Fintech crash is an M&A opportunity for bold banks

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LONDON, July 21 (Reuters Breakingviews) – Banking chief executives have spent years worrying about disruptive fintech, including Affirm (AFRM.O), Klarna and Robinhood Markets (HOOD.O). Now that these former market darlings are on the ropes, established lenders like Goldman Sachs should think about buying them.

Banks are already picking up smaller fintechs. JPMorgan bought British digital wealth manager Nutmeg last year for just under $1 billion, according to Reuters, while UBS (UBSG.S) agreed to pay $1.4 billion for Wealthfront in January.

But the recent storm in the market is bringing bigger fish into the net. Publicly listed group Affirm and private rival Klarna are worth around $8 billion and $7 billion respectively, down from highs of nearly $50 billion. Their fast-growing consumer lending business could be attractive to Goldman, which is already getting into the business through a credit card partnership with Apple (AAPL.O). Meanwhile, the $8 billion Robinhood trading app is worth little more than its net worth. Buying it could help a lender target the so-called “mass affluent” US wealth market, like UBS.

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Stubborn founders could be a hindrance. Klarna’s Sebastian Siemiatkowski, Affirm’s Max Levchin and Robinhood’s Vladimir Tenev want to shake up old-fashioned finance and so might resist selling to a dinosaur. Another risk is potential future regulatory crackdowns on corporate activity. And their red ink is a headache for the banks. Old-school lenders tend to be valued based on a multiple of earnings or book value. The purchase of a loss-making group could therefore destroy the value of equity.

The financial problem can be repaired. Imagine that Goldman bought Affirm for a 30% premium, implying an enterprise value of $10.5 billion. Achieving a respectable 10% return on his investment by 2026 would require about $1.3 billion in pre-tax profit, assuming a rate of 21%, compared to a projected pre-tax loss that year of $179 million. billion, according to Wedbush forecasts. Closing the gap would mean cutting two-fifths of Affirm’s costs that year. This may be plausible given the likely overlap in marketing and loan underwriting, as well as Goldman’s ability to fund itself through cheap deposits rather than expensive wholesale markets. Wedbush analysts estimate Affirm’s funding costs as a percentage of revenue will rise to 8% next year from 6% in 2022.

Bringing fintechs to the negotiating table can be difficult if newcomers view the crash as a failure. Klarna Chairman Michael Moritz, for example, believes its valuation will improve “after investors come out of their bunkers”. But interest rates are rising and markets are less inclined to fund startup losses. Perhaps the bank CEOs’ best argument for a deal is that disruptors have no other choice.

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(The author is a Reuters Breakingviews columnist. The views expressed are his own.)

BACKGROUND NEWS

Klarna said on July 11 that it had raised $800 million from investors. The deal implied a valuation for the Swedish subsequent payment group of $6.7 billion, after including new capital raised. That compares to a valuation of $45.6 billion in its previous fundraising, in June 2021.

Exchange-traded fund ARK Fintech Innovation, which seeks exposure to fast-growing fintech companies, fell 54% between the start of 2022 and July 20.

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Editing by Neil Unmack and Oliver Taslic

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust.

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