Mergers and acquisitions are heating up after a subdued 2023, with investors on the hunt for strategic deals, especially in the fintech and financial services industries. 

In the first three months of 2024 multiple major bank and fintech deals were announced, including: 

• Capital One acquisition of Discover Financial Services; 
• nCino acquisition of DocFox; 
• Nationwide acquisition of Virgin Mobile; 
• Barclays acquisition of Tesco; 
• Paynetics acquisition of Novus Neobank; and 
• Railsr merger with Equals Group. 

So, why is the M&A market coming back?

The global M&A market in 2023 dropped 15% year over year to $3.2 trillion, the lowest level in a decade, due to high interest rates, mixed macroeconomic signals, regulatory scrutiny and geopolitical risks, according to a January report by management and consulting group Bain and Co.

High interest rates accompanied by uncertainty made “investors think twice before going into M&A” activities, Andrew Jamison, chief executive and co-founder of expense management solutions provider Extend, told BAN, adding that the market now has some sense of rates peaking so M&A decisions will be easier. 

Macroeconomic conditions are setting the stage for M&A to increase, Jamison said, adding that many investors who have been on the sidelines will enter the market. 

The macro economy is important to investors, Sophie Winwood, operating partner at venture capital firm Foxe Capital, said at FinovateEurope in February, noting that 2024 will be the year that “fintech M&A will pick up.”  

Morgan Stanley, in a January report, stated that M&A activity in 2024 is expected to rebound due to: 

• Strong corporate balance sheets; 
• Nearly $1.9 trillion of cash sitting on the sidelines that needs to be deployed; and 
• Companies streamlining operations by selling parts of their businesses for efficiency. 

The macro

Between March 2022 and December 2023, the Federal Reserve increased rates by nearly five percentage points, logging a 21-fold increase, to tame inflation, according to the Fed’s website. 

Businesses have struggled during the past year. Chapter 11 bankruptcies have increased 48% YoY to 2,446 as of February, partly due to “elevated interest rates and tighter lending terms,” according to a March 4 report by Epiq, a legal process outsourcing service provider. 

“When there is a sudden shock to the system, buyers want to wait on the sidelines to see where things will be trading at,” Dallin Bills, principal at Battery Ventures, said at FinovateEurope. “I think we’ve gotten to a point where things have settled relatively and as a result, you’ll tend to see M&A starting to pick back up.” 

During the Federal Open Market Committee meeting on March 20, Federal Reserve Chairman Jerome Powell said that inflation has come down, opening the door for rate cuts this year. 

“The question that people in the industry should be asking is, ‘Who is going to be driving the M&A and is it going to be more on the strategic side?’”  — Dallin Bills, Principal, Battery Ventures 

Crowded marketplace

The fast-paced rate-hike environment of the past year flipped the script following activity from the previous low-rate cycle, Paul Staples, group head of embedded banking at ClearBank, told BAN. With rates low, fintech and financial services became crowded because they could easily raise money from venture capitalists as they prioritized fast growth over profitability.  

“I think there are a lot of fintechs that took a lot of easy money because VCs were throwing money out there on a kind of FOMO [fear of missing out] basis,” Staples said. “They were desperate to do deals. But it is profitability now, [and] these fintechs have to make some revenue and show that their proposition is sticky.” 

With the influx of capital in 2021, due to quantitative easing, a lot of money was invested in many companies that were targeting the same customers or solving similar problems, Foxe Capital’s Winwood said. 

One oversaturated segment consists of platforms for operating systems that target at small and medium-sized enterprises, Winwood said. “Everyone is trying to build that holistic platform for SMEs, but you can’t have 30 of them.”  

Companies that raised money in 2020 and 2021 at high valuations are spending more to acquire customers and have been growing at a passive rate, she said. 

“There is bound to be some consolidation there,” Winwood said. “They would also struggle in fundraising because many VCs will have a conflict of interest in investing.” 

Strategic dealmaking

As consolidation picks up, institutions will be looking to acquire businesses that add value to their operations, Jason Wilk, chief executive of digital bank Dave, told BAN. 

“We’re constantly on the lookout for deals on the market for things that could accelerate either our credit or banking strategy,” Wilk said. “I do expect there will be some pretty meaningful consolidation in the industry over the next few years.” 

Companies with good market propositions that are finding it difficult to attain profitability can add value to established organizations, Staples said. 

Institutions will be looking for what adds value to operations, with a heavy focus on technology, Winwood said.

“You just don’t buy something because it’s on sale.” — Sophie Winwood, Operating Partner, Foxe Capital  

For example, Barclays’ acquisition of Tesco’s banking arm is mutually beneficial, Augustin Rubini, director analyst for banking and investment services at think tank Gartner, told BAN. Barclays will add customers to its portfolio while Tesco can offload its banking operation, which was not yielding anticipated returns. 

Merging technology

Much of the heavy lifting after an acquisition happens when tech stacks of two entities are blended, however, it can be a comparatively easier process if both FIs are using the same core provider, Tom Ruppel, vice president and business strategy manager at tech provider FIS, previously told BAN. 

In February, Capital One announced its plans to acquire payment giant Discover Financial Services for $35 billion. Given that both FIs are on FIS platforms, merging their tech stacks will be comparatively easier, Ruppel said. 

When two FIs are using the same tech provider, the ins and outs of both tech stacks are understood, and the data and application migration becomes an “us-to-us” transfer, he said. 

When banks have operations with different core providers, the merger can be a long and tedious, taking from 18 to 30 months, Rohit Jayachandran, head of banking and financial services at Mphasis, a cybersecurity and automation service provider, previously told BAN. 

The $7.6 billion Michigan State University Federal Credit Union (MSUFCU ) announced in November 2023 plans to merge with $27 million Gabriels Community Credit Union (GCCU). 

MSUFCU is exploring how it will blend the tech stacks and what technologies from GCCU it will keep, Ami Iceman Haueter, chief research and digital experience officer at MSUFCU, said at Bank Automation Summit U.S. 2024 recently. 

According to MSUFCU’s website, all 2,700 customers of GCCU migrated to MSUFCU’s platform March 1. 

MSUFCU’s core provider is Jack Henry’s Symitar, according to data and analytics platform FI Navigator. 

Cash is king

Companies with cash surpluses can pursue M&A opportunities as activity picks up and the macroeconomic dust begins to settle, Extend’s Jamison said. 

For example, private equity firms are expected to drive M&A, Battery Venture’s Bills said.  

“We have $2.5 trillion of dry powder on the sidelines today to be invested, which is the most we’ve ever had.” — Dallin Bills, Principal, Battery Ventures   

nCino being profitable gives the company a lot of opportunity to pick up good deals in the market, Glover said. 

“The benefit of being a profitable company is we are going to throw off cash,” nCino Chief Revenue Officer Josh Glover told Bank Automation News. “We’re going to make decisions as a leadership team, about how we’re going to deploy that cash, and there may be situations where we look at organically investing it and there may be situations where we look at inorganic expansion, like what we did with DocFox.” 

M&A is “like putting together pieces of a puzzle,” he said, adding that, nCino intends to acquire companies that add “strategic solutions” to the company’s portfolio and reduce time to market for its services.

Berkshire Hathaway, the investment group led by investor Warren Buffett, reported $33 billion in cash on hand along with $129 billion of treasury bills, according to the company’s Feb. 24 annual letter to shareholders. 

Berkshire “holds a lot of cash and U.S. Treasury bill position, far in excess of what conventional wisdom deems necessary,” Buffett wrote, adding that such measures allow the company to “immediately respond to market seizures” and take advantage of “an occasional large-scale [M&A] opportunity.” 

Companies will approach the rebounding M&A market differently, but there is more opportunity for cash-flush institutions to participate, Jamison said. 

“Resilient companies always survive and grow faster on the back of these kinds of events,” he said.