Fintech 2.0: M&A as a chance to make growth profitable

There has been a lot of movement in the fintech market. With the economic uncertainty, on the rise, investors started to rethink. But there is substance in the sector. Innovation and creativity are assets that have great potential for sustainable growth. M&A strategies are the key to unlock this potential.

Hitting the ground running

The emerging market for fintech was quite unique. The start-up mentality, innovation and a new generation of entrepreneurs made it an Eldorado for investors long before the pandemic gave this industry another mighty boost. Capital seemed to fly into the offices of people with a vision to reinvent the financial landscape and the drive to modernise services and user-experiences. It almost felt like the relatively small fintech time-warped the European financial industry into the 21st century. The agility, disruptive approach, and lean structures of fintech companies allowed them to develop more relevant solutions, react quicker and pace faster in a market that had been dominated by big players. For the broad public new fintech solutions redefined their interaction with finances or allowed access to new services.

No boom lasts forever

Seemingly endless investor-capital attracted more companies, especially because the most important KPI was growth, not profitability. So, it was only a matter of time before the investors started to ask about their return. Recent geopolitical crises and the pessimism regarding the economic climate made money more expensive and investors rethink the KPI and their shares in unsustainable business models. Additionally, some of the fintech services are causing concern regarding privacy and safety. The strict EU-laws also set a limit to the realisation and thereby monetarisation of innovation.

It might be exaggerated to claim that this was when the bubble burst, but it surely deflated a lot when the investors started to look at the companies’ profitability. Even well-known fintech companies had to reduce staff, up to 25%. Taking stock of this industry branch showed that there were a lot of companies with the same product or products that were innovative but didn’t sell or had no profitable sales proposition. Creative people are not necessarily the best sales-representatives. Innovation on its own tends not to be a sustainable business model. Borys Storck, Partner at Marktlink Düsseldorf, has a rather pragmatic view on fintech’s prospects. He observes a return to traditional investment values. “Investors need to understand how fintech makes money. Innovation and vision are not enough. One must sell the product, too.”

The market will tell

Before the recent macroeconomic developments, the investors sought after companies. Now the table has turned, the companies need to seek capital. As a result, the industry faces the need to consolidate for the first time. There are many small companies looking for opportunities to grow. Those with a more generic product will either merge to grow or fuse with a company with a different portfolio to offer broader service. Thus, companies with a more sustainable business model are very attractive to the bigger players to ingest know-how and talent to add to their services. In any case, companies need to take the step from nerdy start-up to a profitable asset. The next years will tell, which companies achieve organic growth, and which apply M&A strategies to dominate the market – because size matters.

Opportunities big and small

Big players sometimes lack exactly what defines fintech companies: agility and a very specific knowledge on how to convert the digital possibilities into coveted products. Also, trendy young brands might be a door-opener to younger audiences. So, fintech is still very interesting for investors, though for different reasons than before.

M&A as a new beginning

Conclusively, mergers and acquisitions are not only a necessity in the fintech sector, but it is also a second coming to achieve sustainable growth because innovation meets entrepreneurship. A consultancy like Marktlink is the perfect interpreter between those parties because the network of more than 120 consultants offers specific and profound knowledge of the finance sector to connect passion for innovation and creativity with the business side. This expertise can unlock the growth potential of this still young sector.