Why Banks Are Buying Fintechs Instead of Traditional Financial Institutions

Key Points

• Traditional banks are shifting their acquisition strategies from buying other banks to acquiring advanced fintech platforms.

• Purchasing established fintech technology is often faster and more cost-effective than building digital capabilities from scratch.

• Fintech acquisitions provide banks with access to younger, digitally-native customer bases and modern payment solutions.

Capital One (NYSE: COF) may have already shown the rest of the banking industry where the next big acquisition opportunity lies. In January, Capital One agreed to pay $5.15 billion for Brex, a fintech company that combines corporate credit cards with expense-management software, payments, and artificial intelligence (AI)-powered financial tools. Capital One Chief Executive Officer Richard Fairbank said the deal would accelerate the bank’s push into business payments. Industry analysts expect Brex to be the harbinger of a much larger trend.

Analysts have spent decades watching banks buy other banks. The logic was easy to understand. Buy another bank, pick up its deposits, loans, customers, and branches, eliminate overlapping costs, and hopefully increase earnings.

That still works. Fifth Third Bancorp (NYSE: FITB), for instance, completed its acquisition of Comerica earlier this year, creating a bank with roughly $294 billion in assets. But banks don’t need more branches nearly as much as they need better technology, younger customers, faster payments, and digital platforms capable of competing with fintech companies that were built from scratch for smartphones. That’s where the next wave of bank acquisitions is headed.

Image source: Getty Images.

Buying growth instead of building it

Building a competitive fintech platform isn’t easy. A bank can spend years developing new payment systems and mobile banking products; underwriting technology; and building artificial intelligence (AI) capabilities. Or it can just buy a company that already has the technology and millions of customers using it.

PwC recently argued that the technology gap between leading banks and many regional institutions is widening, and that acquiring fintech companies can sometimes be the fastest way to close it. Capital One’s Brex deal puts some real money behind that argument.

Brex isn’t another bank with thousands of branches. It’s an AI-native financial platform used for corporate cards, payments, expense management, and automated financial workflows. Brex says it serves tens of thousands of businesses, including more than 300 public companies. That’s what Capital One bought. And if this plays out successfully, other banks will notice.

One fintech I’d watch

One company that fits the profile is Dave (NASDAQ: DAVE). To be sure, I’m not predicting that Dave will be acquired tomorrow. But if I were running a large bank and looking for a fintech acquisition, it would certainly make my list.

Dave has more than 14 million customers, with its platform focused largely on consumers who need short-term liquidity between paychecks. And this isn’t some young, money-losing fintech hoping to eventually figure out a business model.

Second-quarter revenue increased 30% to $170.8 million, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 48% to $75.5 million, and monthly transacting members increased 17% to 3.08 million. Management also raised its full-year revenue forecast to between $725 million and $735 million and $315 million to $325 million in adjusted EBITDA.

That’s a fintech with scale, growth, customers, and profits. And it also gives a traditional bank something particularly valuable: access to younger and underserved consumers who may not have much loyalty to conventional banks. The catch is the price.

Dave’s market cap clocks in at around $4.6 billion, and an acquisition would almost certainly require a meaningful premium. But Capital One just demonstrated that a major bank is willing to spend more than $5 billion for the right fintech platform. Dave is at least in the right neighborhood.

Banks are becoming technology companies

There’s another development you shouldn’t ignore. The line separating banks from fintech companies is disappearing from both directions.

Just this month, the fintech Chime (NASDAQ: CHYM) agreed to buy Stride Bank for $590 million, giving Chime direct access to a national banking charter. Chime expects the deal to generate more than $100 million in additional financial benefits through lower costs and expanded lending opportunities.

Also worth noting: U.K-based digital banking platform Revolut just received conditional approval for a U.S. national bank charter as it prepares to launch a full-service American bank in 2027. So fintechs are actually becoming banks while banks are buying fintechs. That’s not a coincidence.

Consumers increasingly expect banking to work like every other digital service they use. They want instant payments, automated budgeting, fast credit approval, intuitive apps, and fewer reasons to visit a branch. Banks can build all of that themselves. But for some, writing a multibillion-dollar check may be faster, or even less costly.

Capital One’s purchase of Brex could ultimately look less like an unusual acquisition and more like the beginning of a much larger consolidation trend. And if I’m looking for the next major bank acquisition, I’m spending considerably more time looking at a company like Dave than another regional bank.

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