Slava Solodkiy
May 5 · 5 min read

MergerMarket l 04 MAY 2019 l Natalia Lapotko, London

Partnerships facilitate new customers at pace and low cost

Product and geographic alliances in action

Tech giant and banks partnerships threaten unicorns

Commercial partnerships between fintech players and banks, as well as being struck purely between fintechs, has in some quarters shifted slight attention from mergers and acquisitions.

Technology-enabled companies find that partnerships allow them to reach new customers faster and cheaper than M&A, without losing any of their autonomy, according to industry experts. Drill this down further specifically to the financial services space and partnerships among tech companies make further sense because they allow such players to access a broader base of clients, a sector banker said, adding that an acquisition cost per client is far less expensive when reached via partnerships compared to M&A.

Throughout 2018, technology M&A accounted for 15% of the USD 3.6tn worth of deals conducted globally, according to Mergermarket data. This has risen throughout the last decade as IT spans almost every facet and sector of business.

Technology has become an inescapable science, assisting how daily routines are undertaken and more specifically, how business is conducted.

And fintech has become a cornerstone of this latest tech boon. Yet those service providers that make up a significant element of the fintech sphere are often more inclined to find alternative paths to M&A as an avenue to expand.

Cost is not the only driver behind this thinking. Fintech players tend to specialise in niche products. Diversifying their offering and services through product partnerships has become more commonplace. New products help fintech companies reach new clients.

Alliances in action

In February 2016, Berlin-based mobile bank N26 joined forces with London-based peer-to–peer money-transfer firm TransferWise, allowing N26 to provide fair overseas transfers.

These agreements span fintechs of all shapes and sizes. UK unicorns valued at more than GBP 1bn, such as Monzo and OakNorth, have experience engaging in partnerships. In March 2019, UK challenger bank Monzo launched a savings account powered by London-based online lender OakNorth. OakNorth is more likely to acquire talented teams or strike commercial partnerships with other fintech players than make acquisitions, Chief Financial Officer Cristina Alba-Ochoa told Mergermarket in March. Bankers sometimes bring partnership opportunities, Alba-Ochoa said. To develop relationship with unicorns, bankers propose such opportunities, the sector banker said.

In May, Monzo also announced a new multi-year agreement with Palo Alto, California-based digital ID verification company Jumio to simplify the customer onboarding experience.

Curve, a London-based application linking multiple bank cards into one, which is about to close USD 50m round, is also more interested in partnerships than M&A activity for its expansion drive in the near future, according to the CEO and co-founder Shachar Bialick.

A recent survey conducted by Mergermarket and Pinset Masons reveals that 74 of the 100 fintech companies have entered into licensing or franchising agreements, while 72% of those surveyed had engaged in equity-based joint ventures. This number swells to 84% when questioned whether more of these deal types are expected in the next three years.

Legal and regulatory barriers were cited by 39% of respondents as M&A obstacles; agreeing on valuations was a further hurdle named by 37% and an unstable political environment checked by 36%.

Partnerships are largely influenced to address product concerns rather than geographical spread as new products help achieve greater customer reach. Yet, partnerships aimed at entering new territories also take place. In November 2018, London-based challenger bank Tandem announced a strategic partnership with Hong Kong-based financial services group Convoy. The deal was structured such whereby Convoy invested GBP 15m into Tandem and provided its Asian customer base; in return Tandem provided access to its technology.

Elsewhere, OakNorth licenses its technology to nine large institutional banks outside of the UK to reach new clients.

While partnerships struck between fintech companies and banks and other traditional financial fields forged the majority of such alliances, there are now increasingly more of these being conducted between fintech and fintech, Managing Partner of Singapore-based venture capital firm Life.SREDA and co-founder&CEO of Puerto Rico-based Arival bank Vladislav Solodkiy said. This is especially so among start-ups. Partnerships between corporates and start-ups and can prove difficult because of corporate culture clashes, technology variances and conflicts of interest that can rise when new products are launched, Solodkiy said.

Life.SREDA’s team has developed and will shortly launch its independent standalone “fintech bank” Arival, which is based on partnerships, Solodkiy said adding that Arival will have 12 products. Each is based around a partnership with other specialist fintechs in that specific product stream, he said. Partnerships are based on a revenue share model. “The idea is not to reinvent the wheel or compete with other fintechs, but rather develop meaningful partnerships to produce a relationship with customers long-term.” according to Solodkiy’s The First Fintech’s Arrival” book.

According to the Mergermarket and Pinsent Masons survey, 74% of businesses have entered into licensing or franchising agreements, while 72% have engaged in equity-based joint ventures. “[These] can be a way to harness the innovative and entrepreneurial spirit of a smaller company whilst allowing it to retain its independence, or to access a specific tool or technology whilst leaving the business free to continue developing it,” Pinsent Masons’ Hannah Brader said.

For businesses able to harness the innovative and entrepreneurial spirit of Fintechs, the value of such alliances can be immense, the report adds.

Whether partnerships are deemed successful or not will become clear in several years, according to fintech experts.

Fintech large and small

Some partnerships already proved a success, a CEO of a fintech company said. N26 partnership with Transferwise helped the digital bank to increase its customers from several hundreds of thousands in 2016 to over 2m users in 2018 by removing one of the main barriers to its expansion, forex costs.

In nine months that followed July 2015, when UK challenger bank Revolut launched its partnership with London-based B2B cross-border payments company, Currencycloud, the bank received more than 160,000 new customers. On average these customers saved between EUR 30 and EUR 40 on each EUR 500 spent, according to Currecycloud.

Fintech unicorns may find partnerships between large tech players and large banks threatening, an industry source said. Such pairings as JPMorgan [NYSE:JMP] and Amazon [NASDAQ:AMZN] as well as Goldman Sachs [NYSE:GS] and Apple [NASDAQ: AAPL] bring together companies with immense expertise and scale. Despite having the obvious financial clout to undertake M&A at a vast scale, again alliances have become de rigour.

In March, apple announced its partnership with Goldman Sachs and Mastercard to deliver the Apple Card. The credit card is designed to work with the Apple Wallet.

Amazon and JPMorgan are meantime reportedly considering launching checking accounts. And even further competition is expected from Google [NASDAQ: GOOGL], Apple and Facebook [NASDAQ:FB] rather than big global banks, the CEO of a fintech company said.

M&A is vital and fintech takeovers will continue to parade impressive dealmaking numbers each year, but innovative alliances and partnerships matching the inventiveness of such companies offer growing upside alternatives.

by Natalia Lapotko in London

Arival Bank

the first digital fintech bank for SMEs

Slava Solodkiy

Written by

CEO&founder @ Arival bank

Arival Bank

the first digital fintech bank for SMEs

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade