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​Bigwigs circling for fintech quarry as pandemic turns off cash tap

Published on: 12-May-2020

Analysts expect a stronger appetite from corporate and tech bigwigs in acquiring fintech startups in the months ahead, especially as fintechs tight on cash have a viable product to add to these larger entities' existing offers.

Indeed, a Fitch Solutions report this month said the Covid-19 pandemic will lead to lower levels of funding for fintech players.

"The greatest short-term risk that will impact fintech players is a freeze in funding," the report said.

"In the probable scenario of a sustained economic recession, investors might be keen to offload stakes in fintech companies which appear unlikely to turn profitable under current market conditions," the report said.

But this also means that acquisitions are a trend to watch, as tighter funding avenues for fintech companies will likely narrow their competitive advantages over more traditional financial institutions, which are usually better capitalised.

"Traditional companies will likely leverage their stronger balance sheets to acquire smaller companies which possess good intellectual property and robust products."

In Singapore, two such deals made the headlines only last week, with financial supermarket GoBear on Monday announcing that it has acquired Singapore-based digital lender AsiaKredit for an undisclosed sum.

Just a day later, ARA Asset Management announced its foray into fintech in a joint acquisition - along with chief executive John Lim's family office - of a 52.08 per cent stake in crowdfunding platform Minterest. The sum of the deal was also not disclosed.

Analysts said safe distancing measures due to the coronavirus outbreak continue to drive digital solutions as an increasingly important way to conduct business.

"Incumbent financial institutions and larger tech companies have their eyes on these fintech startups because they possess specialised capabilities or customer base to complement their usual offerings," said Associate Professor Sia Siew Kien from Nanyang Business School, who researches on fintech innovation in Asia.

Referring to Grab's acquisition of robo-advisory startup Bento in February, Associate Professor Sia said that Bento complements Grab's venture into digital banking and wealth management.

"In a way, these companies acquire fintech startups to build scale, hoping to provide more offerings in an integrated platform that will eventually own more of the customer relationship." 
In a time of uncertainty, it will benefit those being acquired - often startups with irregular cashflow - to be backed by more established companies.

"Such deals allow them to get much-needed cash to make their dreams come true, leverage professional management teams, and gain access to potentially larger customer markets through the parent company," said associate professor Keith Carter, who teaches at the National University of Singapore's (NUS) School of Computing and also directs NUS' FinTech Lab.

Noting that such merger and acquisition activity is not unique to the region, the observers said that elsewhere in the world, too, fintech players are expecting a freeze in funding.

The Fitch Solutions report cited data from CB Insights and Houlihan Lokey that showed deals in the fintech space globally have dropped by as much as 40 per cent in the first quarter of 2020 compared with a year ago. It will be a "buyers' market," said Prof Carter.

"Fintechs are running out of cash, and when you run out of cash as a business you need to look somewhere for a rescue."

Still, the analysts expect more of such consolidation activity in the Asia-Pacific region in the next three to six months, noting that many such startups are increasingly moving out of Silicon Valley to Asia, to reduce costs and spread out their risks.

The larger acquiring firms will also inherit technology, goodwill and other resources - including regulatory approval - that the startups have developed.

Prof Carter cited, for instance, Hong Kong-based financial institution AMTD's acquisition of Singaporean insurtech firm PolicyPal, announced in March. With that, AMTD secured PolicyPal's digital insurance broker licence from the Monetary Authority of Singapore.

As fintech markets mature, it is becoming clearer which players within each fintech segment are thriving, and which will fall away in time, said Jeff Pirie, executive director of the corporate finance advisory team at Deloitte Southeast Asia.

"In these circumstances, acquisitions can serve to optimise the tech and network investments made and allow economies of scale and stronger market positions to be built more quickly, than organic means alone."

While the value of these deals have typically been kept under wraps, Patrick Thng, director of innovation management and fintech at the Singapore Management University, said the "sweet spot" for partnering is typically when the two entities are not too big - where valuations stand at between S$30 million and S$100 million. Beyond Series B, the deals are not as attractive.

Mr Pirie likewise expects such deals to typically be "small and mid-market in size".

The size of such deals in Singapore are usually much smaller than those seen in the US, Europe, and India, said Prof Carter, citing the relatively lower ages and revenues of fintech firms here. 
In the US, Visa's recent acquisition of application programming interface (API) startup Plaid - a network that helps people connect their financial accounts to apps - amounted to US$5.3 billion, he cited.

To be sure, the outlook for fintechs is mixed, depending on which segment is being reviewed. 

For example, weaker economic activity and employment could put pressure on transaction volumes of payments and remittance players, even as more sales are now occurring online, said Fitch Solutions. But that means more opportunity for the larger players to scale up further.

Industry observers highlighted firms dealing with digital payments, as well as wealth and investment platforms, among the fintech sub-segments that will prove to be most attractive to acquirers. 

"The ability to bring together different services on one platform will be a key to success," Mr Pirie said.

Firms that provide infrastructure for trading in the securities markets will also be a draw, Fitch Solutions noted, as the market correction attracts investors to trade more actively. 

Already, global exchanges from the Singapore Exchange to CME Group have reported higher profits as trading volumes surged amid the pandemic.

In March, US-based commission-free brokerage Robinhood was so overwhelmed by an influx of user activity that it reported outages.

Analysts expect a stronger appetite from corporate and tech bigwigs in acquiring fintech startups in the months ahead, especially as fintechs tight on cash have a viable product to add to these larger entities' existing offers.

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