So last week news broke that UK digital bank Monzo is in early stage talks to acquire and/or merge with Nordic neobank Lunar. Lunar last raised EUR 35m funding in February, at valuation of $2.2b. There are lot’s of stats on what this new entity would look like, and what share of the market in could capture, and that in itself is exciting. Besides the obvious talk of synergies, here are four reasons why we feel that mergers are a clear trend for neobanks and other fintech players in the next 18-24 months:
Funding: Neither of the two entities is profitable, and this severely limits both organic and non-organic growth. While synergies are touted as one of the ways to achieve profitability (and it makes perfect sense in terms of scale), it seems that there will be limited dry powder for large deals in this space, so acquisitions will be harder to execute. Financing of startups has fallen of a cliff, but nowhere as much as the fintech space.
Capital: In March 2022, Lunar had offered EUR 132m to acquire Norway’s Instabank, although the deal later fell through in September 2022. The neobank was unable to secure the additional capital required by the Norwegian FSA and Danish FSA in order to obtain the required regulatory approval of the acquisition. This follows a clear trend of regulators not allowing acquisitions so that . This, again, paves the way for mergers, as capital remains “in the system”, i.e. becomes common equity of the new entity. Reporta analysis also suggests that this can have a positive impact on overall capital adequacy, especially in recovery scenarios.
Valuations: In my previous blogpost I talked about why banks have high ROE, but still low market valuations. I would argue that this will start plaguing neobanks as well. The bigger you get, the close to a “good old bank” you may become, and so will your valuation. It was interesting to read that a large Baltics bank is considering strategic alternatives, and it would not surprise me that a merger may be high on the list of options for growth or exit. On the flip side, neobanks that have raised at high valuations remain elusive acquisition targets – no one wants to pay 2020-2022 prices, but shareholders won’t budge as they’d have to write-down a solid part of their valuation. A merger is an option out, to try to recoup your investment in the mid/long term.
Weariness of newcomers: It seems like in many jurisdictions around Europe, and especially in Lithuania, the focus of regulators is on quality, quality and quality – which is a good thing, and at the same time this means that the hurdle to get a new license will be higher and higher and higher. If you want to enter a new market with a sizeable market position – again M&A is likely to be your go-to tool, as regulators will favor mergers of existing players, thinking that this will allow them to have a stronger focus on risk management and resilience if the weather suddenly changes.
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