While the rapid and exponential growth of Financial Technology (FinTech) companies appear to signal an impending wave of M&A, certain impediments exist that may mitigate these projections. FinTech companies develop and market technologies that facilitate a variety of financial transactions through electronic mediums. Since 2010, over 80 FinTech companies in Canada have garnered about $1 billion in investments. For private FinTech companies worldwide, investments have increased from $1.8 billion USD in 2010 to $19 billion USD in 2015. This unprecedented growth prompted the Competition Bureau to identify FinTech companies as potential disruptors to the Financial Services industry and undertake a study to determine whether there should be regulatory reform as a result.
A Wave of M&A
Predictions of substantial M&A activity among FinTech companies, commonly referred to as a wave of M&A, abound. There are a variety of reasons supporting these predictions. First, the rapid growth and funding of FinTech companies may give rise to companies sufficiently large to acquire other, smaller FinTech companies. Second, the concentration of FinTech companies in particular sectors is unsustainable. Some of these sectors seem to include lending, wealth management and payments. The finance company Difference Capital Financial predicts market consolidation where companies in these sectors will enter into partnerships or merge. Third, FinTech companies constitute a threat to the big banks. To successfully compete in the marketplace, these banks may undertake acquisitions of FinTech companies (or potentially launch their own FinTechs). Fourth, some internet companies seek to enter the FinTech marketplace and may also do so by acquisitions of FinTech companies themselves.
Impediments to FinTech M&A
FinTech companies may overlook regulatory compliance as they often fail to consider themselves financial services businesses subject to regulatory regimes. The regulatory regimes applicable to FinTech companies also appear to be somewhat unclear given their novelty. The effects of this, however, may frustrate the predicted wave of M&A. Consider due diligence. A significant component of the M&A process for both buyers and sellers, undertaking due diligence, requires familiarity with regulatory limitations and requirements. The absence of this familiarity may detrimentally thwart the due diligence process and eventual business transaction. Similarly, compliance with regulatory regimes may impart to FinTech companies the appearance of capacity for future growth and success. Where FinTech companies fail to comply, prospective investors and purchasers may draw adverse inferences. In light of the foregoing, the projected wave of M&A activity may be more of a ripple.
The author would like to thank Samantha Sarkozi, Summer Student, for her assistance in preparing this legal update.
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