Domestic M&A activity still dominates the banking sector. (Photo by Shutterstock)

The outbreak of the Covid-19 pandemic slowed down mergers and acquisitions (M&A) activity in banking and payments in 2020. However, cross-border investments are helping the industry to get back on track.

GlobalData research shows that the size of cross-border M&A has been growing since 2019 when compared with domestic deals. In fact, the value of cross-border M&A deals amounted to 18% of the total market in 2019, 23% in 2020, and 26% between January and April 2021.

This is significant for the future performance of the market, as cross-border deals have continued to increase in number and in value since 2019, while domestic deals decreased in 2020. The decline in domestic deals has also resulted in a drop in the size of the total M&A activity, as domestic deals typically dominate the industry.

Nevertheless, comparing domestic and cross-border activity is not a case of comparing two things that are the same, as different trends apply depending on the sector. There has been a general trend towards domestic consolidation, with some exceptions, in the banking sector. However, this is not the case for all the subsectors within banking and payments, or for other sectors within financial services such as insurance or asset management, which tend to be more global industries.

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData
Visit our Privacy Policy for more information about our services, how we may use, process and share your personal data, including information of your rights in respect of your personal data and how you can unsubscribe from future marketing communications. Our services are intended for corporate subscribers and you warrant that the email address submitted is your corporate email address.

All eyes on the banking sector

Hyder Jumabhoy, a London-based partner and co-head of financial services M&A, Europe, the Middle East and Africa, at law firm White & Case, explains that volumes of regional and domestic consolidation M&A activity within the banking sector have eclipsed cross-border deals in recent years because of the complexity associated with analysing the deliverability of synergies of companies in different countries. He adds that when considering a potential consolidation opportunity between pan-European banks with overlapping footprints, there are many angles that need to be carefully considered, including the stability of the combined business, the impact on market competition, stakeholder support, governance and systems integration.

Today a good bank is the bank that is doing everything but traditional banking. Giuseppe Rossano Latorre, KPMG Italy

Giuseppe Rossano Latorre, partner and global head of deal advisory within financial services at KPMG Italy, says: “The real driver of consolidation within European banks is cost reduction, because revenues are extremely hard to make. So, today a good bank is the bank that is doing everything but traditional banking.”

He explains that the most profitable banks across the globe are located in either North America or Asia, where the drivers in terms of lending are very different from those in Europe. Also, those based in Europe tend to be focused on commission-based businesses, such as insurance, asset management and investment banking.

“Looking to the future, we can’t [rule out] a further wave of consolidation in Europe, but we also can't exclude [the possibility] that there will be North American banks looking at opportunities in niche sectors across Europe, though not in traditional banking," says Latorre. "There might also be a minor but significant trend of consolidation between big European banks that could [bring] some significant cross-border transactions.”

Key trends to watch

Fintech, wealth management and private banking are the most active sectors in terms of M&A deal volume within the banking and payments area, according to GlobalData’s report on worldwide M&A deals for the first quarter of 2021.

The report shows that these three subsectors recorded the highest growth rate in deal volumes in the first three months of 2021 when compared with the same period in 2020. Other subsectors that performed well include risk management and investments and asset management.

Jumabhoy says that payments and fintech M&A is “white hot” in the wake of the Covid-19 pandemic. Exponential growth in consumer demand is creating significant inorganic opportunities for payment and fintech businesses, financial sponsor investors and institutional bank investors.

Latorre adds that raising capital for fintech transactions is emerging as a trend in Europe. He says that there are many new initiatives coming on board alongside a rise in cases of fintech initial public offerings.

Fintech is seen as a key area for investors within financial services. It not only provides good opportunities for returns, but it can also deliver societal impact in the form of improving financial inclusion. Indeed, fintech can play a significant role in providing access to financial services to unbanked populations, especially in the case of Islamic fintech.

Adapting to the new post-Covid normal and navigating uncertainty is key for investors looking to partake in M&A deals, be they domestic or cross-border. However, investors should not overlook environmental, social and governance criteria in M&A deals, and even embrace them during the due diligence process. This could prove key when it comes to protecting their business from future disruptive events.