In FirstCapital’s recent fintech report “Fintech – prepare for a wave of M&A”, we looked at how the financial services ecosystem is experiencing dramatic change. This is being driven on the one hand by new companies with disruptive fintech models that are causing disintermediation of the financial incumbents, and on the other hand by rapid advances in technology that are disrupting the ancient, creaking core banking platforms.
One of the key threats we see to the banks and financial services players comes from the internet majors, who are becoming major players in certain key aspects of financial services.
The big internet companies (e.g. Google, Amazon, Facebook, Apple, PayPal) are actively developing new services and building their fintech offerings through acquisition. While banks today benefit from widespread brand recognition and customer inertia, they are largely failing to capitalise on these strengths. We expect the internet majors, who have much more sophisticated understanding of digital consumer behaviour, as well as their own huge brands, technology and user bases to successfully target everyday transactions such as online payments and mobile wallets.
The internet majors have so far been most active in payments. For example Google (Android), Apple and Samsung have all launched their own mobile wallets. Gallup estimates that only 13% of adults in the US have digital wallets on their smartphones today, which is a relatively slow rate of adoption to date, but we expect that adoption will increase over the next few years. Indeed Gartner suggests that as many as 50% of consumers in mature markets will use smartphones or wearables for mobile payments by 2018.
Some of the key transactions in payments by the majors include PayPal’s acquisitions of Braintree (online payments) and Xoom (remittances). Notable investments by internet majors include Naspers investment in Payumoney, Softbank in PayActiv and Alibaba in Payfm. Meanwhile Amazon is utilising its mammoth position in ecommerce to become a dominant force in payments, adding an online payments service and credit option.
In lending, Amazon and PayPal have launched their own B2B lending solutions to support their ecommerce and payments offerings. The Asian players have also been active in the B2C market, with Alibaba and Tencent launching their own B2C lending services.
Of course one of the key hurdles for new players in financial services is regulation, and to date this has largely meant that the majority of the Western players have stopped short of offering a full banking solution, being reluctant to cross the regulatory line. The same is not true of the Asian players, and Baidu, Alibaba and Tencent have all got banking licenses.
The implications of this activity for emerging players in the fintech space are that we expect a wave of M&A activity in the next 3 years as the internet majors scale up in financial services. We anticipate that the Asian players will make large acquisitions to enter new regions, while the Western majors will acquire to increase engagement, widen revenue opportunities and reduce friction for their platforms.