Published on the 13/04/2023 | Written by Heather Wright

With funding tightening and tech valuations down, banks are eyeing tech companies as acquisition targets to broaden their solution portfolio – with the promise of new embedded finance offerings to come.

High interest rates, declining valuations, talent shortages and the fall of Silicon Valley Bank are all helping drive the trend, with engagement lines softening and embedded finance rising.

“That increasing integration of financial services with the day-to-day lives of customer is going to lead to quite an interesting dynamic.”

Alistair Newton, Gartner research vice president in the banking and investment services client vertical, says “We are going to see more headlines across the globe of banks acquiring technology companies, or fintechs anyway. And we are going to see demand stoked up [in Australia and New Zealand] because of what will be happening in other markets, and that’s down to factors like falling valuations, access to people, talent and things like that.”

Tech stocks were down more than 30 percent in 2022, ahead of the overall market drop of 20 percent, while analysts at Jefferies Group said the valuations of listed financial technology firms plunged 70 percent during the year.

Rising interest rates have also put a damper on expansion plans for many fintechs, and Newton says Silicon Valley Bank’s (SVB) failure may constrain access to capital further.

“If people feel like they have got to diversify, there won’t be this hub of a handful of banks globally who welcome fintechs to their door quite as openly as SVB did.

“So there is generally a tightening of access to funding around this space. And that’s just going to drive more of these acquisitions.” 

Newton says there’s also been a change in mindset in recent years, with banks more willing to work with fintechs for core parts of the banking infrastructure or capability.  

A desire for talent as well as the technology is also a big driver. 

“For  a relatively small investment banks can get into the tent and understand how fintech teams work, understand the best brains in the organisation as well as looking at the technology – and that’s been quite an attractive proposition for a good number of banks,” Newton says. 

“If you’re trying to drive innovation through your bank, snapping up a fintech with a handful of really smart data scientists or cofounders who are particularly catalytic in driving innovation change, could actually be the quickest, most efficient way of kickstarting innovation in your organisation.”

There have already been plenty of acquisitions in recent years. Locally, ANZ purchased Wellington-based data analytics company Dot Loves Data in December. ASB, meanwhile, invested in TradeWindow in 2021, Commonwealth Bank nabbed healthcare services directory WhiteCoat, and ANZ got CashRewards. And the consolidation of the neobank space in Australia included NAB’s $220 million takeover of 86 400.

Other touted deals by banks have fallen by the wayside, including buys of MYOB and VocusRetail.

Global big names including Goldman Sachs and Capital One have also been on the tech acquisition trail as have JP Morgan and Chase, though often for more point technology solution. Mastercard and Visa are both reportedly vying for Brazilian fintech Pismo, which has a cloud banking and payment processing platform. Visa offered US$1.4 billion this month to close the deal.

Lloyds Banking Group, a fairly traditional main street bank, has been acquiring tech companies to integrate into the open banking environment. It recently invested in Caura, a fintech whose app handles driving related payments such as car insurance, MoT, vehicle tax, tolls and city charges.

“Why does a bank want an organisation like that? Well, in the open banking environment, that entity ingests banking data, so the idea there is you start to build up this ecosystem.”

And it’s in that changing nature of banking services that things get more interesting, with banks looking to embed banking products in external ecosystems.

“If you look at the SMB market and the business banking space, there’s the idea banks now offer their clients a range of services. It’s not just banking and payments, you can get logistics, financial accounting, legal – there’s a much broader base of solutions being offered.”

Newton says the concept of embedded finance  is one trend he expects to see hitting New Zealand and Australia.

“It’s the idea that when you consume a product you consume the financial services component of it, like the buy now pay later trend where the lending component is part of the purchase transaction.

“The embodiment of that is stepping into your motor vehicle in the morning and all the payment capabilities form paying for your coffee as you charge your electric car, through to paying road tolls or the finance on your car, are all managed by a digital wallet embedded in the vehicle, probably managed on your behalf either by the vehicle manufacturer or potentially an Amazon, Google, whoever else it might be.”

For businesses, expect to see more integration of bank services into the back office.

Where ERP and back office systems currently ingest data from throughout a business and its supply chain, Newton says the same systems will ingest bank data.

“I won’t go to my bank’s digital banking or mobile banking, but everything I do as a business owner will be run off that dashboard.

“And I think that’s interesting, because there you are getting that morphing softly of the engagement lines between the bank and the customer. And it does play into the thrust around banks acquiring technology customers, because actually if as a bank you are delivering your services through that technology platform that is being used to run that other business, what do you do? Do you just make sure you can deliver that product to service elegantly through that? Do you invest in that tech platform? What do you do? At the very least you have got to understand it. 

“Those engagement lines are going to be more integrated moving forward and that could drive even greater levels of collaboration and acquisitions, not least because if you’re a bank and suddenly you’re just delivering your product and services through that channel you maybe have a deeper understanding of the capabilities it delivers the insights it delivers. For example if you are going to lend that small business money, if you can see the way it manages stock, manages sales… then you are probably going to have a better view of the risk and the risk associated with that loan and the pricing of that loan. 

“That increasing integration of financial services with the day-to-day lives of customer is going to lead to quite an interesting dynamic and could theoretically feed into more collaboration between banks and platform providers. And that collaboration could take the form of investments or acquisitions, or something similar.” 

As to the big movers for the year ahead, Newton’s not prepared to make any bets, but he does note that sustainability and ESG-type technologies are an area where he’s expecting significant uptick. And, of course, there’s generative AI and ChatGPT.

“I’m sure we will see some headlines on that. Someone will decide to spend some money on it!”