Bank Systems & Technology is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Management Strategies

09:30 AM
Connect Directly
Facebook
Twitter
Google+
RSS
E-Mail
50%
50%

2015 Forecast: Fintech Vendor Market Trends

Every quarter, investment bank Berkery Noyes compiles an analysis fintech M&A trends. Berkery's managing director John Guzzo shares his insights on trends to look out for in the fintech market next year.

BS&T: Looking at Berkery Noyes’ Q3 Fintech M&A report, the payments area has been responsible for a lot of the larger transactions this year. How do you expect to see that M&A activity in payments continue to play out next year?

John Guzzo: We expect this trend to continue. Many businesses are seeking a single-vendor business model when contemplating potential mergers or acquisitions. Financial technology buyers are acquiring payments companies that are innovators, so they can converge different models. The payments industry has many license-and-maintenance legacy business models, which are good, but not always the most attractive to buyers. Companies today prefer subscription-based business models as a result of the recurring nature of the revenue streams.

[For more on Berkery Noyes' third quarter fintech M&A report: Payments Driving FinTech M&A]

BS&T: What kind of impact do you think recent developments in payments -- like ApplePay and all of the retailer data breaches we've seen -- will impact that trend?

Guzzo: As the trend moves away from cards, cash and gift cards to e-wallets, point-of-sale transactions will change. Smartphones are slowly becoming digital wallets. This in turn can enable a host of commerce and banking activities. One of the most frequently touted capabilities is mobile check depositing. Meanwhile, merchants are utilizing POS tablet based payments to increase efficiency, boost sales, and improve the retail experience.
 
Data analytics represent another attractive and growing field in payments for buyers as they seek to harness vital customer and transaction data and repackage it for marketing and sales purposes. Payments companies want to offer more intelligence to their customers.

BS&T: In general the topic of cyber security has been such a huge topic for us in financial services this year. Is that something that you see driving M&A activity in other financial services sectors beyond payments?

Guzzo: Security remains a crucial issue for payments companies. This is even more pertinent with the rise in international e-payment transaction volume and mobile banking. Consumers who have security concerns will be more hesitant to adopt new payment technologies. Therefore, enterprises must take concrete steps to ensure that their customers' data is safe and remains private. This can be demonstrated in part through adopting the EMV standards for credit and debit transactions. At the same time, it is imperative to find the right balance between security and convenience.

M&A activity in the cyber-security subsector is being driven in part by several factors such as the need to prevent breaches at major retailers, ensure digital identity as a means of protecting sensitive information, and identify threats both before they occur as well as in real-time. Looking beyond just payments, some notable security deals in the banking sector over the past few years include Experian’s acquisition of The 41st Parameter, a provider of fraud detection services, for $310 million; and IBM’s acquisition of Trusteer, an endpoint security software company that protects financial institutions against fraud and data breaches. Fraud prevention solutions providers will continue to be in high-demand from acquirers and investors

BS&T: Regulators have been focusing in on banks’ third-party relationships, leading to banks trying to consolidate their relationships to simplify compliance. Do you see that leading to a lot of M&A activity in terms of vendors trying to become one-stop shops as much as possible? And if so, do you see that trend continuing?

Guzzo: Regulations are playing a critical role in creating and increasing need for the one-stop vendor. Most core banking systems and loan originations solutions providers are looking at acquisitions as a way to broaden their product suite to truly become end-to-end solutions providers. Many of these companies currently partner with other vendors to offer a one-stop solution. There is a growing trend to acquire these current partners in order to (a) enhance control of the delivery (b) increase margins, and (c) offer a competitive advantage.

BS&T: We sort of talk about a “Big 3” in terms of hot technologies right now in banking: mobile, cloud and big data and analytics. How do you see the demand for those technologies playing out in the vendor market?

Guzzo: With the proliferation of data over the past few years, software solutions focused on credit, loan, and deposit analysis have become more prominent. This information can also be analyzed to obtain insight on consumer preferences and purchasing habits. Digital commerce, however, is being revolutionized by more than just more detailed transaction records. Bank vendors are looking to build consumer profiles based on search histories, social media insight, location based technologies, and other seemingly disparate statistics found in both structured and unstructured data. Getting closer to the consumer is a major trend in the banking industry. With less foot traffic and face-time at brick & mortar banks, banks are utilizing customer-acquisition and retention technology (i.e. automated marketing solutions, CRMs, and analytics) as a way to better understand customer’s needs by analyzing historic patterns.

BS&T: What do you have your eye on in terms of regulatory trends that could impact the vendor M&A market over the next year or so?

Guzzo: Full implementation of the CARD Act, Dodd-Frank Wall Street reform, and other legislation is only starting to have an impact. For instance, the Consumer Financial Protection Bureau (CFPB) has begun using its broad investigative authority under Title X of Dodd-Frank to respond to a high number of billing and credit card complaints. Meanwhile, the interchange fee limits enacted by the Durbin Amendment, another provision of Dodd-Frank, may encourage larger banks to promote credit cards over debit cards. This can be done by limiting debit card rewards programs. Smaller banks and credits unions that are exempt from these regulations thus have an opening to address a void in the market. Regulatory compliance solutions are in great demand by banks, resulting in growing “compliance budgets” for both internal development and 3rd party technology & services spend.

Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio

Register for Bank Systems & Technology Newsletters
Slideshows
Video
Bank Systems & Technology Radio
Archived Audio Interviews
Join Bank Systems & Technology Associate Editor Bryan Yurcan, and guests Karen Massey and Jerry Silva from IDC Financial Insights, for a conversation about the firm's 11th annual FinTech rankings.