Banks Should Acquire FinTech Companies

Banks Should Acquire FinTech Companies

Large Financial Institutions should acquire FinTech companies. Doing so would enable FI’s to diversify beyond the depositary services business which will continue to suffer in a prolonged low interest rate environment. We won’t lay out the entire FinTech ecosystem, but here are several examples.

Capital Markets: FactSet (tkr: FDS) and SS&C Technologies (tkr: SSNC). FactSet offers a strong alternative to Bloomberg. However, both are ripe for disruption as is Refinitiv. Fortunately for this triumvirate, Silicon Valley doesn’t believe the market opportunity is large enough to fund a disruptive competitor.

SS&C is the leading tech-enabled Investment Operations services provider. The company is also moving into the front office with recent acquisitions such as Algorithmics. The opportunity with SS&C would be for a large FI such as JP Morgan (tkr: JPM), to accelerate SS&C’s investment in AI and Machine Learning (see SS&C’s Singularity platform) by 3-5x or more. The goal of course would be to accelerate Singularity’s evolution into a fully autonomous investment operations platform.

Payments infrastructure: Stripe (private). Someone should have aggressively moved to acquire Stripe years ago. Visa (tkr: V), put money into Stripe a few years ago under former CEO Charles Scharf. Visa believed Stripe had the best fraud detection capability at that time, superior even to CyberSource’s fraud detection capability (Visa acquired CYBS in 2010). Thus, any bank interested in Stripe would have Visa to contend with. Stripe is rumored to be spooling up for an IPO.

Banking: Jack Henry (tkr: JKHY) and Bottomline Technologies (tkr: EPAY). The former primarily serves small banks and credit unions while EPAY primarily sells to large financial institutions. Bottomline owns a B2B payments network (Paymode-X), which could be more fully leveraged under a larger owner. We believe were that asset to trade separately it alone could be worth what all of EPAY is worth today.