Creating Strategic Value through Financial Technology

CHAPTER 11Acquiring a FinTech Company

INTRODUCTION

An acquisition of a FinTech company by a bank may be more beneficial than a partnership between the two. Acquisition allows the acquirer to fully integrate the FinTech innovation into its business model and also to fully control the relationship with the customer. The acquirer also has control over the strategic direction of the technology and whether the technology will be offered to competitors.

There are, however, downsides for community banks to an acquisition strategy compared to a partnership strategy. First, acquisitions can be very expensive, particularly when compared to a partnership. There is also the potential for significant valuation differentials between banks and FinTech companies. Thus, bank acquirers have to be significantly capitalized and funded to execute the transaction. This is a key reason why most FinTech acquisitions to date have been undertaken by larger financial services providers who have more capital and resources.

Additionally, there are other acquisition challenges for banks, including the following:

• Goodwill Creation. Acquisitions of FinTech companies tend to create more goodwill than acquisitions of other banking entities. For example, over 90 percent of the purchase price is often accounted for as goodwill in acquisitions of FinTech companies. This is significantly higher than traditional bank acquisitions. This is important to bankers because it creates greater dilution of book value and ...