The M&A Wave in FinTech (1/2)
Making sense of the industry’s headline acquisitions
We recover conversations from the Wharton FinTech podcast with Galileo and SoFi to shed some light on the strategic rationale behind this $1.2 billion transaction
M&A is on the rise in the Fintech space. We at Wharton have been fortunate to host industry leaders whose businesses range from small startups to unicorn-status. We’ve talked about personal finance, regulation, BaaS, insurtech, blockchain, capital markets, financial inclusion, payments, and investing, among many other exciting topics.
While the fintech revolution is far from over and will continue to disrupt existing business models, some markets are entering a maturing phase as companies’ offerings expand and begin to overlap. It’s all part of the continuous innovation cycle of disruptive unbundling and rebundling.
Beyond consolidation, strategic considerations such as access to/control over key tech stack components and international expansion will feature more in the future.
Working on something. #Fintech is 1% Finished Fintech has started to play in retail and SME sectors in the UK in quite a significant way. Going deeper into retail (e.g. Mortgages, Lending) The below pictures the “finance” market and how fintech is disrupting by segment
Therefore, in light of recent headline-grabbing announcements, we thought it would be timely to revisit some of these conversations and hear directly from the industry leaders behind these multi-billion dollar acquisitions. In this first installment (which, in turn, covers two podcast episodes) of a two-part series, we center on SoFi’s recent acquisition of Galileo for $1.2 billion.
1. Clay Wilkes, Founder & CEO at Galileo
In this episode, Clay discusses exciting ways in which Galileo is powering innovative models that we think relate to the strategic rationale behind this acquisition.
SoFi has continuously expanded its suite of offerings through a mix of proprietary products, acquisitions, and partnerships, so it makes sense it tries to stay ahead of the curve and keep innovation under the radar.
Here are a few ideas of how this acquisition could play into SoFi’s plans
Growth levers / disruptive business models
- [3:50] & [7:10] Investing & cash management: offer high-yield deposits and instant liquidity for investment products, retirement accounts, and other offerings.
- [9:30] Cash, Wealth management & Asset management (cont’d.): this sector has not seen profound disruption; both traditional players (BlackRock & Vanguard) and emerging ones will battle to change the status quo.
- [23:25] Lending: POS financing and other consumer credit solutions powered by Galileo.
- [30:52] Payments / Securities: transaction models based on alternative assets other than fiat currencies, e.g., securities and gold, that powered by Galileo securities capabilities. This area is a particularly exciting one.
Access to strategically important tech tools:
- [18:30] AI Capabilities: Galileo has a powerful big-data AI platform it uses for i) fraud reduction, ii) information security, and iii) productivity (highly-accurate predicting models).
Also, Galileo’s international presence and relationships (UK, Mexico, India) undoubtedly played a part as branching-out internationally grows in strategic importance.
While both companies will continue to operate independently, Galileo counts some of the most preeminent fintech companies among its clients, including Chime, Varo, TransferWise, Robinhood, Google, and Monzo. The implications of this are yet to be understood.
2. Michael Tannenbaum, former Chief Revenue Officer at SoFi (now CFO at Brex)
To tie things up neatly, next up, Michael Tannenbaum. In this episode, we take a walk down memory lane. Still, it does provide incredibly rich insights into SoFi’s long-term growth strategy and evolution from a student-loan provider to a diversified financial player.
This strategy is centered around maximizing customer lifetime value (CLV), which asks for a full-stack of solutions around consumers’ financial lives. The company’s rapid ascent and future path, fit well under this paradigm.
A recurring question to many fintech companies -particularly as the start out with niche offerings- is whether they can maintain relationships with their hard-earned customers by cross-selling different products, or whether these customers will eventually “graduate” away from the platform.
Be on the look for the following as they clearly articulate SoFi’s vision
- [1:00] Product extension and product fit within the company’s vision.
- [4:10] The acquisition of Zenbanx, which creates an important precedent as SoFi looked to acquire core financial tech infrastructure on which the company could build upon to offer new products.
- [9:15] How SoFi deploys capital, which is relevant as the company closed its latest round for $500 in late 2019.
We believe a key takeaway from analyzing these discussions is the consistency in SoFi’s vision, and its ability to execute on that vision.
SoFi understood from the very beginning that their customer base would eventually pay off their student loans to become high-earners looking for a full suite of financial products.
M&A activity will play an increasingly important role, particularly in verticals that saw the first waves of disruption from the fintech tide and thus start to reach a certain level of maturity.
Stay tuned for our second installment, where we will analyze Visa’s $5.3 billion acquisition of Plaid.