A recent spree of multibillion-dollar fintech deals reveals that banks will go to great lengths to secure new tech chops. And that looks to be great news for founders of, and early investors in, fintech startups.
"Technology is at the center of the financial services arms race, and large financial institutions have the choice to build it or buy it," Greg McBride, chief financial analyst at Bankrate.com, told Protocol. "They've got the scale to do either, but the speed to market of acquiring a fintech is often the most appealing route."
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And here is increasing evidence that they'll pay top dollar for it. Over the weekend, The Wall Street Journal reported that TurboTax-maker Intuit is on the verge of striking a $7 billion deal to buy the personal finance startup Credit Karma. That follows news from last week that Morgan Stanley is to acquire the online trading platform E-Trade in a $13 billion all-stock deal to take over. And last month, Visa announced a $5.3 billion acquisition of financial API firm Plaid.
Founders and early-stage investors in fintechs are likely to be excited. It almost seems as though the emerging rule of thumb is paying two times the previous valuation of private fintech firms to acquire them, according to S&P Global Market Intelligence analyst Thomas Mason. A 2018 investment by Silver Lake valued Credit Karma at $4 billion versus the reported $7 billion deal price with Intuit, according to data from PitchBook. A funding round that same year valued Plaid at $2.4 billion, versus the $5.3 billion Visa deal, also based on data from PitchBook.
The takeover of E-Trade, a fintech company from the first dot-com boom, stands apart from the Plaid and Credit Karma purchases because it was already publicly traded, Mason added, and thus Morgan Stanley had more insight into it. But overall, he thinks that the three acquisitions show health in the fintech space that could continue to bolster it even if general market forces go south.
"This is all really good for the sector because I think a lot of investors are going to look at this and see there's a tangible exit strategy," Mason told Protocol. That could mean a more secure space for players in this space, including Robinhood, Stripe, SoFi, Revolut, and others. It could also inspire new seed investments in up-and-coming fintech startups, he said.
The recent deals represent a significant jump in the dollar value of deals in the fintech world. A December review of U.S. fintech exits by CB Insights found that 12 firms exited via initial public offering or merger/acquisition deals valued at $1 billion or higher since 2014, with the largest acquisition being Prudential's pick up of Assurance IQ in a deal worth $3.5 billion in September 2019.
McBride sees the race to commission-free trading, which means consumers are increasingly storing cash in brokerage accounts, as one of the driving forces behind Morgan Stanley's purchase of E-Trade, and wider market interest in similar deals. "This is why Wall Street banks continue to covet Main Street consumers," he noted.
The Credit Karma and Plaid deals can also be thought of as consumer acquisition plays. Credit Karma is known for providing free access to credit scores and boasts over 100 million members, which could be funneled toward other Intuit products like TurboTax and QuickBooks if the reported deal goes through. And while Plaid is more of a back-end product, the company told CNBC in 2018 that it already had connected roughly 20 million consumers to more than 10,000 banks.
There's recently been another indicator that fintech startups are doing well. Mason has his eye on a smaller trend where fintech firms actually buy banks. Last week, LendingClub — which went public with a $5.4 billion IPO in late 2014, but has seen lagging stock prices since — turned the tables by announcing that it planned to buy Radius, a branchless digital bank, for $185 million.
"A dual track is emerging now," Mason said, which he said suggests that the sector is primed for even more action.
Converge22 is taking place as Circle wrestles with major pressures, from the crypto market crash to heightened government scrutiny and Binance’s controversial decision to change the way it handles USDC, its dollar-linked stablecoin.Photo: Benjamin Pimentel/Protocol