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M&A in the Digital Financial Services and FinTech sector

M&A in the Digital Financial Services and FinTech sector

  • United Kingdom
  • Financial institutions - Digital Financial Services

11-05-2017

What does it take to run a successful Fintech business? Paul Pugh, Corporate partner at Eversheds Sutherland, interviewed Jonny Clayton, CEO of Oodle Finance to find out. Watch the video covering topics such as inspiring customer confidence through web and app development and competition in the technology market.

Jonny also spoke at our latest Digital Financial Services seminar on M&A in the Digital Financial Services and FinTech sector. Matthew Gough, Head of Digital Financial Services and FinTech at Eversheds Sutherland, Rachel Broquard and Richard Lewis, Corporate partners at Eversheds-Sutherland were also joined by Jeremy Sweetnam from PwC.

Download a copy of the seminar materials here.

UK FinTech and Investment Trends 2017 – Jeremy Sweetnam, Director of Corporate Finance, PwC

Jeremy Sweetnam provided an update and key industry insight into FinTech trends in 2017 and beyond. He identified six key trends driving change across financial services and demand for FinTech solutions:

  1. Mobile connectivity:  There will be over 6 billion smart phone users globally by 2020
  2. Lack of consumer confidence in traditional banks
  3. Demographics: 76% of millenials are open to using non-financial brands
  4. Explosion of data: 90% of the world’s data has been created in the last 2 years 
  5. E-commerce and online payments: $720 billion of mobile payments this year
  6. Regulatory changes: MIFID II, Solvency II and PSD2

FinTech businesses are targeting all aspects of the traditional banking ecosystem with new players emerging and disrupting traditional models. These include digital banks, P2P lenders, crowdfunders, online payments providers, international money transfer providers and robo-advisors.

The FinTech market looks set to continue to expand beyond 2017 driven by continued regulatory liberalisation (PSD2 is set to reignite interest and innovation across the payments sector) and growing interest in the potential of blockchain, artificial intelligence and big data. The FinTech sector continues to attract strategic interest from a range of investors, who are nevertheless becoming more discerning and focused on scaleability and whether there is an established route to market that will ultimately form the basis of a profitable, sustainable business model.

There are many examples of established financial institutions partnering with, investing in, building or buying FinTech solutions. Increasingly the banks' and insurance companies' are looking to collaborate with FinTech businesses as they effectively outsource their R&D functions. The combination of strategic interest from new entrants, regulatory change and maturing sub-sectors ought to drive a wave of M&A activity in the next 3-5 years.

The presentation ended on a positive note as, citing recent funding rounds by Atom, Funding Circle, Monzo and Currency Cloud, who have raised a combined $250 million in Q1 2017, Jeremy suggested that investors were shrugging off Brexit uncertainties around passporting and talent retention meaning the UK would remain a global FinTech leader for some time to come."

Finance as a Service – Jonny Clayton, CEO, Oodle Finance

Jonny Clayton provided an overview of Oodle Finance, which is planning to establish the market leading UK auto finance company. He outlined the value of FinTech to the business model: Essentially that the value of technology comes down to one thing, redefining service.

Oodle has focused its use of technology to:

  • Put customers at the centre of the process;
     
  • Improve engagement and interaction with customers; and
     
  • Re-engineer business processes.
     

A key focus for the business is to identify technology solutions which improve the customer journey, such as the way in which identification checks are processed.

Jonny outlined Oodle’s approach to success and their key drivers:

  • Solid business model/getting the basics right – origination, underwriting and loan servicing
     
  • Team – agile with autonomy, ‘can do’ culture with a clear mission
     
  • Capital – alignment of shareholders to the vision, support pilot lending and platform development
     
  • Financing – execution on senior debt facility to leverage capital and provide competitive liabilities and keeping the deposit pricing power low against the regulatory overheads of the banking licence.

There are many examples of how technology has been leveraged across the business. These include:

  • Data, machine learning and AI to assist with underwriting, customer acquisition and lead management
     
  • Process management and workflow to assist with point and click configuration, to embed compliance into processes of the business and to track activity such as email, SMS, calls and events.
     
  • Provide best in class service by utilising API integrations, photo ID and facial recognition and OCR application via photo of driving licence and number plate.

Jonny concluded by reviewing M&A potential noting that any activity has to drive improved service and efficiencies to the customer base and offering. It is key in any evaluation of value in a target or acquirer to review the customer base, ensure a shared vision and culture, identify funding efficiencies and ensure a complementary offering.

Top Ten Legal Issues in FinTech M&A

Matthew Gough, Rachel Broquard and Richard Lewis discussed the fundamental legal issues underpinning a successful acquisition. For a detailed review of these key issues, see our Digital Financial Services and FinTech briefing: Unlocking your digital ambitions: Top ten legal issues in FinTech M&A.

Three aspects make FinTech M&A distinctive: life cycle, business model and regulation. There is a natural tension between innovation, agility and attention to key legal areas to ensure the business is robust and scalable.

The top ten legal issues are:

Preparation phase

  • 1. FS regulation  
     
  • 2. Regulatory Change of Control

Valuation Considerations

  • 3. Valuation 
     
  • 4. Tax

Due Diligence Phase

  • 5. IP rights / Access to business critical data 
     
  • 6. Managing the FinTech’s core business

Negotiation Phase

  • 7. Warranty recourse 
     
  • 8. Management lock-in

Pre-sale reorganisation

  • 9. Structuring

Post-acquisition integration

  • 10. Culture Clash

Panel discussion – M&A and Investing in FinTech

Q: If FinTechs are to focus on collaboration and partnership with banks, as opposed to seeking acquisition, how do you identify the relevant contacts in financial institutions?

Seek engagement and sponsorship with all level of financial institutions and other FinTechs. There are opportunities throughout the sector. They are not confined to the large financial institutions.

Q: What are the intellectual property risks surrounding Open Source Software (OSS) which it is important to be aware of when selling or acquiring a FinTech?

OSS is software that you can access for free and manipulate for your own purpose, however you have to grant a licence back to the community once you have built something new. This is manageable if you are running things yourself, however we encourage all to look at alternatives to OSS for the protection of their IP.

The key to the IP risk is that of functionality. If OSS plays a large part in the core functionality of your technology / IP, then there runs a serious risk to the value of that if it is required to be licenced back for free to the OSS community.

For all those concerned about IP rights in regards to OSS when acquiring a FinTech, we run due diligence programmes to review all source code of programmes to discover if any OSS is used. This helps flush legal issues out at the outset.

Q: How will Brexit affect the FinTech sector in the UK?

Eversheds Sutherland recently completed a Brexit Survey, asking how UK businesses are responding to some of Brexit’s key commercial and legal issues. Around 200 responses were received from Chief Executives, Chairmen, Managing Directors, Finance Directors and General Counsel, from businesses of every type and size and including some of the UK’s leading organisations. Their views represent a broad range of sectors and paint a balanced picture of the UK's response to Brexit's questions, challenges and opportunities.

This survey found that many businesses do not feel sufficiently prepared for Brexit. Part of the reason many are struggling to prepare or implement strategy is this environment of uncertainty regarding the negotiation with the EU on the UK's exit. The current strategy for many is to think of the worst case scenario and plan for that. Businesses are advised to start thinking about Brexit and planning for it. The process of getting to what Brexit will look like is still a few months off but planning needs to start now.

Download our recent Brexit report here.

For more information contact

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