Steve Davies, PwC’s EMEA fintech leader, said the firm expects investment in financial technology companies to exceed $150 Billion within the next three to five years. In order to remain competitive, firms need to future-proof their IT infrastructure, and to do so they often find it more cost effective and reliable to acquire startups rather than developing equivalent technologies in-house. A recent example would be the acquisition of security company Soha Systems by Akamai (a cloud services provider) in order to “simplify and improve remote and mobile access to enterprise resources, while at the same time minimize the exposed attack surface”. Because fintechs are not subject to the same legacy dependencies and regulatory constraints, they are able to quickly develop flexible solutions that traditional actors (banks for instance) are lacking. Indeed, most banks’ existing IT infrastructures were developed decades ago, which means that they are becoming increasingly difficult to understand and maintain, let alone update. Likewise, developing a new infrastructure from scratch remains both a time consuming and expensive process.

Consequently, companies that were hoping to replicate innovative fintech solutions find themselves struggling, both because of heavy legacy constraints (especially regarding their compliance and regulatory departments) and because of a more rigid corporate culture. Furthermore, when attempting to internalize this process firms often end-up developing a sub-par product, which underlines the importance of having a strategic acquisition process. And yet, acquiring an innovative IT infrastructure comes with its own set of issues; especially regarding the harmonization and integration process, which is crucial in the success of acquiring a fintech firm. For instance, a study from consulting firm McKinsey & Company states that between 50 and 60 percent of expected synergies during a merger or acquisition are “strongly related to IT”; and this despite the fact that “most IT issues are not fully addressed during due diligence or the early stages of post-merger planning”.

Furthermore, this process might take longer than expected, especially as firms often underestimate its complexity. And even the ones that acknowledge it still appear to face an uncomfortable level of uncertainty. FinTech Acquisition Corp (now known as CardConnect Corp) for instance states (in a SEC filing following the acquisition of CardConnect LLC) that “acquisitions subject [the company] to a variety of risks that could harm [its] business”; even mentioning that they “may need to allocate substantial operational, financial and management resources in integrating new businesses, technologies and products” and that “management may encounter difficulties in integrating the operations, personnel or systems of the acquired businesses”. If those issues are relatively frequent in an acquisition process, they become even more important when it comes to acquiring a company in order to integrate its innovative technology to improve an existing business. Also, tech companies have their share of barriers to overcome. According to Uday Singh, a partner at AT Kearney Ltd: “We’ve been waiting for a tech company type of entrant for some time, but barriers that the tech companies have to this is that the financial services area is so highly regulated that they are not used to the compliance they would face.”

Globally, acquisitions of innovative firms do not always serve identical purposes. Some aim at improving existing infrastructures, others try to enter new markets, while sometimes entities merge together in order to benefit from one another’s competitive advantage. But in all cases, similar issues occur when trying to harmonize the IT infrastructure: each entity is inclined to continue its established practices to avoid adapting their operations or having to train their workforce. In a PwC survey, when financial services firms were asked what challenges they face in dealing with fintech companies, 53% of incumbents cited IT security, followed by regulatory uncertainty (49%), and differences in business models (40%).

Achieving complete integration of newly acquired technologies is often a lengthy process, and some firms might keep distinct infrastructures in order to skip this step. For instance, when Funding Circle (a peer-to-peer lending marketplace) acquired Zencap to get a foothold in continental Europe, no plans were made to harmonize both entities’ IT infrastructure. Instead, it was decided to proceed using separate IT platforms. And yet, regardless of how complicated it might be, setting up a complete integration process is a ‘necessary evil’ as “technology integration is a critical aspect of the post-merger phase for financial institutions” according to Rekha Menon, chairman and managing director of Accenture India.