Financial services: towards digitalisation and consolidation
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News: 30 November 2023
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U.S. financial services sector M&A picked up in the second half of 2020, in line with the wider U.S. market. Asset management and fintech investments led the way, with regional bank mergers also showing signs of growth.
Morgan Stanley has been most active, building both its asset and wealth management arms. Following its USD13 billion acquisition of E*TRADE, the online stock brokerage, earlier in the year, it also recently announced the acquisition of asset manager Eaton Vance in a near USD7bn deal.
Whether other banks will follow a similar path is yet to be seen. Goldman Sachs indicated that it will look to grow its asset management business organically but does not rule out dealmaking. J. P. Morgan has indicated that it could, in principle, be interested in acquiring an asset manager.
More activity is likely in both asset management and wealth management as achieving scale and cost synergies drives consolidation across both industries.
Independent mid-sized and domestic wealth management companies continue to be aggressive in pursuing growth opportunities through acquisitions, seeking to fend off challenges from the bigger industry players. Economies of scale and the continued rise of index and ETF products are all putting additional pressure on asset managers to consolidate in order to compete.
Fintech deals dominate
Fintech remains a sector with significant opportunities. M&A, consortium deals and minority investments have continued despite the Covid-19 disruption.
Banks are searching the globe to find transformative digital technologies and are not alone in their interest in this area - venture capitalist (VC) and corporate investors are equally focused on fintech.
Large corporates have been active in the space:
- Visa Inc acquired Plaid Inc for USD4.9bn.
- Mastercard announced its acquisition of open banking company Finicity.
- U.S. payments companies have been receiving particular interest, with Stripe, Chime, Nubank, Bakkt and Varo raising significant funds. In addition, challenger banks Revolut and N26 joined the fray, entering the U.S. market.
Fintech is one to watch, especially in the coming months as the economy recovers, confidence builds and the market continues to diversify.
While the largest U.S. banks have been unable or unwilling to engage in M&A activity in the banking sector, there is evidence of renewed life for domestic banking mergers:
- PNC’s recently announced USD11bn acquisition of BBVA’s U.S. banking arm
- First Citizen’s USD2.2bn acquisition of CIT
The need for growth to compete with the larger banks and the pressure to search for profitable business in a low interest rate environment will continue to drive consolidation among the mid-sized regional banks in the U.S.
Election effect on M&A market
The election of Joe Biden is unlikely to have a significant impact on U.S. financial services M&A in the short term. With control of the Senate likely to stay in Republican hands, legislation that could impact transactions in the sector is unlikely to be passed.
While tougher regulation or enforcement in the financial sectors could dampen activity, especially for larger institutions, the implications of increased regulatory activity would not be immediate and would not change many of the key M&A drivers. The need for continued consolidation among mid-sized banks, asset managers and wealth managers, as well as the growing influence of technology on the financial sector, will remain.