Just a few years ago, neobanks and fintechs were regarded as disruptive competitive threats to incumbent financial institutions (FIs).
By Bradley Elliott, CEO of RelyComply
But now the script has changed, and these startups and innovators are regarded as potential merger and acquisition (M&A) opportunities or partners for larger banks. Likewise, many new-age players are looking to larger institutions for access to capital, regulatory support or customer bases.
For banks, partnering with fintechs is a means to access specialised technology and capabilities from nimble, digital native companies that are leading the way in personalisation, artificial intelligence (AI), product innovation, and financial inclusion and accessibility. Fintechs, meanwhile, benefit from using a larger bank’s resources and credibility with customers and regulators to scale their businesses.
There are more than 1 500 fintech unicorns worldwide at this stage and we are seeing deal-making heat up as FIS and fintechs partner to complement each other’s strengths. Just recently, Nedbank acquired digital payment solution iKhokha (a partner of ours at RelyComply), a deal that deepens Nedbank’s ability to provide inclusive solutions to small and medium-sized enterprises (SMEs) via access to iKhokha’s technology.
The compliance architecture is one of the factors that matters most in these transactions. Robust anti-money laundering (AML) and know-your-customer (KYC) protocols are table stakes for any fintech that hopes to partner with a larger institution. To thrive at all, sturdy AML compliance is a prerequisite to prevent any business from being open to laundering or terrorist financing vulnerabilities.
M&A compliance risks
It is easy to get it wrong, given the complexity of regulation across different jurisdictions as well as the challenges of talent, resources, up-to-date operational systems and risk assessment maturity that fintechs face. Established FIs and startups alike are vulnerable to the dangers of negligent AML or know your customer (KYC) checks, as we see from the unprecedented fine of TD Bank in 2024, or faulty sanctions screening for Starling Bank.
M&As can exacerbate these risks, leading to fines or reputational risk. Gaps between two businesses’ cultures, AML systems and internal IT structures can result in compliance failures. Integrating two businesses is tricky enough without the threat of poor AML controls within the newly merged entity. In the worst-case scenario, the post-acquisition months might be spent fighting fires rather than maximising the opportunities of collaboration.
Because baseline compliance is already a high bar, FIs’ investment decisions will favour fintechs that are acquisition-ready and have AML systems strong enough to scale for bigger businesses, cross-border operations, and larger transaction networks. For some smaller fintechs, this may seem like a difficult ask. For those that are as flexible in AML as they are in other elements of their business, there is an opportunity to accelerate growth.
Partnering with a regulatory technology (RegTech) platform is the optimal way for fintechs to affordably access leading-edge AML and KYC capabilities. A RegTech platform offers the functionality of AI-driven screening and monitoring, backed by ongoing post-deployment support. It is the silent partner that elevates a startup’s AML capabilities to the levels a larger bank would expect.
Getting fit for investment with RegTech
A fintech company running with integrated compliance systems and the expertise to expand KYC/AML shows that it can customise risk strategies in a dynamic environment. It remains adaptable to the prospect of working within a new operational model. The RegTech partner handles the integrations necessary to bring AML systems and jurisdictional customer data together and make an acquisition work.
When fintechs adopt cloud-based AML, it strengthens their risk management and makes it easier to share knowledge in a merger. Mergers are complex, but dialogue can highlight where a fintech’s RegTech solutions outperform the larger partner’s compliance systems. If a fintech with proven income detection and fraud prevention joins a parent company, it can improve compliance and enhance user experience for a larger customer base.
No financial service can operate today without strong AML. As P2Ps, lenders, neobanks, and banks combine to meet customer needs, RegTech provides scalable compliance support that makes fintech more attractive. With M&A activity growing, this edge can determine whether or not a fintech unlocks growth opportunities and secure the investments and partnerships it needs to scale.