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Antitrust risks cloud outlook for fintech deals amid surge

US, European regulators focus on fintech issues

The Justice Department reorganized its Antitrust Division in January to consolidate financial services enforcement into a single unit.
The Justice Department reorganized its Antitrust Division in January to consolidate financial services enforcement into a single unit. (Caroline Brehman/CQ Roll Call)

The pace of global merger activity involving financial technology companies is accelerating as the economic turmoil caused by the COVID-19 pandemic gradually begins to subside.

A total of 232 global fintech deals were announced from Jan. 1 through March 10 with an aggregate value of $47.8 billion, compared with 160 deals collectively worth $39.3 billion during the first full quarter of 2020 before the pandemic fully struck the United States, according to data provided to CQ Roll Call by law firm Ropes & Gray LLP.

As the consolidation continues, a heightened risk for such transactions, particularly large ones, is the potential for antitrust regulatory hurdles in the U.S. and abroad, according to analysts.

Visa Inc.’s failed acquisition of fintech startup Plaid Inc. is among several industry deals that have prompted concerns from antitrust regulators in recent years. Visa and Plaid mutually agreed to terminate their $5.3 billion merger deal in January, citing a challenge from the Justice Department’s Antitrust Division. Plaid makes it easier for apps to securely use financial information, a service Visa sought as fintech importance grows.

“I think we’re going to see more scrutiny of the industry,” Samer Musallam, an antitrust partner at Ropes & Gray, said in an interview. “It’s one of those spaces that are of interest to antitrust enforcers.”

DOJ sued in November 2020 to stop Visa from acquiring Plaid, claiming the transaction was designed to thwart potential competition from a nascent rival. The department alleged that San Francisco-headquartered Plaid posed a threat to Visa’s “monopoly” in the online debit market.

London Stock Exchange Group’s $27 billion agreement to acquire financial markets data firm Refinitiv also received close scrutiny from DOJ last year, although that transaction was eventually allowed to go forward.

In January, the Antitrust Division completed a reorganization that consolidated all of its financial services enforcement, which had been spread across multiple groups, into a single unit known as the Financial Services, Fintech, and Banking Section.

“I think it reflects the importance of the industry,” said Musallam, who recently left the Antitrust Division, where he was a trial attorney.

With antitrust enforcement in general being a hot issue in Washington, DOJ’s effort to keep a close watch on dynamic sectors like fintech is expected to continue, if not intensify, under President Joe Biden.

Competition agencies in Europe are also focused on fintech issues, with the U.K. Competition and Markets Authority leading the way, according to Ingrid Vandenborre, an antitrust partner in the Brussels office of Skadden, Arps, Slate, Meagher & Flom LLP.

“The CMA is by far the most active in Europe when it comes to reviewing fintech transactions,” Vandenborre said in an interview. “The reason for that is that it has a broad jurisdiction that allows it to review deals, even when the acquisition involves a very small target. In many European jurisdictions, the target needs to have a certain revenue before the transaction triggers merger control review.”

Last year, the CMA ordered U.K. fintech company FNZ U.K. Ltd. to unwind its consummated merger with GBST Holdings Ltd., a competitor headquartered in Australia. The case is still pending.

In 2019, Ireland-based credit score provider Experian Plc and its U.K. rival ClearScore Technology Ltd. agreed to abandon their proposed merger after objections from the competition watchdog.

Rising fintech mergers

Even as scrutiny of the industry increases, fintech mergers are on the rise after plummeting in the second quarter of 2020 amid the pandemic.

Deal activity soared from $10.9 billion in the first half of 2020 to more than $50 billion in the second half, led by the $22 billion acquisition of TD Ameritrade by Charles Schwab, according to a report published by accounting firm KPMG International. Transactions in the U.S. drove the rebound, with nine of the top 10 deals involving American companies, the report said.

“As we’re coming out of some of the destruction caused by the pandemic, we’re seeing [mergers and acquisitions] accelerate,” Robert Ruark, KPMG’s U.S. fintech leader, told CQ Roll Call, adding that he expects the trend to continue. “A lot of the bigger, stronger companies still have a lot of cash on their balance sheets,” he said.

The Visa suit and other recent actions by DOJ show that it’s making merger enforcement in the fintech space a priority, according to Musallam.

“I think the enforcers just want to do their due diligence,” he said. “That doesn’t mean there will always be merger challenges; it just means there will be scrutiny, which can sometimes lengthen deal reviews.”

As part of its review of London Stock Exchange Group’s agreement to acquire Refinitiv, DOJ looked at whether the transaction would affect the companies’ incentives to change their licensing terms for proprietary data feeds used by their rivals. After an eight-month probe, the department concluded the deal wasn’t likely to harm competition.

The same transaction was investigated by the European Commission and ultimately cleared with conditions.

A growing trend in recent years has been incumbent financial institutions making fintech investments, according to Ruark. “They realize the need for strong digital capabilities, and acquiring fintechs is one way to close the gap,” he said.

Such transactions could raise competition concerns, although not necessarily in every case, analysts said. In 2020, Mastercard Inc. successfully acquired financial data provider Finicity Inc. for $825 million and American Express Co. purchased what it called “substantially all” of the assets of online small-business lender Kabbage Inc. in a transaction that was reportedly worth as much as $850 million.

In contrast to DOJ’s treatment of the Visa and London Stock Exchange deals, the Mastercard and American Express transactions easily obtained U.S. antitrust clearance.

The different outcomes show that not all big fintech deals will automatically lead to extended investigations or enforcement actions, according to James Fishkin, an antitrust partner at Dechert LLP.

“It all depends on the facts, which are very unique in each case,” he said.

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