Fintech M&A – A New Challenge for Competition Authorities

[By Lavanya Gupta]

The author is a student at the Symbiosis Law School, Pune.

Background

The financial services industry, with its innate technology, has been a significant sector of economies across the globe, and this fact is supported by the existence of payment processing mechanisms, ATMs, etc. However, of late, a separate industry that exclusively focuses on the development of newer technologies for the financial services sector has been rising, i.e., the fintech industry. In other words, while the financial services industry develops products for consumers, the fintech industry develops the technology that ensures extensive and widespread use of such products by leveraging the worldwide adoption of mobiles and smartphones, and the ubiquitous internet.

The speed of M&A between the players of the financial services industry and the fintech industry has recently seen an upswing since mergers and acquisitions (“M&A”) present an opportunity for fintech companies, which are mostly start-ups, to advance their capabilities and expand their reach. Additionally, the fintech industry is characterized by high growth and recurring revenue and is thus an attractive industry for private equity and venture capitalists alike. Concomitantly, as per a 2019 report, fintech M&A has seen a five-fold growth over the past decade. With such a growth profile, it is perhaps apparent that fintech M&A is moving from “too small to care” to “too big to ignore” and in the same line, it is attracting the interest of multiple stakeholders. Amidst the heightened attention, scrutiny by antitrust regulators was obviously to follow, and cases like Visa/Plaid and Mastercard/Nets are paving the way. This article looks at the approaches of various competition authorities across jurisdictions during their assessment of notable fintech M&A deals, and the probable course that fintech M&A is going to take in the near future.

Fintech M&A’s Antitrust Scrutiny in the United Kingdom and the United States

United Kingdom’s (“UK”) competition regulator, the Competition and Markets Authority (“CMA”), and the United States’ (“US”) Department of Justice (“DOJ”) have reviewed many fintech deals in the recent past. While the CMA has time and again asserted itself as the chief antitrust review agency for fintech deals, the DOJ has been vigilant of fintech M&A that may hurt the American market and consumers.

A case in point is the Visa/Plaid merger: In January 2020, Visa decided to merge one of its subsidiaries with Plaid that would lead Visa to gain indirect control over Plaid. It is pertinent to mention that Visa is a well-established global player for electronic consumer-to-business (“C2B”) payments. On the other hand, Plaid (established in 2013) provides services like aggregation of consumers’ account information and signaling businesses about payments made by customers.  Hence, there is a notable overlap in the entities’ C2B payment services. In other words, Plaid is a new entrant in a market where Visa already enjoys significant market power.

Since the pre-merger and post-merger shares of the two parties breached CMA’s “share of supply” threshold, the transaction attracted antitrust scrutiny by the CMA which concluded in August 2020 after a 2-month long inquiry by the regulator. Though the CMA observed that the merger would dilute competition in the market, the transaction was given a green signal by the CMA since it was also observed that multiple other PIS providers were existing in strong competition in the UK.

On the other side of the globe, the reaction to the proposed transaction was quite the opposite. Unlike its English counterpart that cleared the deal, the DOJ filed a civil antitrust suit to stop the acquisition. The DOJ’s suit was based on the fact that the “strategic” acquisition of a nascent competitor by Visa is a sham to eliminate upcoming competition in the market that Visa operates in. Principally, DOJ objected to the “killer acquisition” being proposed by Visa. Following the DOJ’s suit that was pending trial, Visa terminated its acquisition plan in January 2021, which was welcomed by the DOJ.

In the same month when DOJ sued Visa, the American competition regulator cleared Mastercard’s acquisition of Finicity (a start-up that provided an open-banking platform). Some have argued that with such contrasting decisions surrounding fintech M&A, the DOJ’s stance on the whole issue seems unclear. However, it must be noted that the DOJ blocked the Visa/Plaid transaction since the two parties were in competing business, but in Mastercard/Finicity the two parties had complementary technology, and hence, the deal was given clearance. Additionally, according to the DOJ, Visa’s acquisition of Plaid for $5.3 billion was 50x the market price, and thus Visa was essentially paying to preserve its dominance. On the other hand, since the price was deemed correctly calculated in the Mastercard/Finicity transaction by the DOJ, the deal was not stopped.

Hence, within fintech M&A, while there has been an increased deal activity in the sub-sectors of point-of-sale services and merchant payments, competition watchdogs have been active and have modified their review processes to understand the typical workings of the dynamic fintech industry as a whole. From the numerous orders on various fintech M&A transactions, it can be understood that antitrust agencies are keen on exercising a fastidious assessment to capture and understand business strategies and identify “killer acquisitions” or “reverse killer acquisitions”. For instance, a primary consideration in antitrust scrutiny of fintech M&A is the valuation analysis. The identification of a deal premium, which is usually discussed and explained in the internal documents relating to the transaction, can be a potential red flag and could indicate a “killer acquisition” intention, as was the case in the Visa/Plaid transaction.

The Indian Antitrust Approach to Fintech M&A

India’s Competition Commission of India (“CCI”) had a chance to review a fintech M&A transaction when it was notified of Visa’s acquisition of 13% stake in IndiaIdeas. While assessing the merger, CCI noted Visa’s affiliation with various Indian banks for the issue of credit cards and debit cards. On the other hand, it was observed that IndiaIdeas provided a host of services like payment services, voucher distribution, biller network, authentication services, etc. to businesses.

Though the CCI acknowledged the multiple modes of making digital payments and the various steps involved in making a digital payment, the regulator assessed the impact of the deal on the digital payments market as a whole. Thus, the regulator defined the relevant product market in a broad manner. However, delineating a narrower market in this order would have allowed CCI to set a precedent for future scrutiny of fintech M&A deals in India, which are at a relatively nascent stage in the country. For instance, in the Visa/Plaid transaction, the DOJ defined online debit transactions to be distinct from in-person debit payments as well as credit card payments. Defining the accurate relevant product market during fintech M&A assessments would help antitrust agencies to understand the niche competition concerns in the sector since fintech has multiple dimensions like online, offline, card, wireless, QR-based, etc.

Concluding Remarks

Though transactions like Mastercard/Nets and Worldline/Ingenico have attracted antitrust scrutiny in European Union, UK, and the US, the Indian regulator has not had a chance to review these deals since they do not breach the thresholds of the Competition Act, 2002. In particular, CMA reviews more fintech deals than its counterparts due to its “share of supply” jurisdictional test (25%), which it uses as a flexible “gateway” to review transactions involving target entities with limited turnover. Most other jurisdictions’ competence, including India’s, is limited by the statutory minimum target revenue thresholds that most start-up fintech entities typically do not meet.

Additionally, the “fin” aspect in fintech M&A makes the transactions different from deals entered into between traditional tech companies. The difference sharpens with the fact that the financial aspect in fintech can usher in the involvement of a sectoral regulator, like the Reserve Bank of India in the Indian scenario. Since the sectoral regulator would have a better perspective of competition in the jurisdiction’s financial segment, it may be argued that the sectoral regulator would be a better judge. Moreover, if the sectoral regulator introduces a policy regarding fintech M&A, the antitrust review would become more complex.

The size and dynamism of fintech markets and technology-based innovations suggest that there will be lots of room for M&A in fintech, and there will be some cases that will prompt government action. However, it is upon the antitrust agencies to take prudent steps during their examination of deals and not block transactions that may benefit consumers by integrating financial services and the much-required technology for ease of access.

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