A service of

Neobanks come into focus as obstacles remain for cross-border bank deals in Europe

  • Banks increasingly see sponsor-backed neobanks as targets
  • Neobanks have fewer legacy IT issues than conventional banks
  • European banks need to size up to compete globally

The difficulty in executing cross-border bank mergers in Europe is bringing deals with neobanks into sharp focus as an alternative way for banks to grow in new markets and access new technology, dealmakers said.

“Neobanks and other fintechs are increasingly seen as targets,” according to Alexander Glos, partner and co-head of financial institutions group at Freshfields Bruckhaus Deringer. 

Cross-border deals between European banks have been underwhelming for years. Glos said. Meanwhile, neobanks, which operate digital-only banking platforms, often with mobile-first offerings, tend to have better information technology (IT) systems than conventional banks, which could lead to significantly fewer issues with legacy systems, he said.

The weakness of the IPO market also means that investors in neobanks (also sometimes known as challenger banks) see M&A as an attractive exit opportunity. Sponsors might prefer to sell neobanks instead of listing them in the months ahead, dealmakers said.

One fintech consultant noted, however, that neobanks have so far been on a funding journey, and there has been a notable absence of successful exits.

However, the mood might be changing. Jeff Tijssen, global head of the fintech practice at Bain & Company, said, “The recent drop in valuations has made neobanks an interesting acquisition target that would allow incumbent banks to address a key challenge they’ve been trying to tackle for years; an ageing technology stack in desperate need of modernisation, and that’s very costly to run and maintain.”

Mergermarket‘s Likely to Exit (LTE) predictive algorithm identifies a number of neobanks that could come to the market.* Tandem Money of the UK has an LTE score of 56 out of 100. The Pollen Street-backed challenger bank raised GBP 20m in Tier 2 capital from Quilam Capital in July.   Permira-backed Klarna Bank of Sweden also has a score of 56. It is reportedly planning an IPO in 1H24.

In June, Rob Straathof CEO of Liberis of the UK, which has an LTE score of 23, told Mergermarket that it was considering several European acquisitions over the next 18 months.

Meanwhile, Banco Santander [BME:SAN] of Spain has hired Robey Warshaw to explore a white-knight bid for Metro Bank [LON:MTRO], as reported. Metro Bank, which recently recapitalised, was founded in 2010, when it became the first new UK high street bank in more than 150 years.

In an adjacent area, Grovepoint Capital is exploring a sale of card payments solutions business Takepayments, as reported by Mergermarket in October. The sale has attracted the attention of European banks, according to the fintech consultant.

Europe’s fragmented banking scene means that the likes of HSBC [NYSE:HSBC], BNP Paribas [EPA:BNP] of France, and Banco Santander – Europe’s largest banks – are minnows besides JP Morgan Chase [NYSE:JPM] of New York. The US bank, which has a market capitalisation of USD 420bn, is 50% larger than Europe’s top three banks combined. Buying neobanks could help European banks scale up for global competition, dealmakers said.

Although conventional European banks are increasingly interested in neobanks’ modern IT and apps, along with their entrepreneurial systems, there can be some obstacles, according to Sophie de Beer, partner at Cleary Gottlieb.  

Neobanks often focus on the customer journey and less on compliance issues, like anti-money laundering (AML) rules, which can create integration issues, de Beer said.

Bain & Company’s Tijssen agrees. “Banks shouldn’t underestimate what it takes to successfully integrate these businesses into the mothership, especially when pursuing cross-border M&A,” he said. These deals elsewhere in the world have often led to culture clashes and competing visions, he said.

Meanwhile, the fintech consultant said that it would be easier for European banks to buy neobanks in new geographies than to grow organically. However, there are accounting concerns around buying tech platforms instead of loan books, he said.

Cross-border deals sluggish 

The lack of cross-border bank deals is contributing to the rising interest in neobanks, according to Freshfield’s Glos. “We have been waiting for large cross-border bank deals in Europe for a long time; and it is possible they won’t happen in the foreseeable future,” he said.

This year has been a slow one for cross-border deals involving commercial and savings banks in the EU plus the UK, Norway and Switzerland, according to Mergermarket data. There have been just 28 deals with combined volumes of just over EUR 2.37bn, compared to EUR 4.28bn over 53 deals in the full year (FY) for 2022 and EUR 7.76bn over 47 deals in FY21.

These numbers are a long way off those registered in two mega-deals in the early 2000s. In 2005, UniCredit [BIT:UCG] of Italy announced a EUR 15.4bn share deal for HVB of Germany, in the largest cross-border bank deal at the time.

This deal was topped by an aggressive deal by a consortium of European banks to dismantle ABN Amro of the Netherlands. The deal was announced in 2007 and the price eventually hit a staggering EUR 71bn.

In the last decade, deal volumes have never returned to these heights. The record year was 2015, when deal volumes were just below EUR 19.8bn, spread over 52 deals.

In the longer term, the mood could change. “Many banks have significant cash reserves, so there could be some cross-border consolidation in the years ahead, despite the difficulties,” de Beer said.

IT’s hard 

Cross-border bank deals have been hard to execute for multiple reasons, not least the difficulty in integrating IT systems and dealing with different regulatory regimes.

One of the main issues is uncertainty about what is on the balance sheet of a bank in a different jurisdiction, Freshfield’s Glos said. Legal, regulatory and tax differences can have a significant impact on IT and reporting systems, he said. “IT integration and migration are always a major challenge.”

International banks also find it hard to compete with domestic buyers, according to one sector banker. Banks that already compete can generate large synergies through branch closures – an option that is not available to new entrants, he said.

Even so, the end of negative and zero interest rates in 2022 has generally helped the environment. “Interest rates are unlikely to go down any time soon, which is generally good for banks,” Glos said.

On the other hand, changing interest rates can also hurt dealmaking, Cleary Gottlieb’s de Beer said. “One difficulty involves loan books, which are recorded at the accounting value and then booked by a bidder at fair value, which if lower could result in increased capital needs.”

Another issue that hinders cross-border mergers between banks is a more litigious mood, according to José Luis Prieto, a Madrid-based partner at Freshfields Bruckhaus Deringer who specialises in commercial dispute resolution.

“The Courts of Justice have empowered consumers to litigate against banks in a way that we haven’t seen before,” Prieto said, adding that banks are also increasingly litigating against their peers, while new entrants to the debt market, such as private credit funds that have bought debt from banks, have also engaged in litigation.

The net effect of the rising tide in litigation is to change the risk profile for bank deals, Prieto said. “The new environment adds an extra layer of complexity to cross-border deals involving European banks and raises the chances of post-merger disputes.”

Meanwhile, the sector banker argued that, if European politicians and regulators are serious about creating European mega-banks to compete with the likes of JP Morgan, the best way to do it would be to advance the continent’s monetary union. “It is going at a tortoise-like pace,” he said.