Last month, news broke that JPMorgan has expressed interest to purchase Worldpay, one of the hottest fintech firms in the market right now. Worldpay operates in the payment processing market with the likes of Square, Stripe, and PayPal where it lays claim to processing 31 million mobile, in-store, and online transactions per day. The deal saw Worldpay being valued between £8.16bn and £10bn to signal the huge premium that fintech companies can fetch in the market.
JPMorgan has since withdrawn from the acquisition process and Vantiv might end up purchasing Worldpay. Nonetheless, JPMorgan’s interest betrays the fact that traditional financial institutions do not necessarily see fintech startups as rival disruptors to be squashed. This piece provides insight into four reasons banks and other traditional financial institutions will always lean towards acquitting fintech startups.
1. Fintech Startups Are the Future of Money
The first reasons fintech startups will always be attractive acquisition targets to traditional financial institutions is that fintech startups are pointing to the future of money. Fintech startups are triggering massive disruptions in the way we earn money, the way we spend money, and the way we handle financial transactions. Fintech startups are out to disrupt the business of traditional financial firms and challenge their very existence. Acquiring fintech startups helps traditional financial firms to be part of the disruptive force changing the future of money instead of staying on the sidelines where they are likely to become obsolete and redundant.
2. Banks Lacks the Willingness and Capability to Build Fintech Solutions
The second reason traditional financial institutions will always be on the lookout for fintech startups to acquire is that the value proposition of startups makes business sense. Financial institutions are not always lean, nimble, and staffed with the right people that could take up the challenges of taking the unconventional route to solving financial problems. However, startups would have done most of heavy lifting required to create a financial product or service that works. The bank only needs to come in with the funds necessary to scale up without taking up the rollercoaster ride of product development.
3. Fintech Initiatives Have Huge Upside Potential
The profitability of fintech firms built on an app and data center often outperforms the profitability of traditional financial firms because of the huge disparity in their business environments. In the years past, traditional financial often invest as minority shareholders in fintech startups. However, their ROI on fintech startups has thought them that it makes business sense to go all the way in their investments. Hence, a financial institution that wants to have a pipeline of sustainably profitable products will always find ways to invest in fintech firms.
4. Banks Always Need Competitive Advantage
Profitability in the financial industry is a game of numbers and fintech firms can help traditional firms gain competitive edge to steal a bigger market share. For one, fintech solutions often solve huge financial problems that affect millions (sometimes billions) of people. Such solutions are also usually priced to attract people that have been unserved or underserved by traditional financial institutions. Traditional financial institutions with fintech offerings get unique opportunities to increase their customer base and expand their market share. Hence, traditional financial institutions will always be finding ways to outdo the competition to expand their market share.