Considerations for Financial Services Partnership and M&A Due Diligence


Though it may appear that partnerships and M&A across the banking sector have been slowed by the pandemic, a reported uptick in deals closed in August may indicate increased M&A deals in financial services in the remainder of 2020 and across various industries. Moreover, while corporate banks have not been known for risk-taking, the growing demand from customers for seamless digital—and contactless—experiences and frictionless transactions is driving banks to partner with fintechs for quick, cost-effective deployment of new services. Before institutions move into a new partnership or pursue M&A in a still distressed economy, which may exacerbate the existing risks involved in such deals, they are considering a more comprehensive approach to due diligence.

The evidence of resurging M&A is in the recent news of Charles Schwab closing on a $22 billion purchase of rival broker TD Ameritrade, and Morgan Stanley’s acquisition of E-Trade for $13 billion—plus a surge of wealth management M&As reaching record levels in the third quarter of this year. According to the latest ECHELON Partners RIA M&A Deal Report, the third quarter of 2020 shows a record 55 transactions among investment advisory firms, beating last year’s high of 53 in Q4 2020. The record-breaking quarter of M&A occurred after only 35 deals happened in the second quarter, creating one of the highest increases between quarters in the industry’s history and highlighting a rebound toward normal deal-making activity.

Transactions in today’s market are not limited to distressed banks (or businesses) seeking additional capital or looking to combine with a stronger institution. From the Charles Schwabs and Morgan Stanelys of our economy using “dry powder” for expanding their market reach, to sell offs of product lines and service divisions or failed institutions being acquired from the Federal Deposit Insurance Corporation (FDIC), varying types of transactions all require some level of due diligence to investigate areas including the institutions’ customer base and potential, active, or settled litigation. Here are some of the reasons why due diligence is performed for M&A:

  • Confirmation and verification of data brought forth during a deal or in the investment process
  • Identification of potential flaws in the deal or possible investment to avoid a potentially harmful business transaction
  • Obtaining data useful for valuing the deal
  • Ensuring that the deal or possible investment meets criteria set forth for the investment or deal

As fintechs more frequently partner with financial institutions to deploy innovative solutions, regulatory considerations and proper vendor due diligence can help prevent potentially costly problems. The complexity of federal and state laws fintechs are still burgeoning, with new regulatory obstacles coming in the future. Fintech partnerships should start with verifying that the fintech is in good standing with regulators. From there, other considerations for the potential fintech partner may include:

  • Are they tracking and following existing regulations, and what measures will they take to update procedures as regulations evolve?
  • Which rules apply to their existing products and services?
  • Do they have any required licenses or certifications to operate?

Managing compliance in partnerships and M&A goes both ways, and Vcheck Global’s team has worked on both sides of various financial services deals to investigate vendor relationships and support M&A. Vcheck Global actively observes the latest actions taken by regulatory bodies as well as the depth of experience in performing due diligence for these types of deals.



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