Investment and M&A trends in FinTech

Looking back at 2024

In terms of potential reasons for the slow start to 2024, the fact that interest rates did not fall as fast or as far as had perhaps been initially anticipated (and the associated continued impact on valuations and cost of financing) undoubtedly influenced activity levels. Likewise, elections and political uncertainty in a number of jurisdictions will have contributed to a degree of uncertainty in the markets and more cautious investor sentiment. Concerns around valuations and profitability of potential targets also persisted.

That said, the sector saw a number of very large deals, with private equity accounting for a number of significant transactions. Some of the larger deals during the year included (among others) GTCR’s purchase of a majority stake in Worldpay for over $12bn⁴, Advent International’s $6.3bn take-private of Nuvei⁵ and Silver Lake and GIC’s take-private of Zuora for $1.7bn (all in the payments sub-sector), Leonard Green & Partners’ partial buyout in respect of IRIS Software Group (an accounting, payroll, HR and financial management company), valuing IRIS at an enterprise value of around £3.15bn⁶, the $8.9bn take private of R1 RCM (a healthcare revenue cycle management company) by TowerBrook Capital Partners and CD&R⁷ and Bain Capital’s $4.5 billion acquisition of Envestnet, a WealthTech platform.⁸

Unsurprisingly, there continued to be AI-related deal activity, including the strategic acquisition of Corvus Insurance by Travelers for approximately $435m⁹ and the acquisitions of Spiff by Salesforce for $419m¹⁰ and Tegus (a provider of corporate intelligence solutions) by AlphaSense (a market intelligence platform) for $930 million.¹¹ There was also renewed focus on FinTechs in the cryptocurrency and blockchain space - for example Stripe’s purchase of Bridge¹² - and, as at the end of Q3, nearly $1.3 billion had been poured into the crypto and blockchain sector at the Series A stage ($400 million more than was raised in full-year 2023).¹³ This trend continued in Q4, with crypto and blockchain driving 23% of the M&A deal volume in this quarter.¹⁴ As mentioned, private equity and other financial sponsors continued to play a key role in driving activity, featuring in a number of the larger FinTech deals of the year.

In terms of geography, it is interesting to note that a number of the larger early-stage deals during the year involved less-crowded financial services markets outside the US/UK where there is perceived to be more room for early-stage FinTechs to gain traction.¹⁵

Looking ahead into 2025

While geopolitical and macroeconomic conditions continue to be challenging, as mentioned activity levels improved during the second half of 2024 and there are reasons to remain cautiously optimistic that this will continue as we move further into 2025.

Interest rates are expected to continue to fall during the year and, although there remains a degree of political uncertainty, the volume of significant upcoming elections is not comparable to 2024. In terms of deal drivers, we expect to see continued opportunities for consolidation and strategic acquisitions/investments as well as a degree of pent-up demand given the relatively low activity levels to date. Record levels of dry powder also mean there will be increasing pressure on private equity investors to deploy capital. Anecdotally, we have seen particular interest from private equity in B2B FinTech businesses because they are perceived to have predictable recurring revenues.

Factors such as the increasing cost of regulatory compliance, including as a result of increasing divergence between regulation in different countries, are likely to continue to drive deals in RegTech and more generally. We also expect the payments sector to remain a frontrunner, with increasing global adoption of digital payments and mobile banking continuing to create growth. As discussed below, development of AI solutions in relation to fraud and cybersecurity will be of particular relevance to activity in this sphere. Consistent with the predictions in our Spring outlook, we expect to continue to see consolidation going forward. More generally, an uptick in IPO activity is anticipated this year¹⁶ and it is expected this will include listings of companies in the FinTech space – for example, Klarna recently filed IPO paperwork with the US Securities and Exchange Commission¹⁷ and Monzo is working to become ‘IPO ready’ by the end of 2025, as it continues to weigh up where to list.¹⁸

In keeping with broader trends, AI is expected to remain a hot topic in FinTech, including in emerging areas such as behavioural intelligence. Legislation such as the EU’s Digital Operational Resilience Act (DORA), which came into force in January,¹⁹ is likely to lead to increased focus on AI-related cyber security solutions. Use of AI to accelerate fraud detection is also anticipated to continue to develop. For example, in January Swift rolled out new AI-enhanced fraud detection to help the global payments industry step up its defence, following on from a successful pilot in 2024.²⁰ Likewise, in the RegTech space, a projected increase in the use of AI technology as part of anti-money laundering and KYC processes has the potential to drive M&A and investment activity, including as a result of businesses looking to make strategic bolt-on acquisitions, investments or partnerships to enhance their AI capabilities.  Transactions involving AI businesses may attract the interest of competition authorities and/or national security reviews – in the UK, AI is one of the specified sectors which require mandatory notification under the National Security and Investment Act.

Regulation more generally will remain a key focus in the EU and FinTechs operating in the crypto and digital asset sub-sectors in particular will need to be alive to the new EU’s Markets in Crypto Assets (MiCA) regulation, which has recently come into force. With the UK having recently re-affirmed its plans for its own licensing regime, firms operating across multiple jurisdictions will have to continue thinking on the best way to organise themselves.

In the UK we have also seen regulators launching initiatives in a number of areas of potential relevance to FinTechs (among others) including the Digital Securities Sandbox (DSS) which opened for applications in September last year,²¹ the FCA’s new AI Lab which was launched in October and the proposals for a new Private Intermittent Securities and Capital Exchange System (PISCES).²² More broadly, the new UK Government has adopted a strong pro-growth agenda and is putting pressure on UK regulators, including the Competition and Markets Authority, to supercharge the economy with pro-business decisions that will drive prosperity and growth.  It remains to be seen how this will impact specific regulatory decisions, and regulators will need to continue to apply existing regulatory frameworks and legislation.  But this sends a positive message which may help to drive UK deal activity.