Fernway DiarySM

Oct 17, 2022

2022 has seen a continuation of a small but steady trend in the fintech space: banks investing in or purchasing fintech startups. Where once fintech may have been seen as disruptive to the traditional banking industry, banking firms are increasingly regarding investment in or partnership with fintech companies as a means of gaining access to new talent, technology, and products that allow them to attract a diversified customer base. With valuations depressed and the venture capital market uncertain, banks are taking opportunities to make strategic investments, a trend experts expect to continue.

Notable Deal Activity

While some banks have recently invested by acquiring a minority stake in a fintech or backing an investment round, others have purchased fintech startups outright. Recently, British multinational bank and financial services holding company HSBC acquired a minority stake in Monese, a London-based fintech offering digital banking and remittance services for consumers, for $35 million. The deal is intended to enable HSBC to expand its operations through Monese’s banking-as-a-service (BaaS) platform; in a statement, HSBC’s group head of retail banking and strategy, wealth and personal banking noted, “This new partnership is a key step towards helping us deliver digital wealth and banking tools at pace and scale, combining Monese’s fintech credentials with our own global wealth and banking capabilities.” The startup had previously secured funding from Investec with a similar deal.

Other examples of this type of partnership include Lloyds investing £11 million in Thought Machine to leverage its cloud-based core banking services platform Vault, in exchange for a 10 percent stake in the company, and Bank of America leading a $20 million Series A investment round in fintech startup Banked. Brad Goodall, CEO and founder of the London-based startup, felt the support of Bank of America early in Banked’s development was an opportunity to mature the startup’s technology and professionalize the organization while benefiting from BofA’s banking infrastructure, regulatory support, and name recognition, saying, “I do believe that fintechs that can work with banks are going to have more resilience and support in the longer term.”

Other big banks have elected to buy fintechs outright in recent quarters. These include JPMorgan Chase entering into an agreement to purchase independent digital wealth manager Nutmeg to complement the digital bank planned for U.K. launch under the Chase brand, and Western Alliance Bancorp. completing the acquisition of Digital Settlement Technologies, a Los Angeles–based digital payments platform for the class action legal industry.

Industry experts note that banks make up a small part of the overall fintech M&A market; of a total of 484 fintech M&A deals in 2021, banks accounted for 8 of the buyers. Bank acquisitions of fintechs also tend to be smaller deals, with only 3 surpassing $1 billion in deal value since 2012. By contrast, 16 deals in 2021 involved private equity investors or fintech firms spending over $1 billion to acquire a fintech target. Both the size and pace of bank purchases of fintechs are attributed to the frequently purpose-based nature of the acquisitions. Rather than building out digital capabilities in-house, banks seek out startups whose capabilities fulfill existing needs to integrate into the organization’s existing structure.

The Convergence of Fintech and Banking

Many factors are likely to influence the likelihood of deals between banks and fintech firms in the near term. Fintechs’ ability to launch new products and services quickly may be a draw for banks seeking to expand new technological capabilities, while fintechs may view banks’ expertise and infrastructure as helpful support for achieving growth in a volatile global economy. Nevertheless, economic uncertainty may exercise a dampening effect on such investment.

In tough market conditions, startups should obtain timely expert advice, put effective corporate structures in place, and maintain accurate financials to position themselves for continued growth, future funding rounds, or advantageous exit opportunities. Fernway Solutions offers a full range of advisory, corporate structuring, tax planning, compliance, and accounting services to ensure your startup has what it needs at each stage of its growth.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

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