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.
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.
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.
To view the slides and hear a copy of the recording, please see the M&A in the Ever-Changing Fintech Landscape event page as part of the Morgan Lewis M&A Academy Webinar series. For more information on NFTs, view Morgan Lewis’s latest report, NFTs: What’s in Store for 2022?