This article is written by Amarnath Simha, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

Financial services mean the services provided by the finance industries consisting of a wide range of enterprises that manage money including credit-card companies, banks, accountancy companies,  insurance companies,  and while also including some of the government-supported entities.  It is difficult to define what exactly financial services mean.  Consequently, the definition of financial technology is difficult to be confined to narrow terms.  Financial technology (fintech or FinTech in short) could be defined as the technology and innovation that aims to compete with traditional financial methods in the delivery of financial services.  The above definition was arrived at by looking at over 200 definitions and concluding the basic parameters for the definition. 

What differentiates a fintech firm from a traditional financial institution? 

Fintech can now be said to include six areas.  They are provided hereunder; 

• Capital raising includes, crowdfunding focusing on big institutions and also alternative financing which refers to non-traditional ways of raising capital bypassing conventional financial institutions and at the same time focusing on small and medium enterprises.
• Deposit and Lending including Personal Finance, digital banking, and alternative lending.  Alternative lending is an area focusing on providing customers with credit scores and peer-to-peer loans bypassing conventional financial institutions.
• Enterprise Financial Software is the traditional financial institution using technology in the form of software to improve its services. It includes technologies for collaboration and workflow software, accounting and invoice software and data and analytics software as well as cybersecurity. 
• Investment Management is involved in the process of buying, selling, and managing assets and securities, and these services provided help both the institutional and private investors.
• Market Provision is the area wherein the intent is to improve the connectivity, transparency, and accessibility of proper and speedy information on the market while also allowing for comparison and matching of products and services and further services by facilitating interaction between buyers and sellers.
• It is the payment area that is attracting maximum investments at this point in time. It is for providing money-related services including Payment back-end and infrastructure creating end-to-end encrypted payment methodologies, consumer payments, and cryptocurrency which provides access to digital cryptocurrency markets like Bitcoin, etc.

With traditional financial institutions also including technology in their delivery of financial services, the clear cut distinctions between an absolutely Fintech firm and traditional financial institutions using technology are becoming less clear day by day in terms of technology adopted but becoming more clear in the scope of services they provide.  In fact, traditional financial institutions like banks are using fintech and fintech companies for their expansion.  With traditional financial services not rushing into new sectors like crypto-currency, it can be said that Fintech also operates in a niche sector not yet explored by traditional financial institutions.  However, with all that, the traditional financial institutions have big money which is not yet available with new fintech companies.  But the horizons of fintech companies are not just expanding but exploding with them entering into every perceivable financial service.  So it may be a matter of time when the fintech companies might be able to overtake the traditional financial institutions in their domain of financial services also.

Fintech startups in India

Many startups in India are involved in fintech services. They are looking at some innovative ways to reach people and break the traditional means of doing economics.  They are addressing hereto unreached sections of populations with little usage of technologies in their daily activities.  Some of the Fintech startups trying to make a difference are looked at briefly hereunder.

Shiksha finance 

This is a fintech company lending finance in the educational sector.  It offers loans to students of low-income households and also to educational institutions which give education to students.  These households are given loans for the cause of helping the education of their children with loans from 10K to 30K rupees and with a timeline of 6-10 months for repayment. Loans can be used for a multitude of educational purposes including for living arrangements, buying of books, uniforms, tuition payments.  Capacity to pay in terms of earning of the household is looked into for repayment schedule.  The educational institutions are offered loans in amounts of a few lakhs with the same timeline for repayment.  

Catalyst labs

This is a mobile software platform that verifies the quality as well as the grade and varieties of the products helping the bulk buyers and connects them to small-scale suppliers.   It is aimed to reduce the dependence on the middlemen altogether and bring more profits to the producers.

Profitbooks

This is software using cloud technologies for simplifying accounting so that every business owner with no knowledge of accounting can use it and thereby easing his business doing.  It saves around 240 business hours to those small businessmen and organizations and offers a host of services like creating invoices, recording business expenses, and tracking inventory while also calculating taxes.  

Kyash

This is an online payment gateway that enables e-merchants to accept cash payments upfront before delivery and thereby assuring them of payment. 

GyanDhan

This is a lending platform to students which is a very innovative approach.  The loans are disbursed based on the potential of the students and not on their asset security.  It evaluates the potential of the students to repay by looking at their IQ scores, academic records, and quality of the target institutions.  Hence in this mode of lending, the collateral is dependent on the determination of the students and not on the size of their parent’s assets.

HummingBill

This is an extension to Gmail that sends automated reminders thereby almost serving as a contract management software which thereby increases the time-collection rates over 25% for services companies and product suppliers/distributors.

 FineTrain

This is a credit-enabling platform for small businesses, providing lenders with bulk leads supported with accurate business data, which helps lower their due diligence costs.  

Reasons for merger

Financial technology companies consist of both startups and established financial institutions and technology companies trying to replace or enhance the usage of financial services provided by existing financial companies.  With the growth of technology including smartphones and internet connectivity, it is inevitable that even conventional financial institutions resort to the technology for the delivery of their services.  With startups also exploding in the sector, it was only a matter of time that competition increased and mergers and acquisitions started happening in the fintech sector.  Mergers are not just happening amongst the fintech companies but between traditional financial institutions and fintech companies with many financial institutions acquiring fintech companies to boost their conventional services or to venture into new fields.  

Mergers in the fintech industry

Some of the mergers in the Fintech industry which have taken all over the world are looked at hereunder.

• Visa + YellowPepper:  Visa acquired Yellow Pepper that supports leading financial institutions and startups in Latin America and the Caribbean.  Yellow Peppers platform offers a wide range of APIs that allow processors, issuers, and governments to seamlessly access multiple lanes for many payments flows, through a single connection. 
• Morgan Stanley + Eaton Vance:  Morgan Stanley acquired Eaton Vance, a provider of advanced investment strategies and wealth management solutions.  This goes a long way in transforming the acquirer with 3 world-class businesses of scale: Institutional Securities, Wealth Management, and Investment Management. The acquirer and acquired complemented each with little overlapping.
• Syncapay + North Lane Technologies:  DaVinci Payments, an enabler of on-demand real-time virtual and physical payments, and North Lane Technologies have merged to establish a high-growth, payment company with innovative technology and solutions.  The combined entity will operate under the umbrella of Syncapay, a company with unparalleled ability to accelerate the future of digital payments, through its extensive suite of FinTech services & payment solutions across rewards, disbursements, compensation, incentives, and global payouts. 
• INX + Open Finance Securities:  INX Limited, the global blockchain-based platform for trading digital assets has signed a term-sheet for the acquisition of Openfinance Securities, broker-dealer, with an alternative trading system. INX will acquire Openfinance’s broker-dealer and ATS business including its systems, digital asset listings, client base, and licenses.  
• Visa acquired Plaid for $5.3 billion which is a data aggregator.  Plaid provides application programming interfaces, the technology that sits at the heart of Open Banking.   
• Worldline acquired Ingenico for $8.6bn making it the fourth-largest payments company and a juggernaut in merchants.
• American Express acquires SoftBank-backed Kabbage which is a US fintech lender for a reported valuation of 850 million dollars boosting its lending capabilities for small businesses. 
• Stripe acquires Nigerian start-up Paystack in a $200m deal which is a firm having around 60,000 business customers in Nigeria and Ghana and allows clients to collect online and offline payments which are more than half the online transactions in Nigeria and Ghana.
• Payment processor Elavon purchased Sage Pay which many saw as disruptive for the economy.  But Elavon was able to acquire just before Covid lockdown and continue its services and demonstrated the importance and timeliness of bringing on a company that specializes in digital commerce.
• Apple acquired Montreal-based Mobeewave and thereby has placed a long-term bet on where it sees the payments industry headed.  Mobeewave’s technology uses NFC to turn iPhones into mobile card acceptance terminals without a hardware dongle popularized by the likes of Square, Clover, and iZettle. Apple is now set to bring this capability into its main product iPhone alongside P2P payments through Apple Pay Cash and credit services introduced last year with Apple Card.

Conclusion

It was said that fintech mergers are on the low side due to Covid but with innovative ways of delivering economic services at minimal costs due to the adoption of the latest technologies, it is only a matter of time before the sector comes up and the number of mergers also becomes more.  

References 

• https://journalsojs3.fe.up.pt/index.php/jim/article/view/2183-0606_004.004_0004
• https://www.profitbooks.net/profitbooks-named-in-top-3-fintech-companies-in-india/
• https://ibsintelligence.com/top-4-fintech-ma-deals-in-the-americas-october-2020/

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