Why Established Lenders Like Goldman Sachs Should Consider Acquiring Struggling Fintech Upstarts

Established lenders, including Goldman Sachs, should consider acquiring fintech upstarts that are now struggling in the market, such as Affirm, Klarna, and Robinhood Markets, according to a Breakingviews opinion piece. While banks have already started acquiring smaller fintechs, the recent downturn in the market presents an opportunity for them to buy bigger companies. Klarna and Affirm, which have suffered significant losses recently, could be appealing to Goldman Sachs given their fast-growing consumer-lending businesses. Meanwhile, Robinhood could be an attractive target for a lender seeking to target the “mass affluent” US wealth market, as UBS is attempting to do.

However, headstrong founders and potential regulatory crackdowns on the companies’ businesses could be obstacles to such acquisitions.

The recent market downturn has put fintech upstarts like Affirm, Klarna, and Robinhood Markets in a vulnerable position. While these companies were once market darlings, their current valuations are significantly lower than their peak values. This presents an opportunity for banks like Goldman Sachs to consider acquiring them.

Banks have already begun acquiring smaller fintechs, with JPMorgan buying UK digital wealth manager Nutmeg for nearly $1 billion and UBS agreeing to pay $1.4 billion for Wealthfront. However, the recent market storm has brought bigger fish into the net. Acquiring these companies could help banks diversify their offerings and stay competitive in the digital financial landscape.

However, there are potential obstacles to these acquisitions. The headstrong founders of these upstarts may resist selling to a traditional bank, as they want to shake up old-school finance. Additionally, there is a risk of future regulatory crackdowns on these companies’ businesses. Moreover, their current red ink is a concern for banks, as they tend to be valued on a multiple of earnings or book value. Buying a loss-making group could, therefore, destroy equity value.

The financial woes of fintech startups like Affirm, Klarna, and Robinhood Markets can potentially be solved through acquisition by traditional banks like Goldman Sachs. If Goldman Sachs were to acquire Affirm for a 30% premium, it would amount to a $10.5 billion enterprise value. To achieve a respectable 10% return on investment by 2026, Goldman Sachs would need to generate approximately $1.3 billion of pre-tax profit, assuming a 21% rate. This would require the bank to cut two-fifths of Affirm’s costs that year. Fortunately, this may be possible, as there is likely to be an overlap in marketing and loan underwriting, and Goldman Sachs can fund the acquisition through cheap deposits instead of expensive wholesale markets.

However, getting fintechs to the negotiating table may prove to be challenging, as they may view the crash as a temporary setback. Still, with increasing interest rates and investors becoming less willing to fund startups’ losses, acquisition may be the best option for them to remain viable. The best argument for bank CEOs to convince them to enter into a deal would be to highlight the fact that the fintech disruptors have no other choice.

In conclusion, although there may be potential obstacles to acquiring fintech upstarts like Affirm, Klarna, and Robinhood Markets, the potential benefits could outweigh the risks. By cutting costs and leveraging existing marketing and loan underwriting efforts, acquiring these upstarts could be a way for banks to diversify their offerings and remain competitive in an increasingly digital financial landscape.