Fintech Deals to Watch

“There are startups that want to destroy banks and startups that want banks to buy their software. Luckily for the banks, there are many more of the latter than the former.” –Bank Innovation

If you want to know what’s really going on in an industry, follow the money. Money talks. Recent fintech deals across digital, lending, payments and infrastructure are telling a big story. Heck, we weren’t even three weeks into 2019 when Fiserv’s $22 billion proposed First Data acquisition—one of the biggest fintech deals ever—was announced to the Street.

So here’s the follow-the-money skinny on recent fintech deals—and what it says about what’s likely to come next.

Digital: Getting Real, Especially Revenue Gen

Thirty-six percent of banks and credit unions plan to implement or replace digital account opening systems this year, according to Cornerstone Advisors’ What’s Going On In Banking 2019. That’s three times the change rate of core systems and twice the change rate of transactional digital banking systems. Digital account opening was also far and away the number one reason banks cited for exploring fintech partnerships.

In the last few months, we’ve seen an incredible amount of activity in the digital space. Where there weren’t deals, many providers announced or quietly began rolling out internally built digital sales-oriented solutions. To name a few…

• Adobe acquired Marketo, rolling up the major digital marketing competition to Salesforce (which has nCino as the tip of its digital sales industry spear).
• Finastra acquired Malauzai.
• FIS made a significant investment/partnership in Zenmonics.
• Jack Henry acquired BOLTS.
• Temenos acquired Avoka.
• Kony acquired Pivotus Solutions from Umpqua Bank, bringing a platform for service and sales interaction to the broader banking market.
• Live Oak Bank (which birthed nCino) partnered with First Data to create Apiture.
• Q2 acquired Gro Solutions.

SO WHAT? 2019 will be a year of testing and learning for these tools to generate revenue, especially in competing for much needed deposits. We’ll move from “trying stuff” to drafting the playbook.

Lending: Mashing Up Analytics & Digital

From commercial to consumer lending, the credit process is one that banks have been re-working to reflect the shift to digital self-service buying. Who started the false industry narrative that “customers want to visit the branch for complex needs?” How to explain that the most complex financial need most consumers face (getting a mortgage) is the one most often digitally purchased now. Consumer and small business loans, deposits and payments purchases are trending that way, too. In turn, there has been a lot of investor interest:

• Accel-KKR acquired Sageworks and placed it into an analytics and lending mashup with Bankers Toolbox and MainStreet Technologies (now combined as Abrigo).
• Following a focus on its AdvantEdge, CUNA Mutual Group had a string of complementary acquisitions that follow the lending process front to back: LOS fintech Mirador, enabling platform Compliance Systems, and integration specialist Finivation.
• Fiserv’s selloff of a majority interest in its lending solutions to Warburg Pincus (which became Sagent Lending Technologies) was a move designed to inject outside investor energy.
• Moody’s Analytics acquired commercial real estate analytics firm REIS.
• Q2 acquired Cloud Lending Solutions, a digital banking provider focused exclusively on digital loan and deposit origination.
• Private equity firm Thoma Bravo acquired and merged both MeridianLink and CRIF Lending, companies with platforms that include digital loan origination, auto-decisioning and process analytics. Then, Thoma more recently announced the acquisition of Ellie Mae, a leading end-to-end mortgage automation provider. The loan process data possibilities across all those multi-tenant platforms is mind boggling.

SO WHAT? Look for 2019 to be about expanding analytics in lending from use in credit and compliance risk to analytics use for engineering revenue growth and customer responsiveness.

Payments: More Consolidation, Commerce Convergence

Following on Fiserv’s announced acquisition of Elan from US Bank, the pending Fiserv/First Data deal dwarfs all the other recent payments fintech deals in terms of size. Yet the 2X revenue purchase price suggests Fiserv’s First Data acquisition is not entirely where standout future growth is expected. It also suggests Fiserv got a great deal. But those Fiserv deals and Deluxe’s Wausau acquisition of First Data’s remittance business largely tell the story of consolidation within the mature payments space. Some of that consolidation will also fuel new innovations.

City National Bank’s Exactuals acquisition is a case study in where payments fintech is headed: a bank adding value to its niche target clients with a niche acquisition. City National is the “bank to the stars,” and Exactuals uses analytics to simplify complex royalty payments for entertainers. Company, commerce, payments and analytics strategies all rolled into one.

Square’s acquisition of Weebly (a website builder) tells the broader commerce convergence story of payments providers looking to support businesses with their entire storefront. Other examples of payments convergence into whole commerce are NCR’s acquisition of JetPay and CapitalOne’s acquisition of Wikibuy.

SO WHAT? In 2019, look for payments organizations to increasingly support businesses and consumers in their connectivity and end-to-end commerce.

Infrastructure: Control and Integration

The biggest recent deal value multiple winner is Salesforce’s acquisition of Mulesoft, a company that links business apps, databases and corporate IT infrastructure. Salesforce acquired Mulesoft for 20X revenue, or $6.5 billion. Growth expectations for these integration capabilities to fuel API-based competition are at the very top of the value heap. And, from what I heard from my Cornerstone Advisors colleagues and clients alike, the Mulesoft valuation might just be worth it because of the focus on easing integration pain.

IBM recently paid $34 billion to acquire Redhat, a company that gives banks more control of their tech deployments as more applications move to the cloud. IBM’s purchase price of around 11X Redhat’s revenue speaks to its expected bullish growth expectations.

SO WHAT? Look for 2019 to be about easing more integration pain while driving down infrastructure costs on the basics to free up more resources and analytics that drive revenue.

Whether in digital, lending, payments or infrastructure, the lack of integration remains one of the biggest pains in the industry. With all of the new developments in the market, the integration challenge is something that hasn’t changed since years ago when I led digital banking and analytics as a banker and implementations, partnerships and strategy for a couple of tech firms. As competitive and earnings pressures continue rising during 2019, watch for even more fintech deals that tackle process integration to drive better revenue. Because money talks.

Sam Kilmer will be joined by Ryan Rackley, Cornerstone Advisors managing director, and Steve Williams, Cornerstone president, at “Fintech Relationships: Both Sides of the Table,” a webinar to be held on March 5. Register here.

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