Banco Santander SA is the latest European banking giant to jump into the fintech market, buying a majority stake in London-based Ebury, it announced this week.
The move comes as Europe’s negative interest rates are squeezing banks on both the top and bottom lines, forcing them to cast about for new revenue streams and higher margin opportunities. Increasingly, Big Finance has been pouring money into small, but fast-growing digital startups. The lure of Ebury: it operates a payments and trading platform with a global customer base of small- and medium-sized enterprises.
Earlier this year, Deutsche Bank and HSBC, both struggling with hefty losses, made investments in fintech startups to branch into new markets or expand further into existing ones. Deutsche Bank bought a stake in Deposit Solutions of Germany, while HSBC co-led an investment in Britain’s Bud.
The Ebury deal is the biggest of the bunch. Santander is paying £350 million (approximately $450 million) for the 50.1 percent stake in Ebury, a specialist in SME trade and foreign exchange. Ebury operates in 19 countries and 140 currencies.
The move is part of the Santander’s digital strategy of “accelerating growth through new ventures,” and will give the bank the technology it needs to expand its customer base and services portfolio, the company said. Ebury’s technology is expected to accelerate and expand Santander’s own trading platform, Global Trade Services, time-to-market offer by 24 months, a spokesman said.
Promise of growth
“SMEs are becoming increasingly global, and Santander is the best positioned bank to play a leading role to help them access global trade finance,” said Ana Botín, Santander’s group executive chairman in a statement. “By partnering with Ebury, Santander will deliver faster and more efficient products and services for SMEs, previously only accessible to larger corporates.”
That’s all well and good, but the sweet spot of the partnership may be hinged on the nearer-term promise of growth, a rarity for Europe’s banks. Ebury has generated consistent average annual revenue growth of 40 percent in the last three years, the companies said in a joint statement.
The deal, expected to close in the first half of 2020, could contribute €100 million in revenue to Santander by next year, said a market source close to the deal. A Santander spokesman confirmed that Ebury anticipates reaching break-even status in 2021. The companies also note that Santander, for the deal, is eyeing return on invested capital (RoIC) higher than 25% by 2024.
Ebury’s value proposition may be a bright spot for Santander. It claims to serve more than four million SME clients worldwide, with more than 200,000 of them doing business internationally. Santander last week reported that while third quarter income rose 6 percent year-over-year to €12.47 billion, its net profit took a big hit from a €1.49 billion charge to its U.K. business, which struggled with Brexit issues and other regulatory charges. The bank posted quarterly net profit of €501 million, a 75 percent decline from the year-ago period.
Radical moves
This latest bank-fintech matchup may open the door for still more tie-up opportunities around Europe and beyond.
“As growth slows, banks across the globe need to urgently consider a suite of radical organic or inorganic moves before we hit a downturn,” read a key takeaway from McKinsey & Company’s global banking annual review, published last month. “For challenged banks, the sense of urgency is particularly acute given their weak earnings and capital position; banks in this group need to radically rethink their business models. If they are to survive, they will need to gain scale quickly within the markets they currently serve.”
The McKinsey report goes on to say that “potentially high-value mergers” could shorten the distance to achieve that goal. Possibilities may include the merger of organizations with overlapping franchises where more than 20 to 30 percent of combined costs can be taken out, and deals where parties combine complementary assets, such as a marrying of customer and brand experience with strong technology platforms.
The latter scenario seems to be what drew Santander in Ebury’s direction.
“Combining a big bank with nimble Fintech means we can offer our clients the best of both worlds: They can benefit from our technology and high-quality service safe in the knowledge that they are counterparty to one of the world’s most important financial institutions,” said Juan Lobato and Salvador García, co-founders of Ebury.
Under the terms of the transaction, £70 million of the £350 million investment (roughly €80 million) will be new primary equity to support Ebury’s plans to enter new markets in Latin America and Asia, the companies said. Besides the accelerated leap into new markets and the growth that is predicted to come with it, Santander’s execution risk is reduced by buying existing technology, a spokesman said.
Ebury, which has 900 employees working in 22 offices globally, raised more than $134 million since inception in 2009. The company processed £16.7 billion in payments for its 43,000 clients in 2018.
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