While the imperatives for M&A transactions remain familiar and consistent, our research identifies clear priorities for dealmakers in the months and years ahead. In the following chapter, we explore the sectors, regions and opportunities that will drive fintech deals in the coming year and beyond 

Deal drivers 

Respondents universally expect fundraising for fintech firms to rise over the next 12 months. Three-quarters of banks (76%) and two-thirds of private equity, venture capital and family office investors (67%) anticipate this rise being considerable. “Fintech is the future and we all have to make our future secure,” says the head of strategy at a German financial institution. “There are so many opportunities to invest in these companies that fundraising activity is bound to increase over the next 12 months.”


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In practice, there is a broad range of factors driving this increased investment, with motivations varying according to the nature of the businesses involved.

For example, more than half the banks and financial institutions in this survey (52%) suggest fintech investment and M&A are being driven by the need for enhanced compliance and reporting functionality. This is consistent with their intention to invest more in these areas (see page 15) and reflects the regulatory pressures on the sector, as well as new challenges, including the GDPR.

Banks and financial institutions also point in large numbers (49%) to the need to invest in upgrading their legacy IT systems. Acquiring fintech expertise provides a means to evolve IT platforms and infrastructure dynamically, rather than trying to rebuild from within. 

Meanwhile, private equity, venture capital and family office investors point to drivers such as the need to improve customer outreach through digital and mobile tools, a factor cited by 45% of respondents. Some 47% of these respondents also point to the need to drive cost savings for financial firms.

A combination of all these factors will apply to dealmakers across the marketplace. Some fintech businesses offer a means to drive top-line growth with better customer-facing technologies or through access to new markets, while others offer the prospect of cost savings, IT renewal or enhanced compliance standards.

“It is all about upgrading and trying to keep up with the rapidly changing financial landscape,” says the managing partner of a Belgian private equity firm. “Fintech businesses offer the means to do that, in a variety of different ways.”

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Reed Smith on fintechs as good sellers

To make yourself more attractive in the fintech space, firms need to have regulatory and compliance expertise. Make sure your product innovation and development meets regulatory needs and requirements, and emphasise your regulatory compliance. When you’re looking at the buyers’ environment, what they really don’t want to do is take on regulatory risk, and they want to make sure everything has been done with their regulation in mind from the beginning. This is sometimes a little bit of a struggle for tech companies, because they are experts at the tech and really underestimate how granular the regulation can get with respect to directing the tech. Having a team that understands the effect of the relevant regulatory regime and has specifically tailored its technology for those relevant regulatory factors will be more appealing to buyers.

Maria Earley, Partner, Washington, D.C.

The fintech factor

Equally, different attributes, qualities and features may drive the interest of acquirers and investors in a fintech target. The proprietary technology of the target and its ability to develop technology solutions is certainly likely to be one of those factors: two-thirds of banks and financial institutions (67%) say this aspect is important when considering a potential target. This reflects the need of these buyers to acquire intellectual and human capital and innovative tools and solutions. Controlling industry access to key technology is seen as the second most important aspect when considering a potential target.

For private equity, venture capital and family office investors, moreover, other factors may apply. For example, almost half (48%) highlight their desire to find fintechs where there is the option of out-licensing products and services, which represents a means to generate value from their investments.


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Cross-border criteria

There is also the issue of the jurisdiction in which the fintech is based, particularly for cross-border deals where the investor or acquirer may be taking on a business subject to very different rules and laws from those that apply in its home base. The biggest factor in such deals, cited by almost half (48%) of respondents, is the need for the country in which the target is based to have regulatory transparency and stability.

Dealmakers are also concerned about issues such as license transferability, government support for fintechs, consumer perceptions and the local fundraising environment.


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Fintech attractions

From the fintechs’ operating company’s perspective, our survey highlights a number of steps that they can take in order to make themselves more attractive; but the most fundamental factor is to be aware of what dealmakers are looking for and to prepare accordingly.

“Fintechs have to work harder to present themselves and the value they offer,” says the director of strategy and M&A at a leading Canadian financial institution. “They need to have done that work so they are ready to assist a buyer or investor whenever they are approached.”

Almost half the respondents in this survey (49%) suggest fintechs prepare due diligence reports and data rooms for prospective buyers and investors – these will ease the way as negotiations begin. Similar numbers suggest fintechs should develop their own plans for value creation and revenue growth – these ideas can then be pitched to those considering a deal. A similar principle applies to making the case for synergy potential. 


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One-third of banks and financial institutions (33%) and almost as many private equity, venture capital and family office investors (30%) suggest fintechs highlight their key talent. Given that the value of many fintechs lies predominantly in the intellectual capital provided by its innovators, this is important.

In the end, however, the ability of a fintech to identify potential deal drivers and prepare the groundwork for a transaction – and its willingness to do so – will depend on its resources and the progress of its own development cycle. Acquirers and investors make their investments at different stages – more than half (60%) say they are most likely to consider a deal when the fintech is at seed or start-up stage. At this early point in the company’s development, it may not be focused on a transaction or have the resources to undergo the work required to make itself more attractive.

Stand-out sectors

The payments sector has been a clear priority area for dealmakers considering fintech transactions over the past two years and that is likely to continue. Around a fifth of banks and financial institutions (21%) and private equity, venture capital and family office respondents (20%) cite payments processing and online payments as the area where they are most likely to target fintech companies for acquisition or investment.

This is a fragmented sector where inefficiencies have been a longstanding issue, so there is an obvious opportunity to make substantial cost savings, particularly with the help of fintech operators that tend to be more mature than in other sub-sectors. The legacy payments infrastructure of some large financial institutions represents an important source of margin improvement.

Rules, robots and rapid evolution 

However, payments is not the only pressing opportunity for fintech dealmakers. Two-thirds of financial institutions (67%) are considering investments in regulatory compliance software, an even higher proportion than those targeting payments. The extensive regulatory reforms of the past decade have added hugely to the burden faced by financial services firms. Clearly, many businesses see fintech as the solution to tougher regulatory scrutiny.


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Almost as many banks and financial services respondents (64%) are considering investments in fintechs focused on robo-advice, artificial intelligence and machine learning. This would give them the opportunity to use technology to create mass market propositions in wealth management, potentially capturing value from a far broader customer base than face-to-face advisers can currently serve.

Meanwhile, more than half (54%) of fintech-focused investors are banking on data and analytics technologies. Rapidly evolving tools in areas such as the collection, storage, safe-keeping, reporting, processing and analysis of data provide exciting new opportunities, both in the front office, where data is the key to improving and personalising the customer experience, and in the back and middle offices, where it offers potential for process improvement and efficiency. A fifth of these respondents (21%) now regard data and analytics as the most important area of fintech for investment or acquisition.

Overall, though, acquirers and investors should be looking for enduring technologies, argues the managing partner of a Singapore-based venture capital firm. “We are currently investing in various fintech solutions, but our focus is on data analytics and robo-advice,” the executive says. “We are looking for technology that will survive in the market for a long time. We see analytics and robo-advisory as having the potential to drive revenues over the next five to seven years.”

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Reed Smith on regulatory compliance and fintech

In the last 10 years, there has been a significant amount of regulatory change. In the US, there’s been Dodd-Frank and Volcker that affect banks and financial institutions and exchanges, and in Europe you have MiFID II and EMIR, NIS and GDPR, affecting financial institutions and any company acquiring personal data. It’s just so onerous and so personnel-heavy, unless there are tech innovations. That is a real driver for financial institutions to come up with technology solutions for regulatory compliance.

Andreas Splittgerber, Partner, Munich

New kids on the block

As ever, dealmakers’ desire to increase their exposure or gain expertise in these areas will be balanced against ever-higher valuations. Respondents anticipate valuation increases in the sectors they see as likely priority targets – notably payments and data analytics, and to a lesser extent regulatory compliance software.

However, it is a different sub-sector, the distributed ledger technology (DLT) underpinning cryptocurrencies such as Bitcoin and Ethereum, that is regarded as the most likely to see a big increase in valuations over the next 12 months. Almost half the financial institutions in the study (46%) cite DLT as an important growth area.

In part, at least, this reflects the feeding frenzy we have seen among cryptocurrency investors over the past year, with prices for leading currencies repeatedly hitting new highs, but also suffering extensive volatility. As the traditional financial services industry seeks to incorporate cryptocurrency into its own practices, processes and services, it may have to pay top dollar for the most attractive targets.

By contrast, more than half of respondents to this research (52%) identified non-cryptocurrency implementation of DLT applications as the area where fintech targets are most undervalued. This is a potentially interesting opportunity. The application of tools such as blockchain for use cases such as the disintermediation of financial markets and exchanges (such as recording and settling equity and other exchange trades or managing collateral) arguably has far greater potential for the financial services industry than cryptocurrency itself. Today’s relatively low valuations may encourage opportunistic dealmakers looking for exposure to this technology.


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Similarly, 49% of respondents suggest regulatory compliance software providers are currently undervalued. This is likely to change as more financial services businesses recognise the value of tools with the potential to help them deal more effectively with the regulatory burden – and to provide compliance metrics for measuring performance throughout their organisations.

One other area is worth mentioning: while fewer than one in 10 respondents highlight security systems as an area with potential for fintech valuations to increase, these businesses’ tools will be crucial to the whole sector. “With great power comes great responsibility,” says the managing director of a US bank. “As businesses generate more data, companies that can genuinely protect that data and boost compliance will become more and more valuable.”


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Reed Smith on the evolution of the tokenised economy

You will eventually see a bank or large tech company figuring out a token strategy that is regulatory compliant and that will give them an edge. Whether it’s a bank that offers the ability to tokenise funds or collateral; an e-commerce lender enhancing the ability to borrow or pay with tokens; or the ability to fractionalise, trade or pay for ownership of assets such as real estate, tokenisation is going to develop quickly, and you’re going to see rapid growth in 2018.

Herb Koslov, Partner, New York

Regions to watch

More than a third of respondents to this survey (39%) say they are most likely to make their next fintech acquisition or investment in Europe, with the region’s two largest financial centres, the UK (12%) and Germany (9%), seen as the most likely individual countries. North America is the second most sought-after region.


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Developing markets are less likely to see fintech dealmaking, at least in the short term. While the growing middle-class populations of China and India are regarded by Western businesses – including financial services companies – as having huge potential, only 7% and 8% of respondents respectively see themselves making their next fintech investment in these markets. Singapore, a long-established centre for the global financial services sector, particularly in banking and wealth management, is the pick of 6% of respondents.

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Reed Smith on fintech in Europe

Europe has a little bit of the best of both worlds. It has significant financial activity and it also generally has a more industry-friendly regulatory regime – more principles-based than the US. There was support for the crypto space early on from the Bank of England. Germany, similarly, has been very supportive. Munich has been very active in the fintech space, and it’s starting to spread now to other EU countries – Estonia and other areas that are big for developers. Other markets, such as Malta and Gibraltar, are seeking to become friendly regulatory environments for the DLT industry in particular. Expect significant regulatory developments over the next 18 months in the region.

Brett Hillis, Partner, London

Times are changing

However, respondents are very aware of the potential of fintech in developing markets. Already, 16% single out China as the country where they see the greatest potential for fintech businesses to gain market share in the financial services sector. This seems rational given the pace at which technology is driving other sectors of the Chinese economy – in retail, for example, China’s e-commerce market is considered by some to be the biggest in the world.

Additionally, fintech solutions represent an attractive opportunity for regions such as parts of Africa that are underserved by traditional banking.

As for India, the managing director of a Singapore-based bank points to the skills available in the market. “India has so many talented IT professionals and fintech start-ups,” the executive says. “Many of them are looking to partner with big brands all over the world, though it helps if you already have a presence in India because you need to understand local regulation and the legal framework.”

Elsewhere, the US is seen by almost half the respondents (44%) as the country where fintech has the greatest potential to take market share. Clearly, the world’s largest financial services market is an attractive one for fintech operators, who feel they can break down the traditional barriers and democratise the industry.

In Europe, Germany (the pick of 14% of respondents) is almost three times more likely to be seen as offering potential for fintech companies to take market share than the UK (5%). This could well be due to the uncertainties around Brexit (for more, see The Brexit influence, below). 

The next big thing

The race is on among cities around the world to attract fintech businesses and take on the centres of excellence in Silicon Valley. Investors and acquirers certainly see opportunities in this regard. “Our fund started by targeting investments in West Coast US, but we have moved on to New York and into European cities such as Berlin,” says the managing partner of a Japanese venture capital investor. “We plan to gradually expand around the globe.”

Our respondents expect the race to be close. Among banks and financial institutions, 40% pick Singapore as likely to rise to global prominence as a fintech hub over the next two years, while 34% pick Munich. Private equity, venture capital and family office respondents also choose these two cities, but in reverse order, with 48% going for Munich and 33% singling out Singapore. Alternative choices, including Amsterdam, Stockholm and London, also attract notable numbers of recommendations.

Both Munich and Singapore have certain advantages over their rivals, particularly their status as significant financial services aside from fintech. Both have also invested in local initiatives designed to attract fintechs – for example, with regulatory support in Singapore and municipal assistance in Munich, which is also benefiting from the rising cost of rents in Berlin, which has previously attracted many start-up businesses.

Nevertheless, these cities will not have an easy ride. London, in particular, continues to fight to retain a prominent role – not least with the efforts of the Financial Conduct Authority (FCA) to provide a regulatory sandbox in which fintechs can experiment with new solutions. Amsterdam, meanwhile, hopes to be a beneficiary of Brexit in a broader financial services context, including fintech, while Stockholm’s attractions include high standards of living and a supportive ecosystem for start-up enterprises.

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Reed Smith on the strengths of Munich and Singapore

They both have several local supportive issues. Munich has a significant financial sector and has been offering office space and other incentives. They are designing it to attract start-up companies. With Singapore, it’s similar. The jurisdiction has made becoming a fintech hub a priority, and the monetary authority has attempted to be supportive with sandbox initiatives and some regulatory guidance, without being overly restrictive.

Matthew Gorman, Partner, Singapore

Zooming in on exits

Among the private equity, venture capital and family office investors in this survey, 42% see the sale of a business to a technology firm as their most likely future exit route. This underlines the extent to which fintech is not a space that financial services businesses can expect to have to themselves. In fact, barely more than a quarter of these respondents (28%) envisage selling to a bank or another financial institution. Almost as many (25%) regard another private equity buyer as providing them with a potential exit in the future.


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Equally, many respondents accept that investing in early-stage and immature fintechs and then securing value further down the road is an exercise that is fraught with uncertainties. Some 42% say the biggest challenge is anticipating what the market will look like when the time comes to sell. It is very difficult to predict how digital banking transformation will pan out, or how consumer behaviours will change. Meanwhile, a further 30% worry about how they will differentiate the products and services of portfolio companies. Compliance is a headache for 18% – regulatory change could prevent some fintechs reaching their full potential. 

Spotlight on initial coin offerings 

In an initial coin offering (ICO), enterprises raising money issue “coins”, or digital tokens, to their investors rather than traditional securities. These coins may be issued by the enterprise specifically for the purpose of fundraising – investors hope their tokens will rise in value if the enterprise is successful, similar to traditional securities, or may be issued as part of the functionality of a new platform or protocol. In many jurisdictions, ICOs may be regulated as securities offerings, depending upon the characteristics of the ICO and the token.


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From an issuer’s perspective, an ICO aligns the interests of the investor with the company they’re backing: use of the token will ideally drive activity on the company’s product as well.

Despite concerns about a bubble in the ICO market, investors and acquirers considering these businesses may take some comfort from the fact that early backers have bought into the company’s value story. 

In our survey, 55% of private equity, venture capital and family office investors say they would be more likely to invest in a fintech firm that has carried out an ICO, though this falls to 37% among banks and financial institutions.

By contrast, 60% of banks and financial institutions say that they would value a company that has conducted an ICO more highly, and 70% of private equity, venture capital and family office investors agree. The jury is out, however – significant numbers of these respondents also say an ICO would make no difference to their likelihood to invest and the valuation they afford a business.

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Reed Smith on the UK fintech landscape

The fintech market in the UK is very strong. Indeed, Europe is still being driven by London. A recent report from KPMG showed that in the first half of the year, the UK, and London in particular, attracted the lion’s share of global fintech funding – US$16.1bn out of US$57.9. So, while Brexit may have some impact, the UK fintech sector should remain buoyant.

Herb Kozlov, Partner, New York

The Brexit influence 

The UK’s departure from the European Union in May 2019 might be expected to have a major impact on Europe’s fintech markets. There has been a great deal of speculation that London, Europe’s largest financial centre, will lose ground to rivals in Germany, France and the Netherlands.

However, the majority of respondents do not see Brexit as a major factor in their UK investment decisions. Around half the banks and financial institutions in the survey (49%) say Brexit will have no impact on the likelihood of them considering UK acquisitions or investments. This rises to 60% among private equity, venture capital and family office respondents.


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Among respondents who do anticipate an impact, the more common expectation is for Brexit to make it more likely that they will target the UK for fintech acquisitions – 39% of banks and financial institutions take this view, for example, against only 12% who say they will be less likely.

There are a variety of potential explanations for these findings. One is opportunism: the decline in the value of sterling since Brexit has made acquisitions and investments in the UK cheaper for many overseas buyers. Another possibility is that would-be acquirers of UK fintech firms see this as an attractive means of maintaining their exposure to the UK – possibly even to ensure continued access to the UK market as financial services regulation changes in the wake of Brexit.

It is also the case that the UK’s fintech sector is widely admired and has attracted some outstanding talent in recent years. The supportive regulatory environment; English as a common language; and the attractions of the UK’s capital city culturally have all combined to make London an important fintech hub. In this context, it makes sense that investors in fintechs say they want to continue to target the UK.

The partner of an American venture capital firm puts it succinctly: “There is uncertainty in the UK for now, but that will stabilise,” he says. “Investors that neglect the UK now will regret it, given its capacity to bounce back based on its geographic location, reputation and the availability of talent in almost every field – we are not taking that risk.”


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Reed Smith on the post-Brexit fintech landscape

I think one of the outcomes will be more of a distributed fintech community in Europe. Brexit won’t shut things down in London, but it does create an open door in other communities. The stated strategy of UK regulators is not to stifle innovation in fintech but to understand the risks and issues involved to create opportunities and manage the challenges. This regulatory environment will continue to improve operational resilience in fintech solutions, add transparency and create more efficiencies and encourage greater investment in the sector. I don’t think this approach will alter with Brexit and as a consequence I don’t think Brexit will hurt fintech in the UK.

James Wilkinson, Partner, London

Fight or flight

Nevertheless, our survey reveals mixed views on fintech firms’ potential flight from the UK following Brexit. A small majority of banks and financial institutions (52%) envisage a departure of fintech start-ups to other European countries once the UK has left the EU. However, this figure falls to 40% in the case of private equity, venture capital and family office respondents.

“The number of fintech start-ups in the UK will take a hit post-Brexit,” argues the head of investment at a South African bank. “The UK has been a great market generator for Europe but after Brexit, at least in the short term, the UK will become more focused on its own economy.”

Much will depend on the final shape of the agreement under which the UK leaves – assuming that a deal can be reached. For fintechs, a number of concerns are paramount. Freedom of movement is certainly an issue – fintechs recruit from an international pool of talent so reforms that limit their access to this pool would be a problem. Access to EU markets from the UK is also a consideration: there is no guarantee that the passporting regime under which UK-based businesses can currently sell financial services and products to customers in other European Union member countries will continue. 

On the other hand, there are good reasons to remain confident. Few analysts expect the UK’s financial services industry to lose significant market share under Brexit – providing fintechs with every reason to stay in the UK – while a deal that solves the passporting issue is important for the EU as well as the UK. As for freedom of movement, fintechs look globally for talent – while they may find it harder to employ people from the EU, it might become easier to recruit from Asia and North America in the future.

Nor is there any reason to expect the UK’s fintech-friendly regulation to be tightened after Brexit – if anything, regulators will work harder to provide support. Finally, the UK is likely to remain an important centre of capital funding for growing fintechs.

In this context, many analysts are sanguine. Research carried out by consultant PwC, for example, points out that nine of the 20 largest ever fintech deals in the UK completed after the UK voted to leave the EU.