Key risks for financial firms when integrating a FinTech
Compared with conventional acquisitions, there are specific challenges when acquiring a FinTech. These include:
Loss of agility
A FinTech’s agility and speed to market are its great strengths. Yet that strength is too often negated once integration begins. Corporates quickly want or feel a need to apply their standard corporate governance and controls. This is not surprising, given the heavily regulated world of financial services. Unfortunately, it is also not surprising that this can adversely impact the FinTech’s operating agility. Evaluating the FinTech against numerous corporate standards, such as financial crime policies, risk management frameworks, internal controls requirements and cyber standards, is particularly onerous. For this to be done comprehensively, a large programme of remediation work will be needed, with increased demands on the FinTech. Corporates need to challenge themselves on what changes in governance and controls are critical, and how they should be phased in.
Distraction can impact profitability
Integration can distract a FinTech’s management, negatively impacting the firm’s revenue plans. Most FinTechs have a small number of subject-matter experts who are pivotal to both day-to-day operations and change delivery. Their time and capacity are critical determinants of integration phasing. However, business-as-usual product development will likely suffer accordingly, hurting revenue forecasts. FinTechs may also face constraints as priorities for investment will be centred around successful integration. There could be less investment in the FinTech’s business and future propositions, especially for more speculative and slower developing opportunities.
Retaining and motivating talent
For the employees — who drive value creation — the shift from smaller FinTech to corporate can be significant. The loss of flexibility in management and the ‘culture shock’ of the corporate environment can adversely impact morale, engagement, and retention. This problem is intensified by any changes to employee rewards and incentives, such as shared ownership. It is also possible that management and key staff within the business may have deliberately chosen to move out of financial institutions into a FinTech. There is a risk that these people may look to move to another FinTech, rather than re-engage with corporate life.
Too much autonomy can be as harmful as none
It may be tempting to allow the post-deal FinTech to retain as much autonomy as possible for as long as possible. After all, this alleviates some of the risks flagged above, allowing the FinTech to focus on its core business. However, this strategy brings particular problems. It can leave staff feeling that little has changed, encouraging a legacy culture to persist, and constraining their engagement with the new broader corporate vision, culture and identity.
Perceived loss of independence can lose clients
Once a FinTech is owned by a corporate, its current and future consumers may no longer want to work with it. This may be as the buying corporate is a competitor, or they simply value the independence of the pre-deal FinTech. This can create a real risk to future revenues.
How can financial services firms improve integration?
There are five steps that buyers can take to ensure a higher chance of effective integration — both before and after any deal. These include:
- Have a clear FinTech ecosystem strategy that everyone in the business understands. Often, the driver of an acquisition sits within a single business unit — especially given FinTech is typically mono-line focussed. However, successful integration will then depend on a much wider set of stakeholders within the firm.
- Demonstrate transparency right from the start. Buyers need to be sensitive to the risks and challenges, and openly discuss them with any potential FinTech target from the outset. The more transparent and openly discussed, the higher the chance of mitigating risks.
- Conduct financial and operational due diligence. Buyers should factor the impacts outlined into any deal, valuation or evaluation. Each could have a material impact on the value of a business and its financial forecasts.
- Include due diligence of the people. Buyers of FinTechs have the challenge of assessing how material the key personnel are. For example, if the CEO or Chief Technology Officer (CTO) were to leave, how much of the business is linked to them and their relationships?
- Consider more of a hybrid operating model. Firms need to think about how that might work in practice, perhaps operating the FinTech as a distinct entity, with only some elements fully integrated. This would maintain some of the benefits of how the FinTech operated before the integration. It may require a shift in mindset — though most acquisitions are automatically assimilated into the corporate machinery. However, it can create a culture clash if the FinTech is kept separate from the rest of the business.
Integration is key for success
Firms need to have a flexible approach to integrating acquisitions, recognising that some risks and challenges are distinct to FinTechs. The key is not having a one-size-fits-all approach.
As always, a good M&A strategy can be ruined by poor post-deal execution. Being aware of the risks of integration and taking steps to overcome them will be key. As the demand for digitisation and innovation grows, well-executed integrations are crucial. They may not be as noticeable as the technology or innovation that makes FinTech so attractive, but they are essential to realise the value of any FinTech acquisition.
