This week, MasterCard announced the acquisition of Finicity for $825M. The acquisition will be seen by many as a response to Visa’s $5B acquisition of Plaid earlier this year (click here for our view on the deal). Both companies provide open banking capabilities, enabling banks to securely expose certain data elements; equipping FinTech start-ups to create new products leveraging those elements; and empowering individuals to easily sign-up for new products.
Both acquisitions will also fuel a broader shift in the US banking market. This shift is centered on the portability of consumer financial data and the emergence of alternative models to provide access to this data. One model, embodied by initiatives such as the Financial Data Exchange (FDX) and The Clearing House (TCH), is managed by banks and driven by their desire to control their own destiny through industry standards for data access. Another model, historically embodied by Plaid, is focused on providing non-bank entities — and their customers — access to financial data without requiring direct permission or approval from the bank.
While Plaid and Finicity took different approaches to market adoption, their acquisitions will accelerate the impact of open banking and further expand data access across incumbent financial institutions as well as emerging FinTech challengers. It also suggests the emergence of a third model — one centered on the payment networks and driven by their ability (and desire) to offer a diversified set of capabilities for both incumbents and challengers.
Beyond deal-specific implications, the acquisition of Finicity frames an emerging answer to a question that we posed on March 20: Did a Virus Just End an Historic FinTech Boom (click here for the article)? Recent events suggest quite the opposite. Looking at four categories of deal activity, we see early signs that the trend that began late last year is continuing even amidst a global pandemic and an accompanying recession:
- M&A: Finicity continues a recent string of FinTech acquisitions that started this year with Morgan Stanley’s acquisition of E*TRADE ($13B), Intuit’s acquisition of CreditKarma ($7.1B), and Ally’s acquisition of CardWorks ($2.7B). While M&A activity has slowed since the beginning of COVID, the trend has not stopped and deals like SoFi’s acquisition of Galileo ($1.2B) and this acquisition of Finicity are likely a harbinger of increased activity to come.
- New listings: While COVID has put a near-term damper on new listings, the June IPO filing by nCino highlights that demand for FinTech investments in the private markets is likely to extend into the public markets.
- IPO performance: Public market demand is further reflected in the performance of FinTech stocks that recently went public, notably Bill.com which saw a 350% increase between its IPO price in December ($22 p/s) and its recent high in May ($97.84 p/s).
- Private market financings: The number of private markets FinTech deals actually increased 26% in May 2020 from May 2019. These raises included Robinhood ($280M, $8.3B valuation), Carta ($180M, $3B valuation), Marqeta ($150M, $4.3B valuation), Brex ($150M extension, $2.6B valuation), Aspiration ($135M, valuation unknown) and Chime ($70M extension, $5.8B valuation). Driven by strong underlying growth, these financings highlight the continued appeal of FinTech companies that are reshaping existing models — whether card issuing (Marqeta), trading and wealth (Robinhood), retail banking and finance (Chime, Aspiration), and business banking and payments (Brex).
While early signs suggest that the boom in later stage FinTech deals will continue, more limited access to earlier stage capital is likely to lead to lower levels of FinTech funding. This is particularly the case for challenger FinTech models. As illustrated in Figure 1, early funding data from 2020 shows that venture funding has contracted across all categories of challengers.
Figure 1: Venture funding across challenger FinTech categories
As a result, less established players (and potentially even some that are at-scale) may no longer have the option of financing growth through venture capital. This will mean challengers, not entirely unlike incumbent counterparts, will need to leverage new ideas and technologies in order to achieve sustainable, long-term growth.
What does this mean looking ahead?
The tightening of capital for earlier stage FinTech challengers suggests that we may be coming to an inflection point in the market. Proven models and at-scale players will continue to grow through concentration of capital in private as well as public markets. However, unproven challenger business models may have a harder time continuing to grow without access to capital to fuel customer acquisition.
Given these dynamics, it is likely that we are in early stages of market reset. Deal activity will increase as we look to the latter half of 2020, as a new valuation equilibrium is created and existing companies get deals done — even at substantially lower valuations. It is worth reminding ourselves that, other than payments businesses, almost no venture-backed challengers have reached successful IPOs, which underscores the potential risk of a WeWork-like gap between public and private market valuations at scale. We should learn a lot about what to expect from the early performance of Lemonade’s offering.