As 2023 winds into its final few months and 2024 dawns, banks may be on the prowl for acquisitions.
It’s not news, he said, that banks and FinTechs, once enemies, are collaborating and have struck partnerships with increasing frequency over the years. The year 2023 has been a bit of a speed bump, as the cost of capital has increased, and new FinTech formation has lagged amid headwinds in the VC and private equity space. But the long-term trend of banks and FinTechs working together remains intact.
That’s led to a familiarity on the part of banks with these digital-only upstarts, and a better sense of how they can contribute to the banks’ own technological roadmaps and evolution amid the great digital shift.
“The FinTechs are becoming more ‘in tune’ with what needs to be done on the regulatory and compliance front,” said Youakim. “They have been brought into the fold, and have been ‘professionalized’ — and now may be ready to be brought into a bank.”
As to the areas of interest, Youakim noted that FinTechs that focus on the “customer-facing” side of the equation will always be of interest, as banks will always be interested in tapping new markets. They’re also interested in improving infrastructure, and back-end processes.
Looking to Launch, and Get to Scale
“Banks are not great at digital, though they’re getting better at it,” said Youakim. And in at least some cases, when it comes to creating offerings at the digital, cutting edge, “they don’t have the chops or the ability and talent, internally, to launch a new product or get it to scale.”
He stressed that not all banks will seek to buy up their smaller FinTech partners. There are some banks that are focused on “professionalizing” partnerships, he said, but don’t act as acquirers. In fact, some banks, including Web Bank and Cross River Bank, specialize in “growing” FinTechs to the point where another bank would be interested in buying the startup.
For the digital upstarts, there’s a deal waiting in the wings, maybe, though there are a few caveats.
“If you’re in the innovation space as a FinTech, and you can prove profitability and prove growth, you’re likely to prove to be an attractive acquisition target for a bank,” said Youakim.
Of the waves of acquisitions on the horizon, he said, “I see this happening — maybe not this year, but next year and the year after that. Valuations, he said, “are out of whack” and “it’s hard to justify an ‘exit’ at these.” At least some of these FinTechs may be spurred on to pursue an exit strategy or risk going out of business — which in turn means that banks may wind up finding some good deals in the offing.
As the bank/FinTech linkups continue to increase, he said, banks will step back and examine whether buying up their FinTech ally makes sense — if the FinTech is already profitable.
Youakim knows whereof he speaks, having taken several firms from their earliest stages and grown them into more mature enterprises. And, he added, the founders of many smaller startups have yet to develop a full appreciation of how critical the regulatory and compliance aspects of financial services truly are.
“The FinTechs have to ‘grow up’ and get to the point where they can become a target once they have [compliance] under wraps in their businesses,” he said. Culture matters too, and FinTechs that have already developed core products and services — and are focused on building growth momentum — are likely to be more attractive to banks, he said.
Asked by Webster which areas are most fertile ground for acquisitions, Youakim said that “many banks want to bring AI into the fold to help with investment advice … If a bank can find a small startup that’s gaining momentum and has proven that their product works well, they can basically create the distribution platform within their bank that can explode it in terms of its capabilities or reach.”
Banks must proceed with a bit of caution, advised Youakim, and should “feather FinTechs in slowly … don’t try to pull it all off immediately.” And in scaling new offerings, with the FinTech’s technological know-how in the mix, he told Webster, “it’s like baking a cake. You don’t want to dump in all of the ingredients all at once.”