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Incubation to integration: how can major FS firms successfully integrate the new wave of FinTechs?

London is acknowledged as both a major financial centre and an important hub for technology start-ups. As a result, the City plays host to many financial technology businesses (‘FinTechs’) that are becoming ever more successful. M&A represents a significant opportunity for the incumbents to capitalise.

Despite the political uncertainty, FinTechs in London attracted £820m of investment in 2016, have been reported to generate revenues of £6.6bn and support over 60,000 jobs. The UK also leads its European counterparts in major success stories, with four FinTech ‘Unicorns’ valued over $1bn – IHS Markit, Funding Circle, Paysafe and Transferwise. As a result of these and wider successes, the traditional finance firms have had to respond.

A critical factor in the FinTech success story has been the regulatory environment. Schemes such as the FCA’s Project Innovate have reduced the barriers for start-ups looking to operate in the financial services sector and proved to be highly successful. Project Innovate includes the ‘regulatory sandbox’, a means for businesses to test innovative financial products, services and operating models in a live environment whilst maintaining appropriate customer protection. This, alongside the advisory services on offer from the FCA, enables the regulator to act like an incubator to support growing FinTechs.

The prevalence of incubators – organisations that look to act as a catalyst for growth of the start-ups involved – is another factor behind the success of the FinTech sector in London. London is home to around 40 incubators and accelerators including Level 39 in Canary Wharf, one of Europe’s largest specialising in financial technology. In addition to independent incubators, there are several run by big banks. Barclays, Citi and JP Morgan all operate schemes that seek to enable growth of FinTech start-ups and identify firms to support or partner with beyond the term of the scheme.

 

A changing landscape

Irrespective of the route a FinTech takes to relative maturity, the traditional players have taken note – 75% of banking executives stated that they feared that their business was at risk from FinTechs in the recent Moorhouse Barometer on Change. But whilst there is a risk, the big firms also see opportunity. FinTechs hold the platforms to enable incumbent firms to become faster, more intelligent, efficient and secure – via potentially the fastest possible route.

One approach to capitalise the success of FinTechs is M&A. Whilst there was a decline in deal volume in the space in 2016, venture capital investments increased, along with wider interest in FinTechs. Research by White & Case LLP confirms this interest, finding that 75% of FS leaders list FinTech as a key element of their strategy and 95% expecting to do a deal or make an investment in the space in the next 12-24 months.  With a likely significant flow of deals ahead, how can acquirers maximise the likelihood of being successful?

 

Avoiding the cliffs

Unfortunately, the statistics reported on integrating acquisitions paint a less than positive picture, with the Harvard Business Review often quoted on its assessment that the failure rate is typically between 70-90%. At Moorhouse we have covered the key points to maximising value from an integration before, but how can a large, mature institution ensure the acquisition of a FinTech successfully delivers the benefits envisaged?

In our view, there are three key factors of success:

  • It is fundamentally important to retain the entrepreneurial culture that enabled growth in the first instance. Cultural challenges are often overlooked, but in many instances the degree of integration will need to remain light to allow a FinTech to continue along its path and retain its own unique culture and ways of working.
  • The acquiring firm must provide infrastructure and support that can be leveraged by the FinTech. This is particularly critical in the FS sector where there are numerous barriers to entry such as capital requirements, regulation and licencing restrictions.
  • Cross-sell opportunities should also be explored between the two firms. The FinTech will gain access to a significant captive audience to which it can offer its product or services, likely its greatest growth opportunity to date. Cross-selling is the key to realising the value in the product, service or capability in a FinTech acquisition.

These success factors need to be considered in advance of completion in order to properly plan and execute the integration of any FinTech. The understanding required to do so should be developed through the process to completion and as such key team members involved should be retained through pre and post deal activities to ensure continuity of approach and maintain momentum.

 

What is ahead?

Investment continues to develop the London FinTech space, Barclays having just opened a new incubator in Shoreditch, one of the largest in London with space for 40 co-working start-ups. With support such as this, the number of FinTech acquisition targets will continue to increase.  Whilst 2016 was a quiet year for FinTech M&A, 2017 is off to a strong start with deals including the $20m acquisition of Babel Systems (securities processing platform) by US based InvestCloud and the $490m acquisition of Simply Business (online insurance platform) by a US insurance giant, The Travelers Companies. With these and future deals, it will be critical to invest in the integration activities with as much focus as the financial elements of the deal.

If you would like to talk to us about our M&A service and how we help the FTSE100 drive value from deals please don’t hesitate to contact us at info@moorhouseconsulting.com, or via our website.