Fintech is enjoying a meteoric rise among investors in the emerging tech space, representing the second largest area of investment with $3.8 billion in 2021. The fourth quarter of 2021 alone saw $824 million across 23 deals, indicating a strong opportunity for startups to sell products and services. in the global financial ecosystem.
In this rapidly evolving field, some of the key global fintech M&A trends to watch include: “banks of the future” business models and the expansion of challenger banks and digital lenders; continued mergers and acquisitions and the consolidation of larger segments such as payments; deal activity backed by insurtech venture capital; application of blockchain beyond digital assets; and cryptocurrency, stablecoins and non-fungible tokens (NFTs).
Fintech companies operating in the United States are subject to regulation at both federal and state levels under a wide range of government agencies. The Biden-Harris administration is taking an active interest in cryptoassets and sending signals that regulatory action is potentially on the horizon with the planned presidential executive order on cryptocurrency, the release of the task force report of the chairman on stablecoins and the Consumer Financial Protection Bureau (CFPB) launching public inquiries into big tech giants operating payment systems and the “buy now, pay later” industry.
Around the world, many countries have established “regulatory sandboxes” that function as test environments in which fintech companies can develop innovative products and conduct experiments, hidden from the eyes of regulators, but under supervision. This model has been replicated in some states in the United States and the CFPB has created a compliance assistance sandbox where companies can obtain a safe harbor to test innovative products and services for a limited time while sharing data with the CFPB.
Cybersecurity, data privacy and related issues
With the substantial growth of fintech comes heightened data privacy concerns, as businesses are particularly vulnerable to phishing, third-party data sharing, compromised credentials, and asset theft. finance and data. The average cost of a data breach rose from $3.86 million in 2020 to $4.24 million in 2021, the highest average total cost in breach history according to a 2021 IBM report on the cost of a data breach. Interestingly, the average cost was $1.07 million higher for breaches in which remote work was a factor causing the breach compared to those generated elsewhere.
Intellectual property issues
Given the “borderless” nature of the industry, multi-jurisdictional issues come into play. When performing due diligence and considering how best to protect intellectual property (IP) rights, technology companies finance really need to look at the global legal landscape. There are potential delays in intellectual property due diligence due to the complexity of technology and the unstable nature of applying existing intellectual property legislation to digital assets. As a result, this makes the process complicated and may be less conclusive.
An important area to watch for trends in IP litigation is NFT. Described as unique blockchain-based digital assets that are associated with images, artwork, video, games or other creative content, NFTs present a complicated layer of patent, trademark and copyright law concerns. copyright, and metaverse sales and usage.
- The last 12 months have been extremely busy for fintech M&A and investment activity with UK banks, and financial services companies are increasingly targeting acquisitions and partnerships with fintech companies to access emerging technologies.
- The Financial Conduct Authority is keen to promote innovation and its pro-competition mandate in particular has ensured a more conducive regulatory environment for new fintech companies.
- The government is expected to publish its response to its consultation on bringing stablecoins into the scope of regulation soon and the UK’s financial promotion scheme is also extended to crypto-assets.
- In addition, the Bank of England and the Financial Conduct Authority are expected to publish a discussion paper on artificial intelligence (AI) at the end of 2022.
- The activity remains exceptionally active, and in this context, the European Commission has adopted a package on digital finance which includes regulatory proposals in three areas: the crypto-asset market, a pilot regime for market infrastructures based on distributed ledger technology (DLT) and a digital operational resilience framework. for financial services, in addition to issuing a directive clarifying and amending existing EU financial services legislation.
- Other strategically important areas for the region are Insurtech and AI.
- On September 24, 2021, a group of agencies, including the China Securities Regulatory Commission and the People’s Bank of China, essentially curbed all cryptocurrency activity with the release of an announcement broadly prohibiting all cryptocurrency transactions. currency and mining as concerted efforts to combat illicit activities conducted using digital assets.
- 2021 has been a strong year for M&A activity in Singapore, with a variety of companies going public or being acquired by major players. Total deal value jumped 59% year-over-year to $3.94 billion, in venture capital, private equity and M&A deals in 2021, from 2.48 billion in 2020. Local players also use mergers and acquisitions for market consolidation and to create larger products and acquisitions. platform ecosystems.
- In 2022, M&A activity is expected to be resilient as companies seek to expand their capabilities and footprint in Asia Pacific, and US private equity firms and SPACs look to cross-border targets in the region. .
- Regulations continue to impact the industry.
- Partnerships will continue to grow between new and more established fintech players. Fintechs seek to legitimize themselves by obtaining regulatory charters and licenses to work, particularly in the field of cryptocurrencies, within the regulated banking system.
- Large deals and large IPOs will likely remain robust. While the formation of new SPACs is currently experiencing headwinds, we expect de-SPAC activity to continue as existing SPACs must complete transactions before the deadline to close or return SPAC funds to investors.
To view the slides and listen to a copy of the recording, please visit the M&A in the Ever-Changing Fintech Landscape event page as part of the Morgan Lewis M&A Academy webinar series. For more information on NFTs, see Morgan Lewis’ latest report, NFT: What’s in Store for 2022?