While overall transaction value remained stable over the past year, t he latest market report from technology M&A advisory firm, Hampleton Partners, reveals a reduction in fintech transaction volume in 2016. Experts suspect that the early hype around fintech may have been replaced with cautious investment in “proven and more established” technologies and businesses.

The Hampleton Partners’ fintech M&A report, which covers mergers and acquisitions in the period between July 2014 and December 2016, shows deal values for the first half of 2016 were down 32 per cent from the previous half year. With investors increasingly prioritising profitability and resilient business models, EBITDA multiples fell to 15.0x compared with 15.4x in the previous half-year, while revenue multiples through the second half of 2016 also dipped to a four-year low of 2.2x.

2016 deals were driven by acquirers looking to build scale, as well as the opportunity to enhance or replace in-house legacy systems. Hampleton also believes that CBOE Holdings’ $3.2 billion offer for Bats is the latest sign of a push towards global consolidation in the exchanges sector.

Enterprise resource planning and front-to-back office management solutions were particularly sought after. Meanwhile, the growing adoption of cloud and mobile services prompted established players such as SSC&C and Fiserv to buy digital solutions that either complement their existing portfolios or replace them entirely.

However, it seems clear that the pressure for the sector is on. A new PwC report reveals that 61 per cent of UK financial services industry leaders believe they could lose as much as 40 per cent of their revenue to standalone fintech firms, compared to 51 per cent of financial services leaders globally. Regardless of their motivations, almost half of these large firms plan fintech acquisitions over the next three to five years. 81 per cent say they plan to initiate strategic partnerships with these businesses over the same period, according to the survey of more than 1,300 financial services industry leaders worldwide.

Stable growth

“Going forward, Hampleton believes that the fintech M&A marketplace will remain consistent, continuing to deliver attractive multiples for sellers,” says Miro Parizek, managing partner at the firm. “Despite wider concerns surrounding Brexit and other geopolitical issues, London will remain an investment hotspot for fintech assets with investment activity driven by the three forces of consolidation, compliance and disruption.”

According to Steve Hatton, the co-founder and CEO of fintech software platform, Trusek, much has been said about the impact of Brexit and London’s position as a fintech hub, but many focus on the negatives. He believes there are six potential positives to come from Brexit, all of which suggest stable growth for fintech.

1) Regulation
Under the current relationship, with the UK being a full member of the EU, the financial services sector is required to comply with all EU regulations.
Not all regulations within this framework are favourable to fintech companies in the UK, and while it is likely that UK financial regulations will have to comply with the majority of EU-based legislation, Brexit will provide more freedom, Hatton explains. “This will mean that, while bearing in mind that the UK would still want to trade with the EU, it will be able to choose which regulations to implement depending on the impacts they will have on the financial services and fintech sectors in the UK.”

2) Immigration

While the UK is a member of the European Union, free movement of people means that anyone from any European country can choose to work in the UK without a visa. It’s widely commented that one of the main reasons for the leave vote was to remove this freedom of movement, and limit immigration into the UK. It is therefore clear that one important red line for the Brexit negotiations will be immigration controls from the EU, and this will provide the UK with the ability to prioritise which migrants to allow into the country, depending on the sectors and skills they have.

“While we still have a skills gap in the UK for workers in the fintech industry, including developers, this will mean that migrants will continue to play an important role in the sector moving forward,” he adds.

3) Investment and government support

The British fintech sector generated £6.6 billion in revenues in 2015, so the industry is a vital part of the UK economy, Hatton says.

“As the UK leaves the EU it is therefore in the interests of the treasury, as well as the economy as a whole, for the sector to succeed, so the government is likely to support FinTechs and the wider financial services industry so the impacts on the sector are as small as possible.”

In the 2016 Autumn Statement for example, Chancellor Philip Hammond announced plans to provide £400 million into venture capital, to support UK businesses including the fintech sector. Additionally, with immigration being a key issue for the leave vote, and many workers in the fintech sector being from Europe, the UK government will be under pressure to ensure the British education system produces the future coders for the British fintech industry.

4) Partnerships with non-EU fintech sectors

Hatton believes that since fintech is an industry with worldwide importance, and he EU provides strategic partnerships and alliances between fintech companies across the trading block, Brexit will offer the chance to strengthen global partnerships within the sector.

“Countries like Israel, Singapore and the United States have strong FinTech sectors, so building partnerships with the financial services industries in these countries will benefit UK financial services and FinTech greatly,” he says.

5) Ease of doing business

The UK is still seen as a very attractive place to start and run a business because of its strong infrastructure and incentives, argues Hatton. “For example, talking after the Brexit vote, Warren Mead, global co-head of FinTech at KPMG said we could end up seeing tax breaks to encourage technology firms to be based here. Edan Yago, the founder of Blockchain powered SaaS Epiphyte, added if London differentiates itself with streamlined regulation, reduced tax burden for employees and support for innovation, it could become an even more attractive hub for fintech and start-ups.”

6) Capitalising on banks being distracted during the Brexit process

While the banks are busy planning for the potential impacts of Brexit, fintech firms may spot an opening in the market that they can take advantage of, Hatton adds.

“As David Gyori, the founder and CEO of Banking Reports says, efforts to innovate within banks, especially the larger or international banks, will slow down as a result of Brexit. He likens this window of opportunity for fintechs to that of the financial crisis in 2008. Above all else, it’s important to bear in mind that the negotiations are only just getting underway, so what may be a potential issue today may not be when the final deal is agreed.” As the sector faces these challenges, businesses need to ensure their FinTech solution is proven and rigid enough to withstand any potential threats, but also flexible enough to respond to regulatory changes.

Hot new trends for M&A

Enterprise financial software companies accounted for 46 per cent of the deal count on the trailing 30-month period, with a total of 689 deals completed in 2016. According to Hampleton, blockchain and artificial intelligence are the two hottest technologies that will capture investors’ imagination this year.

Jonathan Simnett, Hampleton sector principal, believes that despite the market focus on mature technologies during 2016, these newer technologies may see a spike in demand, particularly for its application in financial services. “Disruptive alternative payment and lending services will also continue to thrive, attracting more interest from technology majors such as Apple and Google,” he says.

According to Christopher Vogt, co-founder and MD of a recently funded fintech start-up, BillFront, 2017 will be a year of M&As, as mobile and telecoms businesses will look to form strategic partnerships with a range of industries, from digital services to fintech firms, all with the aim of enhancing what they do. “Fintech will be a key driver in this industry shift, especially as decision makers in the B2B space believe it to be, with 83 per cent feeling that their business is at risk of being lost to fintech companies,” he says.

Vogt believes that the slow pace of change in traditional financial services still gives fintech the competitive edge, which will prove revolutionary this year. “Undoubtedly the fintech revolution has reshaped finance for everyday consumers around the world. However, for business, it has had less of an effect. Traditional financial institutions have been very slow to make financing decisions for firms in need of quick capital, especially start-ups. Because of this, many businesses are now looking to alternative financing options, powered by fintech innovation, which are now worth £3.2 billion in the UK alone and will only keep growing,” he reasons.

A range of industries, including digital advertising, are now being affected by B2B fintech innovations on offer, according to Vogt. “Due to outdated methods of dealing with payments, many companies within the digital media industry are unable to conveniently and quickly access their revenues. This hampered ability to readily access capital makes dealing with unexpected economic issues, such as Brexit, more difficult, particularly for small to mid-sized companies who are more cashflow dependent,” he says. “Those with readily available capital can pivot faster and more easily in the face of unexpected events than those who don’t. Alternative fintech financing solutions, which are driven by a mobile-first approach, are driving this long needed change.”