The $2.5m deal will allow Allocations to implement Lumen's accounting tools into the platformRead more...
With Visa buying Plaid and Intuit buying Credit Karma, fintech M&A is on the rise
[Editor's note: Future of Behavioral and Mental Health with BetterHelp, Headspace, Ginger.io, Providence Hospitals, UnitedHealthcare Optum, Khosla Ventures, Oak HC/FT and more has become 3 virtual conferences and one live event pushed out to May 27! Register one time for all 4 events! REGISTER. Also, during this stressful time use the code "vator" for 50% off BetterHelp online therapy for 3 months!]
We're only two months into 2020 and we've already seen two big mergers in the fintech space. In January, Visa revealed it was buying Plaid, a network for people to connect their financial accounts to their fintech apps, for $5.3 billion. That was followed by Intuit, the company best known for its tax software, including TurboTax and QuickBooks, which acquired Credit Karma, a company that provides free credit scores and credit reports, for $7.1 billion.
This follows an active 2019, during which four huge deals set the record for the largest transactions ever recorded in fintech history, according to the 1H 2020 Fintech M&A Market Report from Hampleton Partners. They were Fidelity’s $44 billion acquisition of payment processing company Worldpay; Fiserv's purchase of payment processor First Data for $22 billion; Global Payments' acquisition of electronic payment processing startup TSYS for $21.5 billion; and London Stock Exchange Group buying financial markets data provider Refinitiv for $14 billion.
In total, 2019 saw 439 transactions, valued at over $130 billion, almost twice the $71 billion seen in 2018.
With so many companies snapped up in the last year, why now and what does it mean for the future of fintech?
A maturing space
A large part of what's driving all the M&A activity has to do with the maturing companies in the fintech space, said Kat Utecht, Managing Partner at Core Innovation Capital, a firm that focuses exclusively on financial services and technology.
"The financial services startups are more mature than they’ve ever been. If you think about it, the rise of fintech has really been in the last decade; before that was there was only PayPal. Now you have Stripe and Square, and all these great entrepreneurs that have spun out of those companies and have created their own fintech startup," she told me, noting that the fund would see 150 deals a year when it first started back in 2011, a number that has since grown to 1,000 deals a year.
"If you look at when Plaid and Credit karma started, which was between 2007 and 2010, they’ve both now had time to mature, prove that they’re great at customer acquisitions, and that they provide this valuable service."
On the other side of the equation are the established fintech companies; for them, these acquisitions allow them to be a part of every aspect of the fintech ecosystem, said Thomas Smyth, founder and CEO of Trim, a company that automatically reviews its users financial data to determine how they can save money.
"All of the players in consumer financial services today recognize that the customers' attention is the most valuable commodity in the ecosystem. Once you get a little bit of that attention, you’ve got to get a lot more. If you don’t, someone else is going to take it away from you," said Smyth. "There’s this huge fight going on for the primary relationship with a customer and whoever’s able to own that across a broad swath of America will win this entire market manyfold."
By acquiring Credit Karma, for example, Intuit has the chance to extend its financial relationship with the consumer, not just for a brief moment at tax time, like they do now, but all year round.
"If you’re Turbotax you get a lot of customer attention leading up to tax filing, and maybe when that tax refund comes back, but then how do you stay in touch with that person for the rest of the year? Obviously, Credit Karma has this fantastic suite of tools that facilitate that," said Smyth.
For Jules Maltz, Partner at IVP, it comes down to a simple fact: as a large company, it’s always hard to innovate, especially in a heavily regulated industry like financial services. Scooping up these smaller companies give the larger companies the ability to give customers what they want without needing to do it themselves.
"These large finance companies, whether that’s Intuit or Visa or a large bank or other businesses, are slow to move. That slowness has created opportunities within the startup world to overtake those companies," he said.
"These new fintech companies have been able to outpace and out innovate traditional vendors, and then those vendors realize they have to catch up and a great way to catch up is M&A. Whether it’s Visa buying Plaid and continuing to own a pretty important connector in the fintech ecosystem, or Intuit with Credit Karma, those are signs of these companies trying to catch up and stay relevant over the next 10 plus years."
All about that data
Of course, a huge part of deals of this kind are about data: the new companies have a ton of it, and the legacy companies want it. Plaid, for example, enables fintech companies like Trim to connect their services to a consumer's bank account.
"That’s super valuable and represents a whole new ecosystem that is, in some ways, different or adjacent to Visa’s core ecosystem, which is just looking at the raw transactions as they go across the network. Fundamentally, they want to be the underpinning of all those transactions," said Smyth.
For a company like Intuit, said Utecht, buying Credit Karma gives them access to all the consumer data that has been amassed by people checking their credit scores every month.
"It ends up being a win-win-win for the consumer and for all the companies. It’s also going to help the consumer experience, because Intuit’s going to take a lot of Credit Karma’s best practices and vice versa, so you’re going to wind up having an all-in, better customer experience," she explained.
"Right now I don't think Intuit has a lending product for the consumer. With the Credit Karma data maybe you’ll see Intuit end up with a credit product for consumers. They’re tracking their credit scores, they have their spend, they have what credit cards they’re billing, they’ll have so much more data so maybe they’ll be able to offer loans or other services because they’ll know the consumer so much more than just by their taxes."
Making sense of the data
In Smyth's view, though, simply getting this data isn't all that big of a deal because data is becoming increasingly commoditized.
"If you at look any bank, they’re awash in consumer transaction data from their own customers, but are they making it useful? That’s a whole separate question," he said. "In my own banking relationships, I do not believe they are delivering additional value to me on top of the data they have. Mostly, my banks are sending me ads for car loans, but I don't own a car, nor do I plan to. So, they appear to be ignoring it, at best."
Ultimately what will determine whether or not an acquisition like Credit Karma or Plaid, or any of the others, is successful will be how they deploy that data and if they use it in service of their customer.
In addition to getting their hands on data, legacy companies are also acquiring a younger user base, one that has an entirely different idea of what financial services even are as compared to the older generation.
"Fintech applications are changing and are being led by younger folks, that is real," said IVP's Maltz. "The idea of walking into a bank and asking them for a loan or what their products are, what used to happen 10 or 20 years ago, that's over now; everything is done online. You’re researching financial products or going to sites like Nerd Wallet or you’re looking at Credit Karma or you’re looking at LendingTree for your mortgage You’re not walking into the bank anyway. That has really changed," he told me.
This is especially important, he pointed out, because when a financial services company hooks someone when they're young, they often become customers for decades, if not life. According to a survey conducted for Bankrate and MONEY, the average U.S. adult has used the same primary checking account for about 16 years, while more than a quarter have used the same checking account for more than 20 years. That makes it that much more important for a bank, or other financial services company, to get people hooked on their services at as young an age as possible.
"If you can build a financial relationship with someone, and a really integrated one, at an early stage of life, often that doesn’t change. I still have the same credit card or the same bank that I signed up for after college is usually the same bank they use now. So, there is that race to get people when they're young and open to change," Maltz said.
On the other hand, Trim's Smyth said getting younger and more tech savvy users comes with its own potential pitfall: they’re more accustomed to convenience, so the bar is higher to give them good service.
"When you’re building something for a tech savvy audience, you need to make sure that it looks really good and feels really crisp, and just the expectations on the part of the user are higher when you’re talking about a more tech savvy audience," he said to me.
Is every company a fintech company?
The natural thing to do when these types of deals start to happen is look around at what other companies might be acquired, and who the acquirers might be as well. Utecht, for example, said she wouldn't be surprised to see Goldman Sachs make an acquisition in this space.
"Goldman has done such a wonderful job with building their Marcus product, and that’s really brought them into a different customer base than Goldman used to have. I wouldn't be shocked to see them buy things in other market niches where they don’t have plays and where they some white spaces, so that wouldn't be a surprise. I’d love to see Goldman buy Chime or something like that," she said.
Other companies she mentioned that could be considered in trade deals include startups like Robinhood, SoFi, Betterment and Wealthfront.
"There’s a lot of really large financial services companies which never existed before. Now you have valuations over $1 billion, which used to not be the case. So what ends up happening in those companies?" she asked
Even the banks could be potential acquirers in this space, said Trim's Smyth.
"Anyone who is touching part of consumers’ financial lives is going to be interested in touching more and more of their financial lives, and playing a more central role in a relationship that encompasses not just transactions, not just tax, but all of the above," he said.
"By and large, big banks are starting to wake up to the idea that there’s a lot more that they can and should be offering their customers, and as they do that there will be a bunch more activity in this space."
Most interestingly, there are potential opportunities for companies that are not in the fintech space to start making these types of acquisitions as well, as other major tech companies might also want to see themselves as fintech companies too.
"There’s a little bit of a feeling that every company is a fintech company. Amazon’s a fintech company and Google's a fintech company and Facebook should be a fintech company. I know some of those companies have sort of dabbled in it, and I know the wallet that Amazon has and the information around our spending is really, really strong, but those companies haven’t executed at scale. They haven’t dedicated the massive resources to have that be a huge, huge part of their business yet," said IVP's Maltz.
"I’ve always thought they should, but, again, there’s more regulatory scrutiny in fintech; those companies already face massive regulatory scrutiny around consumer data, so maybe there’s a good business person saying, ‘We should go buy Square,’ but then somebody in the legal department says, ‘It’s not such a great idea.’ So, on paper it makes sense for those companies to need to get into fintech, but it might be hard to do operationally."
While Smyth sees the potential opportunity in some of these companies making these types of deals, he's also skeptical about whether or not these types of mergers would make sense, especially for the consumer.
"There’s a world where it gets really big and every company is a fintech company, or has a fintech solution in-house, and there’s a world where we go, ‘That doesn't make a ton of sense.’ As a customer, do I really want a credit card for every single merchant I work with? Probably not."
(Image source: bioworld.com)
Support VatorNews by Donating
Read more from our "Trends and news" series
The company sends nurses and phlebotomists into the home to take blood and do vital checksRead more...
The company gives patients access to a care team, which they can connect to via telehealthRead more...
Related Companies, Investors, and Entrepreneurs
Joined Vator on
We're building the future of personal finance: a fast-learning, AI-powered assistant that takes care of your money so you don't have to.
"Financial health" has become an industry buzzword. Trim makes this real by automating ways to give our users tangible savings. We have saved our users over $25 million to date and we are just getting started.
In 10 years, we hope to look back and wonder: How did anyone pay monthly for a membership they had forgotten about? How could banks make $30 billion per year in overdraft fees? How is it possible that Americans paid $13 billion annually in credit card late fees? We estimate that if all Americans had a personal financial assistant, they could save more than $100 billion per year.
Joined Vator onJules Maltz is a General Partner at IVP and led IVP's investments in Buddy Media (CRM), Checkr, Dropbox, Indiegogo, NerdWallet, Oportun, RetailMeNot (SALE), Slack, SteelBrick, TuneIn, Zendesk (ZEN), and Zenefits