A changing digital landscape: Partnership or acquisition?
Throughout history, partnerships and acquisitions have been seen as quick ways to grow a business, expand a client base, and secure proprietary technology. Partnerships can be leveraged as shortcuts for wirehouses to innovate, with a lower risk level compared to acquisitions. Acquisitions might be seen as more complex short-term endeavours but have high return on investment with operational efficiencies gained in the long run. Within the wealth management space, culture compatibility has become a significant determining factor for acquisitions, as warring company cultures could mark the collapse of the relationship between a traditional wirehouse and a laid-back FinTech firm.
In the past year, there have been several acquisitions and partnerships that will redefine how other industry players will innovate to meet the needs of the future generation of clients; examples include, UBS purchasing Wealthfront for $1.4 billion USD, Square buying Afterpay for $29 billion USD, and DBS Bank partnering with CredAble. While these acquisitions and partnerships are strong opportunities, they represent an overall trend in the wealth management industry. Wirehouses are looking to acquire or partner with FinTech companies in a bid to develop new products and expand to new customer segments while scaling their technology divisions in a more rapid pace than years before. Partnerships and acquisitions both have their own benefits, but which option should wirehouses pursue for advancing wealth management capabilities?
De-risk your innovation: Partnerships from a FinTech and wirehouse point of view
Between acquisitions and partnerships, both wirehouses and FinTech firms seem to prefer partnerships as the less risky option: a short-term commitment with flexibility to maintain individual autonomy. Like dating, partnerships allow both entities the ability to test how the relationship will hold, without signing up for a long-term commitment. Wirehouses can leverage FinTech API integrations to rapidly enhance their customer experiences without having the complications that come with acquisitions. For FinTech firms, partnerships can be seen as ideal as they maintain their firm’s operational decision making and proprietary tech while generating recurring revenue opportunities.
Partnerships may seem like the ideal approach for both parties, but within this approach lay several hidden challenges that can derail a successful partnership. Although wirehouses can access licensed technology from partnered FinTech firms, they often have minimal influence over the FinTech’s product roadmap. This means FinTech companies have full discretion over their business decisions, even if their decisions do not advance the best interests of their partnered wirehouse firm. Lastly, since the wirehouse will be utilizing the FinTech’s APIs to enhance their digital products and services, there could be a lack of integration flexibility resulting in poor user experiences.
Wirehouses and FinTech firms should carefully evaluate their ideal future state for their wealth management capabilities and assess if partnerships will contain enough of the short-term benefits to outweigh an acquisition.
Short-term pain, long-term gain: Acquisitions from a FinTech and wirehouse point of view
Acquisitions can be seen as a higher short-term risk to a wirehouse, however if planned and executed correctly, it can lead to greater rewards in the long run. With acquisitions, there are more risks due to integration efforts that are required to merge the two entities with a significant challenge stemming from cultural compatibility. Like marriage, acquisitions are a long-term commitment and, without proper attention being given to the post-merger process, the relationship can fall apart.
For wirehouses, acquisitions carry the promise of obtaining proprietary technology, enabling cross-selling capabilities, and expanding their current client base. A FinTech firm’s focus in an acquisition scenario often comes down to negotiating a high enough offer to ensure they maximize their buy-out value. While that may light up dollar signs in their founders’ and investors’ eyes, it is essential to align on a strategic plan for upcoming integration activities before pursuing a deal.
One of the biggest short-term risks both FinTechs and wirehouses must overcome is integrating their opposing cultures and coming to a happy middle ground. In most FinTech cultures, there exists a hoodie culture, one where employees are against the stereotypical image of corporate culture and seek to be less centralized in decision making, promoting an open work culture as an alternative vs. the traditional suit culture. If neglected, culture incompatibility could lead to high firm-wide attrition rates, including senior leadership in the FinTech firm, which can present a large risk to the longevity of the merger.
Cultural compatibility is a major factor in determining approach
So, is there a right approach to the choice between a partnership or acquisition? A partnership allows both parties to utilize a relatively less-risky alternative in their approach to innovation. While acquisitions should be assessed by their fundamentals, there must be a consideration of how well the two cultures can be aligned.
With acquisition activity over the years, there have been several failures where cultural compatibility was a key issue. Firms may want to take the recent UBS acquisition of WealthFront as an example, where UBS has recognized the differences in culture and has taken the right steps to keep WealthFront as a separate sub-entity. With this approach, UBS can ensure adequate time is given for both entities to integrate at a manageable pace. As with all relationships, the strongest ones come from a solid foundation, one where both parties have a deep understanding of the other before tying the knot. With partnerships and acquisitions, it is no different, companies must consider if they want to experiment with dating, or if they want to take the plunge.
This article is part of a series exploring the world of wealth management and how different players are getting ahead of the competition through expanding their digital capabilities. Stay tuned for more in this series exploring disruption within wealth management and exploring M&A opportunities within this space.
Contact us to learn more:
Pushpak Das Purkayastha (PDP), Senior Client Partner, Pushpak.DasPurkayastha@capco.com
Nikhil Sharma, Head of US Digital Wealth Management, nikhil.sharma@capco.com
JJ Jeffries, Head of US Fintech Partnerships, jj.jeffries@capco.com