NEW YORK, Nov 17 (Reuters) – Financial technology firms, long seen as a threat by the likes of JPMorgan Chase & Co ( JPM.N ), are increasingly becoming takeover targets for traditional U.S. banks as rising interest rates and falling valuations drag from them. expansion.
The valuation of listed fintech companies is down 70% by 2022, analysts at Jefferies Group said in a note last week. Over the same period, the valuation of banks in the S&P 500 has fallen 33%, while the valuation of the S&P 500 (.SPX) has fallen 23%, according to data from Refinitiv IBES.
The downgrade presents an opportunity for Main Street banks to buy companies and boost their technology for digital banking, online payments and other financial services, diversifying beyond lending.
Huntington Bancshares Inc (HBAN.O) is one such bank. The Columbus, Ohio-based regional bank is looking for more targets after it bought payment technology company Torana in May.
“We could buy more on the payments side,” Huntington chief executive Steve Steinour told Reuters in an interview.
Investors have ditched fintech stocks this year along with other tech stocks, which perform better when economic growth is strong. With the US heading toward a possible recession and interest rates rising, the outlook for fintechs has eroded. The notable inflation of crypto exchange FTX last week has also shaken confidence.
“With valuations falling, and the IPO and SPAC markets all but wiped out at the moment, there’s certainly a lot more room for traditional bank takeovers in fintech,” said Dan Goerlich, a partner at PwC who focuses on financial transactions.
The renewed interest contrasts with previous years, when CFOs stopped buying companies they thought were overvalued, he said.
The loss of the year has been great. For example, shares of Affirm Holdings ( AFRM.O ), which offers a buy-now payment service, have fallen 85% this year. Personal finance firm Dave Inc ( DAVE.O ) has fallen nearly 97%.
Affirm declined to comment. Dave did not immediately respond to a request for comment.
Startup founders may face more pressure to make deals as it becomes more expensive to run their businesses. Investors have focused heavily on rising funding costs, Jefferies analyst John Hecht wrote in a note.
JPMorgan CEO Jamie Dimon has been warning for a decade that Silicon Valley is coming to eat banks’ lunch. During that time, fintechs have flourished as customers and businesses embraced digital financial services. Pandemic shutdowns fueled the trend as everyone went online. Even so, the price increase stalled this year as the economic outlook darkened.
The largest US lender has been buying to meet the challenge. In September, JPMorgan agreed to buy Renovite Technologies Inc, a cloud-based payments technology company, the latest in a series of deals worth $5 billion over the past 18 months.
PNC Financial Services Inc (PNC.N) in September acquired Linga, a fintech focused on the operation and sale of restaurants.
“You’re going to see an explosion of deals” in the next year and a half, said Michael Abbott, head of global banking at Accenture.
ON THE FOOD LANE
Large lenders have plenty of reasons to do deals. The fall in fintech valuations coincides with banks making more money from traditional lending companies when interest rates rise.
Fintech transactions may be easier to prevent than bank mergers, which have been delayed by regulatory scrutiny.
“Management teams and boards have shifted their focus to non-bank opportunities,” said Brennin Kroog, managing director in Lazard’s financial institutions group. These include digital tools for asset management or treasury and point-of-sale financing.
Fintech deals allow banks to buy new technologies or products instead of developing them in-house. Acquisitions can also be defensive moves into other businesses outside of lending, such as tourism.
Not all sellers will find a buyer. Some banks have shunned buy-now-pay-later firms because of concerns about their loan portfolios and the potential for regulation. Crypto providers were already considered unattractive due to regulatory uncertainty, even before the FTX crash.
Even under better conditions, it is not easy to make an offer.
Pittsburgh, Pennsylvania-based PNC looked at more than 50 potential acquisitions this year and settled on one company, CEO Bill Demchak told Reuters. However, since “valuations have come down a lot, our activity could be higher,” he said.
Reporting by Saeed Azhar and David French in New York; Additional reports Niket Nishant in Bengaluru; Editing by Lananh Nguyen and Anna Driver
Our standards: Thomson Reuters Trust Principles.