marzo 30 2020

US M&A During the COVID-19 Pandemic—Considerations for Fintech Businesses

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Fintech businesses started 2020 on an optimistic note with several large M&A deals announced and an environment that indicated that other deals were sure to follow.  This momentum has paused and may have come to a screeching halt with the COVID-19 pandemic raising a host of new issues for fintechs.  Many had predicted that fintechs were overvalued and had never weathered an economic downturn.  On the other hand, as the global workplace deals with the need to work remotely, fintech online solutions become increasingly relevant.   Deals relating to software and software-related businesses may be less negatively affected by the pandemic. Large financial institutions enter this crisis in a much stronger position than in 2008 and may be willing to assist or acquire fintechs, including fintechs that they may have viewed as uncertain in value in the recent past.  Similarly, private equity funds retain massive amounts of uninvested capital and, if not overwhelmed by COVID-19-related concerns with their existing portfolio companies, may seek to capitalize on current opportunities.  As with past economic downturns, winners and losers among fintechs will emerge.

Factors Driving M&A Upswing Preceding the Crisis

The fintech sector started 2020 strong coming off a very active 2019.  For example, according to CB Insights corporate venture capital deals for financial services companies hit news records with 368 deals worth $9.6 billion in 2019.1  Bank investors in fintechs were more active in 2019 than in 2018 while insurance company investors in insurtechs in 2019 remained steady with 2018.2 In general, there were fewer early stage fintech start-up investments with a greater focus on later stage and larger investments in more mature fintechs, including investments in more unicorns (companies worth more than $1 billion).  Investors such as American Express, Citi Ventures and Goldman Sachs led the charge with multiple minority investments in unicorns and other later stage fintechs.  A growing trend saw financial institutions entering into bank/fintech platform transactions whereby the fintech provides technology-related services or customer-facing white label services to the financial institution to, for example, originate unsecured personal or small business loans.3 These bank/fintech partnerships might or might not include a minority investment by the bank in the fintech.

Early 2020 also saw more full M&A acquisitions of mature fintechs than in the past, reflecting greater confidence by financial institution investors that they could properly value and execute these transactions.  Large acquisitions of Credit Karma, Inc. by Intuit Inc., Plaid, Inc. by Visa Inc. and Cardworks by Ally Financial highlighted this new acquisition trend.  Because the IPO market for fintechs was lukewarm in 2019 following some noteworthy missteps (e.g., the WeWork saga), private fintechs achieved liquidity through an M&A sale as opposed to an IPO.

  • Credit Karma/Intuit:  In February 2020, Intuit announced that it would acquire Credit Karma, with a closing reported as likely to occur in the second half of 2020.  A mature and successful fintech, Credit Karma was founded in 2007, employs approximately 1,300 employees and reported approximately $1 billion in unaudited revenue for 2019 (up 20% year-over-year).  Total consideration for the transaction equals approximately $7.1 billion (subject to adjustment) with approximately 50% Intuit stock and 50% cash.  Demonstrating the importance of human capital to fintech businesses, total consideration included approximately $1 billion of equity awards, with an additional $300 million of retention equity to be granted to Credit Karma employees upon closing.  Through this acquisition, Intuit will acquire Credit Karma’s sizable customer base and suite of products. For example,  Intuit will benefit by purchasing Credit Karma’s tax preparation services business and consolidating it with its own TurboTax.4 The acquisition of Credit Karma’s products also allows Intuit to significantly increase the number and depth of interconnected products it offers with a view to address all of its customers’ financial needs in one platform.

  • Plaid/Visa:  In January 2020, Visa announced it would acquire data aggregator Plaid, with a closing reported as likely to occur in the next three to six months.  The consideration for the transaction totals $5.3 billion, consisting of approximately $4.9 billion of cash and $400 million of retention equity and deferred equity consideration.  This acquisition will allow Visa to expand from its core credit and debit network business into an emerging fintech ecosystem.  Prior to the acquisition, Plaid successfully worked to connect customers with numerous successful fintech businesses (e.g., the popular “Venmo” application).  The acquisition of Plaid presents an opportunity for Visa to use its reputation and recognition in the marketplace to grow Plaid’s prevalence and further develop Visa’s relationships with fintech companies in the future.  The Plaid transaction was regarded as one of the most successful fintech exits to date.

  • CardWorks/Ally: In February 2020, Ally announced it would acquire Cardworks, with a closing likely to occur in the third quarter of 2020. Another mature and successful fintech, Cardworks is a credit card issuer founded in 1987 with approximately $4.7 billion in assets and $2.9 billion in deposits.  The consideration for the transaction totals approximately $2.65 billion, consisting of approximately $1.35 billion of cash and $1.30 billion of Ally common stock.  The CardWorks acquisition will allow Ally to expand its consumer finance offerings, expanding into a mature subprime credit card business that is synergistic with its existing online banking and prime and subprime auto loan finance businesses.

Prior to the COVID-19 crisis, many viewed these deals as likely to start a new boom of fintech M&A with the M&A exit route often being viewed as more predictable and value enhancing than an IPO.  Time will tell whether these pre-COVID-19 transactions are viewed as overvalued in the current environment and whether transaction parties may seek (if they have the contractual ability to seek) to terminate or re-negotiate their deal terms.

Perhaps the most interesting transaction of early 2020, however, received the least attention – Lending Club’s purchase of Radius Bank, an online bank with approximately $1.4 billion in assets, for cash and stock valued at $185 million.  In February 2020, Lending Club was the first U.S. fintech business to acquire a bank, with a closing likely to occur in the next twelve to fifteen months.  Marketplace lender fintechs have struggled for years with how to efficiently fund their personal consumer lending businesses with access to bank deposit funding and the ability to export interest rates being the holy grail.  Many fintechs have spent years trying to apply for their own bank charters with little progress made in light of the extensive requirements to obtain a bank charter. Many fintechs have partnered with smaller banks to support their lending programs and benefit from national preemption of state usury laws (e.g., Square/Celtic  and Avant/WebBank) but pending litigation presents uncertainty as to whether the partner bank is the “true lender” in these relationships.   Lending Club potentially solves these issues with its acquisition of Radius.  In a related significant development that received little attention during the COVID-19 crisis, on March 17, 2020 the FDIC approved Square Financial Services’ application to become a Utah –chartered industrial bank with access to federal deposit insurance.5  At the same time, the FDIC proposed for comment a new rule codifying its approach to approve new insured industrial banks and industrial loan companies.6 These new developments for fintech marketplace lenders have been over-shadowed by recent events but will undoubtedly prove to be of lasting significance.

Short-Term Issues for Fintech Businesses

Fintechs, and particularly marketplace lenders providing online unsecured personal loans and non-SBA small business loans, have not benefited from federal relief legislation as of the date of this alert.  The CARES Act only provides forbearance and other relief for agency mortgage loans although many observers expect additional legislative and regulatory relief to come.  Fintech lenders to small businesses are not typically qualified SBA lenders and thus are not able to benefit from many of the SBA relief provisions in the CARES Act.  However, it may be possible for fintech lenders to small businesses that do not qualify as SBA lenders to benefit from CARES Act provisions relating to “additional lenders.”7 In addition, programs such as the proposed Term Asset-Backed Securities Loan Facility to date have failed to include unsecured personal loans and non-SBA small business loans in the list of eligible assets and asset-backed securities.8 Many marketplace lending securitizations also do not have the “AAA” ratings currently required to meet TALF standards.  All of this adds up to a liquidity crisis for marketplace lenders and other fintechs that rely on capital markets that are frozen or sluggish and private lending facilities where lenders may be pulling back availability. 

Venture capital investments are also expected to take an abrupt downward plunge.  CB Insights’ data indicates that global startup funding in the first quarter of 2020 will likely be 17% lower than the fourth quarter of 2019 (which reflects a healthy January and February and a dramatic drop off in March) and predicts that these challenges to private company financing are likely to be even  more dramatic in the second quarter of 2020.9

Time will tell how severely fintechs will be affected by COVID-19.  Certainly many marketplace lenders will be challenged to obtain the liquidity needed to continue making new loans at the same time as their existing borrowers are unable to pay existing loans and their existing securitizations and financing facilities are hitting performance triggers.  On the other hand, some segments may benefit from the situation.  For example, digital-payment services will benefit from a surge in demand from stay-at-home shoppers stocking up on groceries, prescription drugs, basic household items and movies online.  AI-driven businesses may need to assess how effectively their AI functions when it has not been trained on historical data from a downturn.  A general lack of liquidity will likely challenge fintechs regardless of segment.  On the other hand, private credit and private equity funds may view the current situation as an opportunity to make investments in the fintech sector, which ultimately will grow and thrive in an increasingly digital economy.


1 The Global Financial Services CVC Report, CB Insights, (information as of December 11, 2019).

2 Id.

3 Contracting for Digital Platform Relationships, Mayer Brown LLP, November 5, 2019, https://www.mayerbrown.com/-/media/files/perspectives-events/events/2019/11/contractingfordigitalplatformrelationships.pdf.

4 What the Recent Wave of Fintech M&A Tells Us About the Future of Financial Services, CB Insights, March 11, 2020.

5 Order of the Federal Deposit Insurance Corporation Re: Square Financial Services, Inc., March 17, 2020, https://www.fdic.gov/news/news/press/2020/pr20033a.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery.

6 Proposed Rule of the Federal Deposit Insurance Corporation Re: Parent Companies of Industrial Banks and Industrial Loan Companies, https://www.fdic.gov/news/news/press/2020/pr20031a.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery.

7 Small Business Loans under the CARES Act, Mayer Brown LLP, March 27, 2020, https://www.mayerbrown.com/en/perspectives-events/publications/2020/03/small-business-loans-under-the-cares-act.

8 Market Participants Request Expansion of TALF 2.0, Mayer Brown LLP, March 23, 2020, https://www.retainedinterest.com/2020/03/market-participants-request-expansion-of-talf-2/.

9 CB Insights, March 26, 2020.

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