An extensive report has been shared, entitled Financial Fusion: Fintech’s M&A Landscape Unveiled: A guide to fintech M&A and the next wave of deals, by the researchers at Pitchbook.
PitchBook says that the Fintech sector continues to attract substantial investments but certain segments might have become oversaturated.
According to Pitchbook, here are the key takeaways:
- Heavy investment has led to both winners and overcrowding: Today’s fintech M&A landscape is informed by six years of heavy fintech investment through 2022. Fintech startups were an early darling and beneficiary of ZIRP-era capital flows. As a result, many fintech spaces appear crowded to us, including KYC/ AML, fraud detection/prevention, expense management, and underwriting as a service. A number of these companies will have to add new products, merge, get acquired, or close shop.
- Fintech M&A activity declining YoY: 2023 saw $28.3 billion in US/Canadian fintech M&A value, a 45.8% decrease from $52.2 billion in 2022 and a 36.5% decrease from $44.5 billion in 2021. 145 total fintech acquisitions were seen in 2023, representing a 15.7% decline from 2022’s 172 deals and a 48.9% decline from 2021’s 284 deals.
- Acquisitions favoring enterprise fintech: Enterprise fintech companies have been the primary targets of acquirers in fintech. In 2023, 90.7% of fintech M&A value ($25.7 billion) and 75.2% of fintech M&A count (109 deals) came from enterprise fintech acquisitions. From 2020 to 2023, the segments that saw the highest M&A value were financial services infrastructure ($31.7 billion), CFO stack ($29.2 billion), and payments ($27.9 billion).
- Future deal activity likely to favor some sectors: We expect additional strategic acquisitions to occur in the CFO stack, payments, financial services infrastructure, and wealthtech segments. Recent deals in these spaces have been completed to expand product offerings, break into new geographic markets, and capture new opportunities in generative AI.
Methodology:
The data provided in this fintech M&A note “looks at US and Canadian public and private fintech M&A from 2020 to 2023. M&A deals included during this period are based on announcement date rather than close date.”
They exclude companies that primarily “operate in digital assets, insurance technology, and property technology.”
The report from Pitchbook further revealed that European regulatory challenges persisting, though US pressure “could abate depending on the presidential election: Outsized deals may be viewed with caution due to regulatory challenges and antitrust concerns, further deterring large acquisitions.”
Regulatory complexities have slowed completion of deals “such as ICE’s acquisition of Black Knight and resulted in the blocking of attempted deals such as Visa’s acquisition of Plaid, Meta’s acquisition of GIPHY, Adobe’s acquisition of Figma, and Amazon’s acquisition of iRobot.”
Valuation expectations between buyers and sellers “slowly converging, but not fully there yet: Valuation expectations are still preventing deals from getting done, but 2024 will provide another year for sellers to accept that 2021 was an outlier year fueled by federal and central bank stimulus.”
Acceptance happens slowly, though, and it “could take several more years for valuation expectations to converge.”
As stated in the Pitchbook report, there will still be “a fair amount of waiting for better valuations, because most VCs are notoriously hands-off and founders are tenacious.”
However, dwindling cash balances will “force many companies to sell, merge, or close.”
Fintech failures are expected to continue for another three years: Pitchbook believe we are in “the fifth inning of fintech’s failure wave. Insider rounds buoyed many fintech companies in 2022 and 2023, but this earmarked capital is dwindling.”
As explained in the Pitchbook report, today’s valuations and capital scarcity are making it harder “for fintech companies to get funded if their revenue base and revenue growth have not materialized.”