When is a fintech too big to be bought by a bank?
Many banks will be tempted to buy fintech firms to play catch-up in the technology race, and more fintechs might be willing to be sold, but splurging now could be exactly the wrong move for banks, according to Hans Morris, head of the venture capital firm Nyca Partners.
The reason? Several fintech companies are valued at, or headed towards a valuation of, $1 billion — a price that could be too rich for the blood (and books) of many banks, Morris warned in an interview at a recent fintech conference in New York.
“Goodwill is a 100% deduction at a bank,” Morris said. “If you buy a company for a billion dollars, your tangible common equity is reduced by a billion dollars. If that company only earns $15 million, then that’s a really dumb decision. If that billion-dollar company is earning you $200 million that would be great, but most of these companies don’t have that type of earnings.”
In April, the digital payments company Bill.com, the cryptocurrency platform Liquid and the renters insurance company Lemonade each entered into what the tech industry calls the "unicorn" $1 billion valuation space, according to CB Insights. Monzo, which became a unicorn in October 2018, launches in the U.S. this week.
Fintechs are often faced with the decision to find a buyer when they cannot raise enough money to expand further — which was the case when CUNA Mutual Group bought the digital-lending startup Mirador, one of Morris' portfolio companies.
Even if banks sit out fintech M&A for awhile until valuations come down, potential sellers can still look to be bought up by larger banking vendors, Morris said. This year, Fiserv agreed to buy First Data, FIS announced a deal for Worldpay and Global Payments said it was acquiring TSYS.
For banks, the ideal purchase would resemble JPMorgan Chase's acquisition of the payments processor InstaMed for $500 million, Morris said.
"That's a specific vertical and key area," he said. “It’s a small percentage of their market cap and they can run a lot more transactions than the smaller company can."