Are mergers and fintechs increasingly becoming an oxymoron? Hope not, but looking at the way two large deals fell apart, it does seem so.

In August 2021, global payments giant PayU announced a $4.7-billion deal to acquire homegrown payments gateway firm, BillDesk. The PayU-BillDesk deal would have been the largest M&A deal in the fintech space, and the second largest in the Indian start-up ecosystem, after Walmart’s $16-billion acquisition of Flipkart. But over a year later, Prosus NV (Netherlands-headquartered parent of PayU Payments) terminated the deal citing “certain conditions” precedent not fulfilled. The decision came as a surprise because it was called off after the Competition Commission of India (CCI) blessed the transaction.

Even before the fintech sector could come to terms with the loss of its largest deal, the sector saw the collapse of another much-anticipated mega merger. About a month ago, fintech major PhonePe called off the acquisition of ZestMoney, one of early movers and start-up leaders in the buy now pay later or BNPL space. This was after six months of rigorous due diligence. Quite ironically it was subsequently reported that the Walmart-backed PhonePe called off the deal because its business due diligence of ZestMoney “did not meet the required standards”.

In a soup

The collapse of two M&A deals in quick succession has left investors, innovators, and start-up founders of the world’s third largest fintech ecosystem in a quandary.

Ninad Karpe, Partner of venture capital firm 100X.VC, says complex deals in any regulated industry are never easy to consummate. “The fintech industry, and rightfully so, has a lot of regulations. So, it is not easy to consummate large fintech deals, unlike in edtech or other sectors.”

Tightening regulations around digital lending and wallet payments in recent years, and delays in regulatory approvals, could perhaps be some of the reasons for deals to get called off. In the PhonePe-ZestMoney’s case, the reasons could be a lot more complicated.  

Regulatory hurdles

The BNPL industry, where ZestMoney operates, has been facing regulatory hurdles in recent times. Last year, the Reserve Bank of India clamped down on fintechs from loading credit through Prepaid Payment Instruments (PPIs), such as wallets and prepaid cards, which affected players in the BNPL industry.

While the PhonePe-ZestMoney deal fell off due to “due diligence” concerns, experts opine that the deal would have anyways face regulatory hurdles in the subsequent phase, as it could be seen like a backdoor entry for PhonePe, and for other fintechs in the future, to obtain a NBFC licence. The banking regulator remains selective about fintechs operating as non-banks.

Prabhtej Singh Bhatia, co-founder of modern fintech infrastructure company, Falcon, pitches in with a slightly different take. He believes that as M&A deals happen mostly within the same industry, the issue of regulations and complex approval processes must have been adequately factored at the time of decision making itself. “It’s not just the fintech M&As, but the overall deals in the start-up space itself have come down due to funding winter. It may have less to do with the fundamentals or the robustness of these companies,” he added.

Neha Singh, co-founder of start-up data platform, Tracxn, concurs. “The fintech space in India has always been one of the most-active sectors in the country, and has seen considerable acquisition activity in the recent years. The ongoing funding winter has created a major cash crunch for some start-ups in the sector”. Data corroborate Singh’s view. The number of M&A deals in the fintech space stood at 30 in 2021, and went up to 40 deals in 2022. In the current year, the number fell to 14 deals so far.

Apart from regulatory hurdles, experts believe the astronomically high valuations of some of the late-stage fintechs, compared to their business realities, may also be shooing away interest — possibly another important “deal-breaker”.

For instance, the market debacle of several recently listed new-age fintech companies such as Paytm and PB Fintech also dented investors’ confidence, forcing them to rethink valuations agreed upon at the time of entering the deal. 

Falcon’s Bhatia says it is easier for early-stage companies to raise funding, but in the growth stage, the valuations start climbing up. A lot of companies have just about began the journey of maturing to end defend the asking rate.

“Investors typically prefer to take a bet on an early-stage with larger growth potential than dealing with companies that are facing growth slowdown and finding it difficult to cut costs,” he adds.

funding winter

Singh feels the ongoing funding winter and increased uncertainty in the global economic outlook are likely to push more consolidation in the fintech space in the future.

“We will see a lot more and more new companies emerging with innovation and product ideas in the fintech space in the next 2-3 years. Typically, consolidation is a trigger point for M&A, so that will happen when there are more fintechs,” said Karpe.

Now that going to the market through initial public offering seems tougher than before, the sector cannot have any more failed marriages. Especially if the exit should be somewhere at the end of the tunnel for investors.