way Canadians pay for goods and services, invest their savings, and manage their finances. A recent survey shows that Canadians are becoming less dependent on traditional banks given the variety of options to self-manage their finances.
At the same time, financings in the fintech sector have ramped up over the last five years. $7.4 billion was raised by venture-backed fintech firms in the first six months of 2016. As discussed in a previous blog post, there is some speculation that a wave of M&A may be on the horizon for fintech. A recent Mergermarket report (the Report) sheds light on the dynamics of M&A transactions in the fintech sector with, specifically, traditional banks.
The Report, which was conducted in the United States, found that there is optimism about the partnerships that can be forged by fintech companies and regional and community banks. Banks, in particular, are eager to embrace new technologies. Using financial technology gives banks the ability to improve their online services, decrease costs, and reach new customer bases. In fact, 81% of banks surveyed as part of the Report were already working with fintech companies, usually in the form of a formal partnership or joint venture.
On the flip side, the Report revealed that fintech companies and banks have a different view on how important it is to partner with each other. Whereas the majority of bank respondents viewed working with fintech companies as essential or very important, there was sentiment among many fintech firms that fintech can thrive without working with banks. Many fintech respondents envisioned the banking industry in ten years’ time as consisting of just a few large banks with fintech servicing all other niches.
The Report makes a few key conclusions. First, banks are eager to work with fintech companies and fintech companies can benefit from bank partnerships (which may bolster fledgling reputations and scale up customer bases). Second, data security and system integration remain perennial issues. Third, the risks involved with getting a fintech’s systems to communicate with a bank’s existing technology can pose barriers to partnership. Last, conducting due diligence, obtaining regulatory approvals and maintaining regulatory compliance are weighty considerations for companies looking to merge or acquire a fintech company.
There are some important differentiating factors in the Canadian market which may impact the Report’s application to Canada. Unlike the United States, Canada’s financial institution landscape is dominated by a handful of large established banks which, to a certain extent, have the ability to keep up with or emulate financial innovations using in-house resources. As well, the regulatory landscape, already complex in the United States, is notoriously more rigorous in Canada. A potential result may be a chilling effect for transactions with American fintech companies unused to the harsh Canadian environment.
Whether through M&A transactions with banks, via partnerships and joint ventures with established players in the banking industry, or by a company’s internal operations’ initiatives, fintech companies are going to continue to have a significant impact on the way Canadians bank.
Stay informed on M&A developments and subscribe to our blog today.