Fintech: from disruption to collaboration

Finding the right model for collaboration is no easy task

But what model should be used to get the most out of the collaboration between the two: acquisition (majority / minority), incubation, private equity or commercial partnerships? How do you approach such a deal and how do you determine the price tag? And once the deal is in place, how can the synergies be achieved? Should the fintech be integrated or left to operate on its own?

During its first Fintech breakfast conference, PwC Deals brought together 50 representatives from fintechs, financial institutions and the private equity domain for a round table discussion on these strategically important but hard-to-crack topics. It was an interactive event that resulted in very interesting insights:

The strategic angle is moving more towards unlocking real benefits

The days when financial services companies invested in fintech just to have a window on innovation are clearly over. As shown by our survey held during the conference, financial services companies want clear strategic benefits, which mainly lie in improved services to achieve true customer engagement. For fintechs, it is all about access to clients and capital.

Financial institutions are increasingly looking at scale-ups, which they find mostly through their own network

It’s a people's business and all about networking and being present in the market. Most financial services companies use their internal teams to find fintechs, while the well-known institutions receive many spontaneous applications from fintechs. This can make it difficult to make a selection, showing the need for the financial services development team to have a strong link to the business and understand their needs. Tech scouting using artificial intelligence can also be helpful to search for potential tech solutions.

The financial institutions and private equity / venture capital prefer scale-ups to start-ups illustrating the increasing maturity of the fintech industry and the higher need to deliver return on investment. Indeed, scale-ups should be able to deliver real transformation and return on investment much quicker than true start-ups. In fact, big tech (e.g. Amazon, Facebook) was also cited as a potential partner for financial services companies due to their skills and scale. Interestingly, fintechs themselves prefer corporate partnerships over private equity / venture capital, in order to benefit from access to their clients.

Eco-systems with various types of partnerships, focusing on the quality of the fintech founders and team

In terms of type of partnership, there is no one size fits all. Financial institutions clearly favor the development of an eco-system for innovation where they do multiple types of deals: acquisitions, corporate venturing/incubation, and non-capitalistic partnerships. When executing the deal, most important aspects of diligence are the founders and management team as well as the strategic/market potential. The scalability of the technology is another key aspect. It is not so much about financials as track records are thin and there is no appetite for short term exits. Hence, valuation of fintechs is typically based on market multiples and/or other non-financial parameters.

Long term value by developing ‘healthy’ work relationships with fintechs and robust post deal execution

Financial institutions would need to offer more sincere opportunities to fintechs and cut red-tape in order to truly partner with fintechs. To illustrate, one of the fintechs faced lengthy questionnaires from the corporate partner, including a question on having a paper shredder in the office. Typically, fintechs are frustrated that it takes months to get an appointment with the business people even if they have a partnership in place. Here the role of corporate development teams is key to limit barriers, offer candid feedback and expedite the decision making process. At the same time, fintechs need to be much more business savvy and be prepared to quickly link the innovative solution to the mainstream financial services business. It helps to start small and celebrate early successes to build bridges. 

Keep entrepreneurial and creative freedom

The key challenges in making successful collaborations are the cultural differences, followed by technological differences and retention of key staff. Fintech leaders are looking beyond earn-outs and financial rewards, hence for talent retention it is key to preserve entrepreneurial and creative freedom and offer genuine scale-up opportunities. Some of the major causes for partnership failures are damaged working relationships, business plans turning out to be poor and flawed post-deal integration execution.

There is no silver bullet to success

Traditionally, post-deal integration concepts are characterised by uniform approaches and rigid structures – generally, the acquirer dictates the terms and absorbs the acquired business into its own organisation and culture. When it comes to scale-ups, financial institutions should choose the right alliance model and tailor the post deal execution as per the chosen model and envisaged partnership duration. While there is no silver bullet to success as each partnership model is complex and unique, it is crucial to develop‘trust early on in the deal process. Partnerships are finite and it is important to plan the end. Consider circumstances that might lead to dissolution and agree what will happen (e.g. to any joint intellectual assets), both in pre- and post-deal stage. 

In partnerships, circumstances change and the success of partnership depends on how quickly both parties learn and adapt to new situation. A simple yet effective exercise is to define successes and risks for both parties, along with explicit exit conditions. Hence, it is key to develop healthy work relationships, supported by robust post deal execution to achieve the strategic collaboration objectives.

Interested to learn more about fintech deals?

Are you interested in learning more about fintech deals, please contact Manoël de Goeij, Martijn de Haan or Deepak Chadha.