Banks may look to acquire fintechs to fuel growth, build upon lagging technology and recruit top talent, but before dipping their toes into the fintech acquisition pool, banks should consider their end-game strategy.
Fintechs are being snatched up by banks for a variety of reasons, Jonathan Shiery, director of financial services at global consulting firm Guidehouse, told Bank Automation News. “Acquiring fintechs helps banks, small and large, to save time developing technology associated with increasing productivity or competing in an innovative way,” he said. “It is not difficult to see why this is an attractive strategy for a bank’s management team.”
However, for smaller banks, it’s more challenging to acquire a fintech because they have less to spend and there’s less room for error, Shiery said. “Community and smaller banks should be prepared for hidden costs and dyssynergies that may occur after a deal is made,” he noted.
Like any strategy, success is determined by how well it is executed, Shiery added.
Financial and business consultants in the space shared with BAN four critical considerations for success:
1. Beware inflated valuations: With capital available at low cost and fintech funding up significantly this year, banks can expect competition in purchasing a fintech, both from other banks as well as fintechs who may be “flush with cash,” Shiery said.
2. Understand the fintech’s ability to accelerate the bank’s current tech: Banks must assess their own capabilities and how a fintech’s services might fit in and advance current technologies, Shiery noted.
“Banks are still in the transition from IT as a cost center toward a model that monetizes their technology assets,” said Bryce VanDiver, a partner at global business and technology consulting firm Capco, adding that banks are at different stages in that transition. “Adoption of disruptive’ technologies is not as easy as ‘rip and replace,’ given the hard-wire implementations within the bank’s larger ecosystem, including access, process and support applications,” he told BAN.
3. Make sure it’s a cultural fit: There are undeniable cultural differences between banks and fintechs, Shiery said. Fintechs tend to be fast-moving, agile and more innovative than banks. A bank should consider whether fintech employees chose that environment for a reason, as well as how the two cultures may — or may not — blend.
4. Risk and compliance management: Compared to banks with strict regulations, fintechs may not be as focused on areas such as governance, risk and compliance management. An acquiring bank must assess these areas and examine the value that the fintech’s capabilities adds to its overall system — including new revenue streams and technological expertise — and work to integrate the two.
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