Fintech acquisitions: prone to failure?
by Tze Yeen Liew
Industrial observers have raised concerns about acquisitions and partnerships by existing financial institutions gradually cannibalizing the lofty ideals that many fintechs were built on — disrupting the financial landscape by removing financial intermediaries that do not add value to the global economy, and empowering consumers to take charge of their personal finances and investments. Kerim Derhalli, who founded micro-investment app Investr in 2013 after leaving his position as Head of Equity Trading at Deutsche Bank, believes that firms are only into the business of financial technology and not ‘fintech’ per se if they are just helping existing financial intermediaries marginally improve their existing processes. At BusinessCloud’s ‘The Future of FinTech’ event, he further elaborates that fintech is ‘the manifestation in the financial markets of the information revolution’; the democratisation of financial data previously only within the stranglehold of large financial institutions.
In spite of valid criticism, the ongoing pattern of aggressive fintech acquisitions by established financial institutions shows no sign of slowing down.
Gjensidige’s digital banking unit acquired
Not too long ago Nordea, a leading bank in the Nordic region, announced that it will be acquiring Norwegian insurer Gjensidige Forsikring‘s digital banking unit for EUR578 million cash, effectively adding 176k customers and EUR4,840 million of their assets onto their balance sheet. With the acquisition of Gjensidige digital platform, Nordea will also be distributing Gijensidige’s insurance products to its own 900,000 customers. The acquisition, Gjensidige believes, aims at providing opportunities for the insurer to expand its customer reach through synergising with a leading Nordic bank that is also receptive to their digitalisation and innovation priorities.
Just days prior to Gjensidige’s acquisition, Bloomberg reported that that French payments processor Ingenico Group SA is being targeted for buyout by several firms; including private equity giants CVC Capital Partners, Hellman & Friedman, and Bain Capital — all of which were actively vetting through ‘Europe’s hottest fintechs‘ for the next acquisition target. As of March 2018, Ingenico remains unacquired, even though it has taken over fintechs Paymark and Bambora.
Fool hardy, not fool proof
Contrary to the optimism permeating from these acquisition sprees, multiple studies point to the sordid truth that 80% of acquisitions, both tech and non-tech, fail. A failed acquisition is defined as one that brings no added value to the acquirer or acquired. A survey of tech acquisition literature from 2002 to the present shows that the 80% fail rate is fairly consistent (McCarthy and Aalbers, 2017; Vester, 2002; Graebner and Eisenhardt, 2010, Evans, 2004). Cisco, one of the world’s largest tech conglomerates, are anomalous for having managed to reduce the failure rate of their own acquisitions to 70% mainly by acquiring en masse and spreading out their risks.
The reasons for failure are manifold. The extrinsic factors are primarily related to geographical distance between the acquirer and the acquiree, which increases monitoring, transactional and information transfer costs; and decreases the efficiency of tacit, or ‘soft knowledge’. Cultural disparities, on the other hand, have a lesser negative impact on tech companies (McCarthy and Aalbers, 2017).
The intrinsic factors, on the other hand, point to ineffective structural integration and coordination: Lack of integrative decision making, integrative systemic processes and holistic changes required from both companies (Bannert and Tschirky, 2004). Specific to the acquisition of small tech firms by larger incumbents, integration helps acquirers “use the acquired firm’s existing knowledge as an input to their own innovation processes (leveraging what they know), but hinders their reliance on the acquired firm as an independent source of ongoing innovation [leveraging what they do]” (Puranam and Srikanth, 2007).
A gambler never makes the same mistake twice, just three or four more times
As we can see, tech acquisitions are not without their challenges, especially in the rapidly expanding EU Fintech domain. Despite irrefutable evidence that acquisitions are futile in 2 our 3 instances, the strategic benefits that result from a potentially successful acquisition emboldens companies into taking those risks. Tech acquisitions are also made by incumbents to quickly expand ‘key pipelines’ (Puranam, Sing & Zollo, 2003). A recent case in point is the recent deal between BBVA and ABN AMRO, as they attempt to expand their joint digital reach with new solarisBank investment by funnelling a whopping EUR 56 million into the small startup.
German fintech solarisBank announced a successful EUR 56.6 million financing deal, the second highest to date for a German fintech after Kreditech. Their latest Series B funding round is a combination of new funding from Spanish BBVA, Dutch ABN AMRO and Visa as well as renewed investments from current investors Arvato Financial Solutions and SBI Group. The deal follows a broader trend of financial incumbents rapidly acquiring stakes in emerging fintechs around Europe.
The financing deal is notable as solarisBank happens to be the world’s first banking platform with a full banking license. Founded in March 2016, the company offers “banking-as-a-platform” technology to corporate clients all around Europe and offers products in three categories of banking: digital banking and cards; payments and “e-money”; and lending and deposits. The company is also distinguished for its use of modern RESTful APIs in speeding up the integration of its modular services.
Although BBVA and ABN AMRO’s financial backing of solarisBank heralds the first major investment forays by large European banks in the German fintech scene, it dovetails with the broader existing strategies of both finance heavyweights in undergoing digital transformation. BBVA believes that acquisitions in emerging fintechs will hasten BBVA’s growth in the ‘banking as a service (BaaS)’ area, and has recently acquired major stakes in various other digital banking startups all around the world; including Silicon Valley gig-oriented banking platform Azlo, Finnish online business banking service Holvi, the UK’s mobile only Atom Bank, Oregon-based checking account startup Simple and new fintech venture capital partnership Propel. Today, approximately 42% of BBVA’s customers access their banking services online.
Despite changes in investor lineup, Berlin-based fintech incubator Finleap remains as solarisBank’s largest investor with a stake of 30%, followed by BBVA. The new funds will be used to help further geographic expansion, the fintech said in its press release, as well as the continued development of its online banking platform and the launch of new products. solarisBank has received capital injections in excess of EUR 95 million over the past two years, with initial seed and series A funding rounds closing at EUR 12.2 million and EUR 26.3 million respectively.
ABN AMRO has also completed a slew of its own fintech investment and acquisitions via its in-house Digital Impact Fund (DIF). The fund also owns four other fintech companies: US cloud-based lending platform Cloud Lending Services; US cybersecurity firm BehavioSec; Swedish finance planning app Tink; and an upcoming blockchain-based energy trading platform. With its latest investment in solarisBank, ABN AMRO intends to expand the clientele base of its own subsidiary Moneyou, by allowing the banking platform to access solarisBank’s customers and stakeholders in Germany.
Easier said than done
The key element to avoiding acquisition failure is to ensure that an effective integration strategy is in place, and best practices vary immensely according to the industry and cultural peculiarities. An interesting example: A 2004 empirical study 228 financial acquisitions in the US banking industry (Zollo and Singh, 2004) highlights that: 1. Codifying and formalizing acquisition knowledge and know-how into systems, manuals and tools is strongly correlated to positive acquisition performance; 2. The level of integration between two firms significantly enhances performance and; 3. Replacing top managers in the acquired firm is a sure-fire way to negatively impact both sentiment and performance.
A tech based acquisition, however, would require a different strategy that is cognizant of the role that independence plays in driving innovation especially if both firms are in the same line of business — and therefore needs to be capable of guiding the acquirer in striking the right balance between the two extremes of full structural integration and maintaining full operational independence. In fact, acquirers who often buy small tech-based firms for their tech capabilities often discover that the post merger integration process has all but destroyed the innovative capabilities that made the firm an attractive target in the first place (Puranam and Chaudhuri, 2009).
The FINDER questions
The FinTech industry poses its own set of unique challenges being an amalgamation of both the finance and tech industries. One might easily infer that the an effective integration strategy is a middle path between existing strategies of the aforementioned industries, but that would mean ignoring the glaring asymmetry that exist between both the acquirer (larger, hierarchical, established, and more often than not; a financial or banking incumbent that is trying to improve its digital capabilities) and the acquired (a smaller, younger, more tech-than-finance competitor that is often sought out by the former for knowledge grafting). What would be the best form of symbiotic existence for both firms in the EU context, such that the spirit of innovation and competition is retained postmerger? How can insights from network analysis and literature deepen our understanding of the rapidly changing fintech ecosystem?