M&A in the Ever-Changing Fintech Landscape

Fintech is having a meteoric rise among investors in the emerging tech space, accounting for the second-highest area of investment with $3.8 billion in 2021. Q4 2021 alone saw $824 million across 23 deals, indicating a strong opportunity for startups to sell products and services into the global financial ecosystem.

In this rapidly evolving area, some of the key global fintech M&A trends to watch for include: “banks of the future” business models and expansion of challenger banks and digital lenders; continued M&A and consolidation of more major segments such as payments; insurtech venture capital-backed deal activity; application of blockchain beyond digital assets; and cryptocurrency, stablecoins, and non-fungible tokens (NFTs).

Fintech businesses operating in the United States are subject to regulation at both a federal and state level under a wide range of government agencies. The Biden-Harris administration is taking an active interest in cryptoassets and sending signals that regulatory action is potentially on the horizon with the president’s anticipated executive order on cryptocurrency, the issuance of the president’s Working Group report on stablecoins, and the Consumer Financial Protection Bureau (CFPB) launching public inquiries into big-tech giants operating payments systems and the “buy now, pay later” sector.

Around the world, many countries have established “regulatory sandboxes” that function as test environments in which fintech companies can develop innovative products and carry out experiments—free from regulators’ eyes, but under supervision. This model has been replicated in certain states in the United States, and the CFPB has created a compliance assistance sandbox in which companies can obtain a safe harbor for testing innovative products and services for a limited period of time while sharing data with the CFPB.

Cybersecurity, Data Privacy, and Related Issues

With fintech’s substantial growth comes increased data privacy concerns, as companies are particularly at risk from phishing, third-party data sharing, compromised credentials, and financial asset and data theft. The average cost of a data breach rose from $3.86 million in 2020 to $4.24 million in 2021, the highest average total cost in the history of breaches according to a 2021 IBM Cost of a Data Breach Report. Interestingly, the average cost was $1.07 million higher in breaches in which remote work was a factor in causing the breach as compared to those that were generated elsewhere.

Intellectual Property Concerns

Given the “borderless” nature of the industry, multijurisdictional issues come into play. When doing due diligence and considering how best to protect intellectual property (IP) rights, fintech companies should truly look at the global legal landscape. There are potential lags in IP due diligence because of the complexities with technology and the unsettled nature of applying existing IP law to digital assets. As a result, it makes the process complicated and may be less conclusive.

One big area to watch for IP litigation trends is NFTs. Described as unique blockchain-based digital assets that are associated with images, artwork, videos, games, or other creative content, NFTs present a complicated layer of concerns regarding patent, trademark, and copyright law, as well as sales and usage in the metaverse.

International Trends

United Kingdom

• The last 12 months have been extremely busy for fintech M&A and investment activity with UK banks, and financial service firms are increasingly targeting acquisitions and partnerships with fintech firms to access emerging technologies.
• The Financial Conduct Authority is keen to promote innovation and its pro-competition mandate in particular has ensured a more nurturing regulatory environment for new fintech firms.
• The government should be publishing shortly its response to its consultation on bringing stablecoins within scope of regulation and the United Kingdom’s financial promotion regime is also being extended to cryptoassets
• Further, the Bank of England and the Financial Conduct Authority are due to publish a discussion paper on artificial intelligence (AI) in late 2022.

European Union

• Activity remains exceptionally busy, and against this backdrop, the European Commission has adopted a digital finance package that includes proposed regulations in three areas: cryptoassets market, pilot regime for market infrastructures based on distributed ledger technology (DLT), and a digital operational resilience framework for financial services, in addition to issuing a directive clarifying and amending existing EU financial services legislation.
• Other strategically important areas for the region are Insurtech and AI.

China

• On September 24, 2021, a group of agencies including the China Securities Regulatory Commission and the People’s Bank of China, essentially slammed the brakes on any cryptocurrency activity with the issuance of an announcement that placed a blanket ban on all cryptocurrency transactions and mining as a concerted effort to address illicit activities conducted using digital assets.

Singapore

• 2021 has been a strong year for M&A activity in Singapore, with a variety of companies going public or being acquired by major players. The total transaction value surged by 59% year-on-year at $3.94 billion, across VC, PE, and M&A deals in 2021, up from $2.48 billion in 2020. Local players are also using M&A for market consolidation and to create larger product and platform ecosystems.
• In 2022, M&A activity is anticipated to be resilient as corporates seek to expand their capabilities and footprint in Asia-Pacific, and PE firms and US SPACs set their sights on cross-border targets in the region.

United States

• Regulation continues to impact the industry.
• Partnerships will continue to grow between new and more established fintech players. Fintechs are looking to legitimize themselves by obtaining regulatory charters and licenses to work, particularly in the cryptocurrency area, within the regulated banking system.
• Big deals and big IPOs likely will remain robust. While the formation of new SPACs are currently seeing some headwinds, we anticipate there will be continued de-SPAC activity, as existing SPACs need to complete transactions before the deadline to close or return the SPAC funds to the investors.

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