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M&As can accelerate the change brought on by FinTech

Giuseppe Donvito, Partner of P101 SGR | February 25th, 2019

Something is deeply changing in the relationship between banks and FinTech. Banks started to see FinTech startups as a threat only in 2010, but it wasn’t until five years later that they understood a simple truth: that instead of fighting them, it would be more profitable to collaborate with them. Also because, in the meantime, the number of digital lending, payment, robo-advisory startups grew dramatically. And the Gafa, i.e. the technological giants named Google, Amazon, Facebook and Apple, also entered the market.

A sort of siege that could only be resisted by starting to consider FinTech as an instrument to compete in the arena. So much so that from 2017, between the USA and Europe, a wave of M&As has come that is still growing.

Psd2 will cost banks 550 million euros per year: but technology can act as a clearing house

The reason lies in the regulatory and technological changes that affect the processes of banks and financial institutions and have already started a new era, that of open banking.

In fact, with the official operational start of PSD2 (the directive requiring banks and financial institutions to share their customers’ data with third parties), the European banks have lost what has always been one of their main assets, their exclusive competitive advantage. According to Valdis Dombrovskis, Vice President of the EU Commission, with the Payment Services Directive European consumers will save around 550 million euros per year. Money that was in the hands of the banks.

Financial technology is easy to use and makes new financial services extremely flexible and customizable. It will further enhance this phenomenon and it will enable other providers of financial services, such as asset managers or specialist lenders, to do the same.

Obviously, the risk of being disrupted will be greater for those institutions that are still linked to a very traditional structure and are less likely to change. While the most dynamic players are embracing the revolution and the new FinTech & Big Tech operators are consolidating their positions, the value chain will probably undergo significant disruptions.

According to a recent study by Accenture, the European market potential for this new business model is of about 60 billion euros. European banks that will exploit open banking in order to become digital leaders will generate 20% of their profits through lending, 21% through current accounts, 17% through payments and 12% through retail investment.

A cultural change

This transformation, however, should not only concern the technological, CRM or Marketing areas, but it will have to drive a profound cultural change. Indeed, banks are required to carry out a Copernican revolution in order to meet their customers’ expectations in terms of friendliness, swiftness and flexibility.

Worldwide, M&As – the acquisitions of FinTech companies by banks and financial institutions – have certainly accelerated change in recent months. This is indeed an effective way to obtain an exclusive right to use disruptive technology, gaining a new competitive advantage and the possibility to rapidly expand into new markets and towards new customers.

Acquisitions

According to the consulting firm Medici, between 2017 and 2018, 21 acquisitions were led by banks and financial institutions, for a value that only in 2018 amounted to 1.4 billion of US dollars. Overall, 10 banks acquired 13 FinTech startups, 2 asset managers acquired 2 FinTech startups and 5 insurance companies other 5 FinTechs. The main players of the banking industry were Goldman Sachs, Banco Sabadell Group and Societé Génerale. All buyers are based either in North America (48%) or in Europe (52%) – no Asian bank is on the list – though non-EU and non-North American companies are 9%. 38% of acquisitions regarded wealth management companies, followed by FinTech B2B (19%), lending (14%) and payments (10%).

What about Italy?

In Europe, the sprint of acquisitions was led by Santander, Credit Suisse and UBS. In the top-14 list there is only one Italian bank, Unicredit at number 14. However, this was not an actual acquisition, rather more the bank joining a blockchain consortium. The Italian road to the new paradigm is probably still long.

Yet, M&As are the only possible key to a second life for our banks, which were hurt by the crisis and are short of liquid assets. Other industries with a high risk of disruption have already taken this path, demonstrating that acquiring disruptive technologies that were created and tested by young and smart research teams is an accelerator of change, both because it allows to bring talented professionals in-house, and since it immediately contributes to ensuring the scalability of innovative models. According to P101, less radical forms of collaboration, from partnerships, to consortia, to open innovation, would risk creating confused hybrids, unclear situations that won’t actually make a change. Italy is no exception: we need to take this path with confidence.