Big tech rather than banks to drive fintech M&A in 2021, with payments key – S&P Global

Banks will still have the appetite for financial technology M&A in 2021, but the economic uncertainty created by the coronavirus pandemic will make them more cautious in their dealmaking, analysts said.

The COVID-19 crisis has put pressure on banks to improve their digital offering as lockdowns have forced customers to use applications and online banking rather than visit branches. Buying up small, innovative fintechs can be a faster and more effective way for banks to improve their tech offerings, and the infrastructure that supports them, than building their own solutions. But given the punishing year that lenders have had, and the bleak economic outlook for 2021, their capacity for larger deals will be constrained.

Big techs such as Facebook Inc. and Alphabet Inc., on the other hand, have deeper pockets.

Meanwhile, a streak of M&A in the payments world in 2020 is likely to continue this year, as the shift to digital payments ushered in by the pandemic makes payments fintechs attractive targets.

Big tech, deep pockets

Although it is still difficult to see what the wider-reaching impacts of the events of 2020 will be, many corporates will be taking a "longer-term view" and will be thinking about the importance of technology and innovation, according to Fionnghuala Griggs, partner and global co-head of fintech at Linklaters. For many banks, card networks and other financial institutions, M&A will still look like an attractive way to broaden their geographic coverage and unlock potential benefits of scale, she said.

But they will be far more circumspect in the coming year when it comes to dealmaking.

"Given the economic uncertainty they will be understandably cautious over how they deploy their resources for M&A opportunities, and therefore we expect that there will be an increased focus on valuation, and on the ability of fintech business models to generate profits on a longer-term basis," she said in an email.

The need to provide better, faster and cheaper financial services remains a powerful driver for investment by banks into fintech, according to Benjamin Ensor, director of research at 11:FS, a fintech and banking tech consultancy. But the pandemic has diminished banks' appetite and ability to make acquisitions.

"What has changed with the pandemic is the appetite and ability of companies to invest and so take part in acquisitions. Specifically, the earnings outlook for most banks deteriorated sharply with the onset of pandemic and is unlikely to improve dramatically even with the gradual roll out of vaccines because of the huge damage to businesses right across most economies," he said in an email.

"While banks and other financial services companies may want to invest in promising fintechs, they have less capital available to do so than they did at the start of 2020," he said.

By contrast, "big tech" companies have "thrived" during the pandemic and have money to spend on acquisitions, he said.

Although a banking crisis was averted in Europe in 2020 due to robust fiscal and monetary support, profitability at European lenders will be "subdued" in 2021, according to a December analyst note from Scope Ratings.

The picture for tech giants, however, is brighter. Retail behemoth Amazon.com Inc.'s earnings per share exceeded analyst expectations in the third quarter, at $12.37 compared with the S&P Capital IQ mean consensus estimate of $7.53, while the company said that it expects double-digit growth in sales in the fourth quarter. Google LLC parent Alphabet Inc. reported a 14% year-over-year increase in revenues in the third quarter, at $46.17 billion, partly thanks to a rebound in its digital advertising business.

"Big techs" have been muscling their way into financial services in recent years, having lent $572 billion globally in 2019, double the amount of credit extended by fintechs that year, according to the Bank for International Settlements.

Even if incumbent financial institutions such as banks, investment management companies and insurance companies want to buy fintechs, they may increasingly find themselves outbid, either by big tech firms or established fintech companies that are looking to bolster their capabilities in areas such as artificial intelligence, Ensor said.

Payments heats up

M&A involving payments companies was a major theme in 2020, with a number of large European deals including Nexi SpA's 7.8 billion deal to buy Danish rival Nets A/S, agreed in November, and Worldline SA's 7.8 billion acquisition of Ingenico Group SA, cleared by European regulators in October.

Linklaters' Griggs anticipates further payments M&A in 2021.

"The events of 2020 have placed ever-increasing focus on the value of digitalization and technology in payment service, and has also driven widespread innovation in the sector, including significant growth opportunities for companies offering new payment methods. As a result we expect fintechs focused on payments ... to remain attractive investment prospects, whether for full acquisitions, minority investments or strategic partnerships," she said.

Some 420 billion transactions worth $7 trillion are anticipated to switch from cash to cards and digital payments by 2023, rising to US$48 trillion by 2030, according to November research from Accenture. The coronavirus pandemic has sped up the shift to digital payments "at a pace banks could not have predicted," Sulabh Agarwal, who leads Accenture's payments practice globally, said in a company statement.

The pandemic triggered a major shift toward digital payments in much of Europe, especially in countries such as Greece and Italy, where the public have traditionally leaned toward using cash instead of card, online or mobile transactions.

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Big tech rather than banks to drive fintech M&A in 2021, with payments key - S&P Global