What Are The Best Areas For Fintech Acquisition?
Banks have altered over the last five years, in part by concentrating on bank-to-bank mergers. However, the boom in banking M&A will move away from conventional acquisitions as banks seek innovative technologies and distinctive customer experiences to safeguard under-attack profit sources. SME Bank discovered that "ecosystem deals" (where the buyer purchases outside of the core sector to develop the company) provided 3.4x higher value in the long term than "builder deals" in a soon-to-be-published research of banking and payments M&A and private placement transactions This contributes to the appeal of fintechs in terms of value generation. In the first three quarters of 2021, Commercial banks made 62 equity investments in fintech startups, which is higher than the number for the whole year of 2020 and roughly equal to the 67 made in 2018 and 2019. Fintech acquisitions are now at the forefront of capability-driven plays, allowing cash-strapped banks to improve their competitive positioning by addressing changing consumer demand, addressing regulation, expanding markets, and augmenting scale and digital capabilities — all of which indicate robust activity: Increasing values as a consequence of the abundance of capital, resulting in fewer conventional banking targets and more appealing fintechs. Read More: Easy way to Open Saving Account More fintechs are seeking banking licences in order to compete with industry heavyweights. Banks are purchasing fintechs to address their digital consumer base in order to compete with them. Banks are divesting non-core assets to free up money and concentrate on key capabilities and markets; given their larger skills and markets, fintechs are feasible solutions. Rising inflation may force banks to reconsider their future strategy and either target fintechs for new income streams or enter new industries. Fintech acquisitions will become more important in banking changes. As we've seen in previous market downturns, values may flatten, making fintech targets more appealing. Fintech integrations are particularly difficult: 80% of technology purchases fail, compared to 50% of conventional M&A deals. Merger success is as much an art as it is a science in three critical areas: developing the transaction thesis, completing due diligence, and planning and implementing integrations. Read More: Are you Looking For A Loan For Small Business Investment / Deal Thesis: Acquiring a fintech differs greatly from acquiring a conventional bank. Value drivers such as economies of scale and regional growth are less important. Rather, acquirers must examine the future of target markets, changes in client requirements, reliance on ecosystem participants, and technological improvements. When determining the value potential, acquiring banks must also consider the pace with which they can fuel expansion, which is often associated with the degree of modernization of their technology. The internal rate of return, which banks use to determine the success of acquisitions, contrasts sharply with fintechs' laser focus on market share, product and customer growth. To retain value, banks should consider aligning their metrics with the transaction thesis, since a lack of clarity may erode value once the deal is done. Pre-deal due diligence should concentrate on the "new" parts of the investment thesis. These include general IT implications as well as platform-specific consequences; customer segment preferences, size, and growth; competitive dynamics; and conventional components like as risk and possible tax and legal responsibilities. In the case of technology diligence, the technological platform is crucial to the transaction case in a fintech acquisition. A platform-centric diligence that evaluates the business fit, future roadmap, development capability, technology maturity and flexibility, stability and performance, scalability, data security, supportability, and ability to integrate with the rest of the ecosystem will provide critical insight to the deal decision. This enables acquiring banks to be more precise about the worth of the technology while also understanding where the industry is heading. The fluidity of technology necessitates a close examination of market movement. An acquirer should consider how consumers are developing and embracing new goods and services, as well as how rivals are rising and moving their investment in technology, channels, services, and so on, to match continuously changing customer expectations. To acquire and maintain important capabilities, teams must also grasp and explain the organization's personnel strategy, as well as create a focus on culture. Read More: Easy ways to get Loan For Small Business Approach to integration: Speed is crucial, since the rate of technological developments may make a once-attractive target outdated. However, before proceeding, banks must understand how the fintech purchase will complement their long-term development goal in order to determine the optimum integration method. Is it an acquisition to achieve size in a current market, or an acquisition to enter new markets and/or create new capabilities? This will determine the sort of integration: purchasing the IP, tucking it in, standing alone, forming a joint venture, forming a culture of cultures (holding company), or completely integrating while retaining value, growth potential, and culture. The integration strategy has three components that must be considered: People: To maintain their development, fintechs must retain and continue to attract essential tech talent. To retain their new acquisition's personnel, banks must preserve or strengthen the employee value proposition and carefully define the merged entity's culture. This is performed by evaluating both cultures in order to determine the essential traits of the united organisation (e.g., entrepreneurial, fun, risk-taking vs. averse, etc.). Furthermore, the merged organisation must identify the most significant skill shortages and devise a plan to address them via internal development, recruitment, or outsourcing ("create, buy, borrow, or bot": Build - increase the workforce's skills and capacities. Buy - across all talent and skill pools to hire in the skills required Borrow - hire independent contractors, consultants, agencies, or other service providers. Bot - task or job automation Technology: Banks have historically been hesitant to upgrade their fundamental infrastructure, making it difficult to incorporate contemporary tech stacks. According to SME Bank study, 47% of banks have "a substantial degree" of their workloads on the cloud, but only 35% have realised the full benefit they intended. Technology businesses may plan successfully by detecting variances in the tech stack. A comprehensive technology plan should evaluate the age of systems, mainframes, and data centres. Governance, architecture, delivery techniques, and operating norms: how fast decisions are made, contracts are performed, and products are improved are all factors to consider for the technology operating model. All of these might have an influence on value realisation. For more informative blogs like that visit: SME BANK