FinTech

6 The FinTech sector is saturated with startups and early-stage companies that are vying to establish new business models, products, and services. Globally there are thousands of FinTech startups attempting to disrupt or complement the traditional provision of financial services in varying ways and with varying success. M&A will prove critical to next-generation successes, with "individual companies [vying] to become undisputed leaders by size and breadth, and ecosystems that have a tight grip on customer loyalty" (McKinsey).¹ As this sector matures, we expect to see a reduction in the number of weaker FinTech companies, as customers and counterparties place an even greater emphasis on quality providers that demonstrate strong compliance cultures, value customer privacy, and have operational resiliency and overall stability. Traditional banks and financial institutions are aggressively investing in FinTech as banking needs continue to digitize and traditional sources of fee revenue become more constrained. A review of leading banks' annual reports and earnings-call transcripts highlights the banking sector's desire to increase noninterest income and pursue revenue diversification. Strategic M&A, including bank/ FinTech partnerships and minority investments, will enable banks to obtain digital expertise and provide new products and services to their clients. For many FinTech companies, this will provide the resources they need to scale operations and services and enter new markets. The U.S. banking market is particularly ripe for FinTech M&A activity due to the large number of community banks and credit unions across the country. Regional banks are also trying to catch up, as they begin to offer more robust mobile banking and financial apps to customers, in order to compete with the much larger players in the sector. Suddenly, a customer's physical proximity to a branch is much less of a selling point—customers want the flexibility to conduct transactions remotely, either online or on a mobile device. To stay competitive, and offer their customers a full range of services, these regional banks must acquire or partner with FinTechs. QUALITY MATTERS BANKS NEED NEW DIGITAL SERVICES AND REVENUE MODELS

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