In the wake of the COVID-19 pandemic, activity in fintech mergers and acquisitions (M&A) climbed to unprecedented levels, with a record US$348.5 billion in volume and 1,485 transactions in 2021.1 Fintechs in fraud, AML, and cybersecurity played a critical role in this activity, with legacy players eager to snap up newcomers offering cutting-edge approaches to dramatic rises in cyberattacks and fraud. This trend decelerated in 2022 and 2023 amid global economic uncertainty, but it remains relatively strong—with the possibility to pick up steam in 2024.
What has prompted this remarkable surge in activity? The interplay between digitalization and competition holds the answer.
Digital transformation skyrocketed as the pandemic drove individuals, companies, and governments to look for new ways of conducting business. Digital payments, mobile and online banking, and e-commerce underwent rapid growth, and financial institutions and governments invested in digitalization strategies to modernize business and governance approaches. Cash usage took a major hit as contactless payments spread and ATMs disappeared.
Meanwhile, emerging markets’ continued investment in internet penetration—coupled with an expansion in mobile device access and ownership—meant that more individuals than ever before had access to the web. In this landscape, emerging technologies such as cryptocurrency, blockchain, and Web3 came to the fore. New financial crime vectors arose, and more individuals resorted to fraudulent activity as they grappled with the economic repercussions of the pandemic. In response, new regulatory requirements were instituted, with stricter fines and penalties for non-compliance.
This environment was ripe for competition. New entrants flooded the fintech ecosystem as financial crime accelerated, fintech adoption rose, and novel and innovative approaches challenged legacy players’ traditional ways of doing business. Companies across the board were under immense pressure to innovate and offer solutions that were quicker, sleeker, and up-to-date. M&A became the perfect solution to adapt to this competitive and challenging landscape, one rife with rampant fraud and scams, complex regulatory requirements, and economic turbulence.
Benefits to M&A
By combining forces, companies—from startups to the well-established to everything in between—can reap an array of benefits. It comes down to accessing a broader and more robust set of resources, all while curbing competition and cutting costs. Key advantages include the following:
- Small and midsize companies gain access to the funding available to legacy players and private equity firms. Some fintechs have faced barriers to scaling and profitability, and M&A can ensure that their solutions are better brought to market.
- Many fintechs in early growth have the opportunity to focus on innovation. However, once they have clients, it becomes more of a challenge to scale because they have to invest in infrastructure for client services, implementation, and product management. A benefit of convergence is that they can take advantage of the infrastructure offered by larger players.
- Companies can tap into new brainpower and innovations, which helps to diversify approaches and fine-tune solutions. Overall, this serves to broaden the services offered, boost profitability, and strengthen brand reputation.
- Many newer fintechs harness exciting technology, but they do not have as firm a grasp of market forces and real-time issues. Legacy players have been navigating market issues for years, and M&A offers newcomers a sharper understanding and approach to the market landscape.
- Companies can penetrate and expand into new geographies. Many established companies have acquired small fintechs that cater to clients in emerging markets (e.g., Asia-Pacific, the Middle East, Africa, and Latin America), allowing them to tap into geographies that are undergoing incredible expansion in all things digital. Alongside more established fintech hotspots such as Singapore and Switzerland, Nigeria and India will be two countries to watch going into 2024.
What the Future Holds
As the year progresses, we at Datos Insights predict that heightened fintech M&A will continue as financial crime rates remain high, markets stabilize, emerging markets increasingly invest in fintech, interest rates go down, and companies look to adapt to the emergence of innovative technologies like generative AI. Expect to see activity among companies that are harnessing generative AI to tackle financial crime—from detecting fraud to streamlining AML investigations—and ones focused on identity and authentication. As vendors continue to develop products and bring them to market, they must understand this market and what’s driving M&A activity to learn and develop plans. For a deeper exploration of fintech M&A in fraud, AML, and cybersecurity in 2023, read Datos Insights’ report, Risk Insights & Advisory Fintech Spotlight: Q1 2024.
- “2021 Fintech Almanac,” FT Partners, published January 2022, accessed January 31, 2024, https://www.ftpartners.com/fintech-research/almanac. ↩︎
