Innovation and consolidation key drivers of fintech M&A

Technology-driven solutions, changing consumer demand for digital banking and the need for scale are among the trends that will drive mergers and acquisitions in financial services across the coming 12 months.

The Pitcher Partners’ Dealmakers Australia Mid-market M&A Outlook 2024, released this week, showed four out of five corporate dealmakers believe Australia’s mid-market investment opportunities are better than those in other regional and global markets.

About 42% of dealmakers say mid-market M&A in the financial services sector will increase in the year ahead, fuelled by the twin factors of consolidation and innovation.

Melbourne Pitcher Partners Corporate Finance Partner Stephen Craig said Australia’s financial services industry is undergoing a profound transformation.

“The change is being partly driven by organisations seeking tech-driven solutions that improve cost efficiencies and inflation-proof their business, and also by the changing consumer demand for digital banking,” Mr Craig said.

“The emergence of new fintech companies offering innovative solutions sets the stage for a surge in M&A activity as established institutions look to acquire companies to enhance their digital capabilities.

“Building in-house solutions can be an effective strategy in some cases but it does take time and there are significant risks in implementation, and for many buying an existing business and technology is a simpler solution.”

Fintech startups themselves are looking at M&A as a pathway for growth, driven by the need for scale or to acquire additional service offerings.

“There is a significant amount of activity in the technology sector in general at present, with parties knocking on doors and looking to acquire,” Mr Craig said.

“As a result, the sector is likely to see consolidation as larger financial institutions will aim to secure their market positions.

“Among the smaller, nimble startups, they may seek to merge with each other to form stronger entities that challenge traditional market leaders.”

The Dealmakers report indicates cross-border M&A is likely to perform strongly, with the Australian dollar stabilising and macro growth drivers such as population increases, technology adoption and rising trade with Asia all favourable.

Seven out of 10 respondents said they would increase deal activity in Australia over the next 12 months – the strongest sentiment recorded in three years – and 95% were planning M&A in the country this year.

Respondents gave Australia a 77% confidence score when rating the current environment for M&A, based on the ease of doing deals, sourcing opportunities and other factors crucial to yielding value from these transactions.

For fintech businesses looking to position themselves as a potential target for a merger or takeover, particularly for overseas investors, Mr Craig said it is crucial that they enhance their value proposition.

“There is plenty of interest in Australia’s fintech solutions from overseas investors,” Mr Craig said.

“To get the company on their radar, founders and business leaders need to focus on running the business as well as possible, which reduces the risk flags for potential buyers.

“They need to position themselves as a solution or a disruptor, and examine opportunities to join forces with other firms that are competing or where there are synergies to make the company more attractive.”