Fintech M&A deals- Mastercard’s acquisition of Finicity

With many M&A transactions coming to a standstill in March, different sectors’ M&A activity resumed at different times throughout the year. One sector that has largely benefited from the ongoing pandemic outbreak is financial technology (fintech), which is coincidentally the UK’s best-funded tech-based sector. Fintech companies integrate technologies to automate and digitalise many traditional financial services and products. Services can range from automated financial advice or trading, to processing online payments. Some fintech sub-sectors have benefited more than others from the ongoing pandemic due to the resulting acceleration of digitalisation. One sub-sector that has benefitted from the trend of digitalisation and the movement towards a more cashless society is the digital payments space. Digital payments volume has increased almost 25% this year, stimulated by the reliance of online shopping and reluctance to handle cash during the pandemic. As a result of the resilient nature of the fintech sector and growing optimism surrounding fintech as a whole, M&A activity recovered relatively quickly for specific sub-sectors within fintech, such as the payments space. For instance, KPMG revealed that UK payment M&A deal volume in 2020Q1 exceeded the total number of deals in the whole of 2019. 

There has been a trend of consolidation in the fintech industry in recent years. Many of the large traditional financial services firms, such as Visa, Mastercard and American Express, have engaged in a large number of acquisitions of start-up companies in recent years. The aforementioned acceleration of digitalisation has accelerated the rate of acquisitions, and the larger firms are seeking access to the innovative and profitable services of the newest fintech companies. Given the heavily regulation that the financial services industry is scrutinised with, it has become harder for established firms to innovate and develop new arms for their own businesses. Hence, opportunities arise for start-up companies to develop their own innovative products and services, that the more prominent players would find it difficult to develop themselves due to the regulation. This leaves the larger companies behind in terms of new product or service offerings, and M&A deals are the easiest way to catch up. Strategic acquisitions enable acquirers to not necessarily need to innovate themselves, but instead acquire other businesses to widen their ecosystems and possess more products and services to offer consumers, and also eliminate competition. 

In June 2020, Mastercard announced that it would acquire Finicity for 825 million USD at close, but with a possible 160 million USD in extra consideration based on performance targets. The strategic rationale behind the deal makes sense long-term, but this deal was estimated to have been priced at over 50 times Finicity’s annual revenue, possibly accounting for the vast synergies to be realised upon integration. Based on a revenue multiple of 50x, this would yield an annual revenue figure for Finicity of around 19.7 million USD, which is a tiny percentage of Mastercard’s mammoth 2019 revenue figure of 16.88 billion USD. Hence, it is clear that the rationale behind this deal was driven from the long-term synergies, rather than current fundamentals. Extremely high valuation multiples have developed in public tech markets, and has also partially been realised in private markets as investors want a piece of the resilient, long-term prospects of the innovative companies that make up this market. It not uncommon to see such high valuation multiples in fintech M&A deals, as there is always competition for acquisitions in this market from the traditional players, which results in a bid-up price. 

Finicity is an open banking company that uses its application programming interface (API) to enable third-parties to connect to financial institutions and access a consumer’s banking, transaction history, and other financial data in real-time. Open banking was an initiative aimed to centralise the consumer throughout the banking process by permitting access to their data to provide a better financial package via a more informative and transparent process. Traditionally, consumers searching for financial services or products were often restricted for choice, as the large firms dominated the market, thereby limiting visibility of products from smaller firms. However, with the implementation of the open banking initiative, consumers could compare different packages of products or services, which are tailored and best suited to their usages and needs. The tailored packages are determined via the aggregation and analyses of data collected over different points of the consumer network. Finicity collects data by facilitating access to secure, consumer data on a data-sharing ecosystem between fintech companies and consumers. It then handles and analyses the data gathered throughout these processes and transactions. Finicity’s customers include Experian, Bank of America and Rocket Mortgage, and has offices in Utah and Mumbai with around 445 employees. It is also known to operate using a very bank-friendly model which help banks make better-informed decisions on matters such as credit lending, account verification or account-based payment initiation. As stated by Mastercard’s president “they’re [open banking services] helping banks in terms of doing better credit decisioning, they’re helping bank’s customers make sure they can apply for a mortgage or a loan in a much more easy fashion.” Hence, the addition of Finicity’s strong API would enable Mastercard to improve their services’ efficiency to sustain long-term competitiveness.

Strategically, the rationale regarding the acquisition makes sense. The acquisition of Finicity will aid Mastercard in strengthening their global open banking platform. Mastercard has organically grown its own open banking service in Europe (a much more regulated marketplace). However, this acquisition will accelerate Mastercard’s global expansion of its open banking platform by inorganically growing its own open banking platform in other key geographies and advance its position as a strong open banking partner for fintech companies and financial institutions. Mastercard aims to leverage Finicity’s existing relationships and become a “one-stop partner” for North America’s banking, lending and wealth management ecosystems. The implementation of Finicity’s API will enhance user experience and offer consumers and small businesses better and more tailored services provided by Mastercard from streamlining the decision-making process. This could ensue revenue synergies as the enhanced service may attract future customers to Finicity’s advanced and efficient API, combined with the trustworthy utility that comes with the Mastercard brand. The expansion of Mastercard’s current open banking platform in this way would enhance their positioning in this market, as the use of data is growing, and more firms are beginning to utilise consumer data in this way. Earlier this year, Visa acquired Plaid, a fintech company that connects fintech applications to consumer bank accounts, whilst aggregating data in the process. So, it is clear that large financial institutions see the future being more a consumer-centric process, with data aggregation and analysis as one way to achieve this. Furthermore, acquiring data-collecting fintech companies provide the opportunity to sell the data to partnering banks and institutions – providing further value to a proposed acquisition. 

Overall, it is likely that the trend of consolidation in this industry will continue, especially given the low interest rate environment combined with the rapid pace of new start-up companies that are emerging. Cheap financing is relatively easy to access, particularly for the larger cash-rich firms such as Visa, Mastercard and American Express. Hence, this generates a fruitful setting for rife M&A activity in this sector, given that the future leans towards a sustainably fast rate of digitalisation, with many economists calling this the fourth industrial revolution. Larger firms will continue to want access to the new products and services which are being developed and it is no coincidence that the fintech sector is the UK’s most funded tech sector considering the optimism surrounding how these new services will revolutionise the financial services industry. Young fintech companies are typically able to implement a more consumer-centric service, which seems to be what is achieving more success in this era from a change in consumer expectations for newer generations. These are primary reasons why the valuations of these companies have been bid up so much: the fintech sector contains over 12% of recognised unicorns (start-up companies with valuations of $1B+), which have resulted from extensive M&A interest. Larger companies can implement fintech services to large addressable markets that it either is already operating in or looking to expand into. In the case of Finicity, the enhanced service offered by the merged company will streamline and make processes and services more efficient for Mastercard and the consumer, and thus, provide a more consumer-centric and profitable service.