Financial institutions M&A: Sector trends - July 2020: Consumer Finance

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White & Case LLP Financial Institutions M&A sector trends: Consumer finance — H1 2020 and outlook for H2 2020.

A time of temperance as COVID-19 covenant breach forbearance, payment holiday and repossession deferral relief measures take their toll.

Overview

CURRENT MARKET

  • Flat

WE ARE SEEING

  • Trade consolidators bulk up—particular focus on payroll finance (e.g., Salary Finance's acquisition of Neyber and Greensill's acquisition of Earnd)
  • Disruptive residential lenders continue to attract capital (e.g., residential mortgage providers Verteva and Trussle both successfully raised funds in H1 2020)
  • Payday lenders exit stage-left (Peachy, Uploan and Privilege Wealth collapse into administration)

KEY DRIVERS/ CHALLENGES

  • Trade consolidators:
    • Need new distributional channels (e.g., NewDay's acquisition of Dekko)
    • Integrate vertically (e.g., Max IT Finance's acquisition of CreditGuard)
    • Capitalise on stressed opportunities (e.g., Salary Finance's acquisition of Neyber)
  • Financial sponsors—opportunity to:
    • Conquer niche market segments (e.g., Anthemis's equity investment in gig economy lender Wollit)
    • Disrupt incumbents (e.g., EQT Ventures' equity investment in Anyfin)
  • Regulatory intervention:
    • Interest rate caps cripple mega-margin lending (e.g., Polish UOKiK's cap on non-interest costs of credit and interest charged for late payment on consumer loans)
    • Focus on affordability and debt spirals (e.g., UK FCA's 2021 focus on consumer harm and avoiding unaffordable debt)

TRENDS TO WATCH

  • Market consolidation as consumer lenders suffer strain from:
    • Lower interest rates for longer in the wake of COVID-19
    • Government-backed COVID-19 covenant breach forbearance, payment holiday and repossession deferral relief measures
  • Increasing focus of regulators on potentially harmful lending practices
  • POS / Buy Now Pay Later—strong online retail and temporary reduction in income reduction could mean well-positioned firms have not been dented by Covid19. Watch for strategic industry acquisition and global expansion

OUR M&A FORECAST

Disruption across the European consumer finance market is likely to continue in the medium-term as the true impact of government-backed COVID-19 consumer relief measures becomes clearer. M&A is likely to remain flat until equity valuation volatility settles

Publicly reported deals & situations

Healthy buyer/ investor appetite

Market highlight:

ZipCo shares surged in June 2020 on its expansion into the US through QuadPay. ZipCo inherited an initial stake in QuadPay through its acquisition of PartPay. White & Case advised ZipCo on its acquisition of PartPay in 2019, a strategic transaction which gave ZipCo access to markets in the US, UK, New Zealand and South Africa

  • Santander: Acquisition of remaining 25% of Santander Consumer Finance (June 2020)
  • Lock Trust: Acquisition of Axxa Fintech Solutions (April 2020)
  • Salary Finance: Acquisition of Neyber (March 2020)
  • Greensill: Acquisition of Earnd (March 2020)
  • Ally Financial: Acquisition of CardWorks (February 2020)
  • Max IT Finance: Acquisition of CreditGuard (February 2020)
  • NewDay: Acquisition of Dekko (January 2020)

Smaller lenders stockpile lending firepower

  • LaterPay (Point-of-sale lending): US$10 million equity investment by existing investors (June 2020)
  • Checkout.com (Point-of-sale lending): Successful US$150 million Series B funding round, led by Coatue Management (June 2020)
  • Upgrade (Consumer credit): Successful US$40 million Series D funding round, led by Santander InnoVentures (June 2020)
  • Tillhub (Point-of-sale lending): Equity investment by Heidelpay (June 2020)
  • Tabby (Point-of-sale lending): Successful US$7 million Seed funding round, led by Raed Ventures (June 2020)
  • FlexxPay (Payroll finance): Equity investment from DIFC Fintech Fund (June 2020)
  • Go Rise (Migrant worker lending): Equity investment from DIFC Fintech Fund (June 2020)
  • NOW Money (Payroll finance): Equity investment from DIFC Fintech Fund (June 2020)
  • Shahry (Point-of-sale lending): Successful US$650,000 pre- Seed funding round, led by Egyptian Gulf Holding for Financial Investments (June 2020)
  • Anyfin (Consumer loan refinancing): Successful US$30 million Series B funding round, led by EQT Ventures (May 2020)
  • Verteva (Residential mortgages): Successful US$33 million funding round, led by Bolton Equities (May 2020)
  • Smava (Consumer credit): Successful €22 million Series E funding round, led by Vitruvian Partners (May 2020)
  • Wollit (Gig economy finance): Successful £1 million Seed funding round, led by Anthemis (February 2020)
  • Ramp (Credit cards): Successful US$25 million Venture funding round, led by Founders Fund (February 2020)
  • ChargeAfter (Point-of-sale lending): Equity investment by Visa (February 2020)
  • Trussle (Residential mortgages): Successful £7.5 million Series B funding round, led by Rabo Frontier Ventures (January 2020)

Demise of payday lending

Market highlight:

Poland's UOKiK introduced new regulations which cap the maximum noninterest costs of credit and interest charged for late payment on consumer loans

  • Peachy: Winding up (March 2020)
  • Uploan: Winding up (March 2020)
  • Privilege Wealth: Winding up (January 2020)

Partnership model

  • First Digital Bank: Debit card JV with Isracard (May 2020)
  • Max IT Finance: European and US payment clearing JV with Nuvei (February 2020)

Click here to download Financial services M&A experiences shortness of breath in H1 2020 (PDF)

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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