By AltFi on Monday 29 March 2021
A regulatory wrong turn risks reducing competition in the long run.
Weekly Leading Article
The scuppering of Seedrs and Crowdcube’s planned merger last week by the Competition and Markets Authority (CMA) risks both a chilling effect in an industry poised for consolidation, and threatens a key funding source for nascent fintechs.
Firstly, consolidation. This is actually the second high-profile deal we’ve seen derailed by the regulators already in 2021.
Visa’s acquisition of Plaid was called off in January, terminated by looming “lengthy litigation” as the US Department of Justice moved to block the deal.
Fintech was built on the premise of challenging traditional financial services, but the reality is that acquisition is the inevitable outcome for the majority of challengers.
Whether it’s open banking providers, SME lenders, current account providers, digital wealth platforms, or indeed, equity crowdfunders, there’s a clear over-supply of players and M&A is the obvious outcome.
But regulators don’t always recognise that, or at least they view the landscape differently from those within it.
Take Seedrs/Crowdcube, whose merger failed due to the classic competition challenge: market definition.
Merging companies will always paint a picture of operating in the broadest possible market, to deny that their coming together could possibly alter such a vast competitive landscape.
Seedrs and Crowdcube defined their market to the CMA as “within the ecosystem of finance for SMEs”—pointing to VCs, angel investment, corporates, and “Goliath” firms as their rivals.
That’s a hard-sell, especially given Crowdcube in particular has spent years marketing itself as the “leading equity crowdfunding platform” with a “dominant market share”—great for attracting companies to fundraise, but a red flag to a regulatory bull.
The CMA meanwhile defined the equity crowdfunding market as narrowly as possible, a market in which it said Seedrs and Crowdcube control “at least a 90% share”.
In Seedrs/Crowdcube’s definition of the market, both companies face vast competitive pressures from national and international rivals.
In the CMA’s definition, their only competitors are each other, leaving its decision a foregone conclusion.
Neither regulator nor crowdfunders are entirely correct in their market definitions, but the CMA’s decision, in the words of Tim Levene of Augmentum Fintech (a Seedrs shareholder), is certainly “one dimensional”.
Secondly, a note on funding. It’s important to note just how important equity crowdfunding has been for the fintech industry over the past decade.
Monzo, Freetrade, Curve, Chip, Coconut, Snoop and GoHenry to name a few have all tapped into these platforms to get their ambitious and risky projects off the ground.
It’s too early to say whether “at least one of the parties [Seedrs or Crowdcube] will be compelled to discontinue trading”, as Crowdcube stated in its evidence to the CMA should the merger fail, however such an eventuality would be a lose-lose for everyone.
Fintech needs a diverse funding landscape, lest it becomes dull and dependent on a narrow source of venture capital.
This is why going forward we need, in the words of Innovate Finance’s Charlotte Crosswell, “stronger industry input into competition regulation so there is a deep understanding of how sectors may evolve.”
The CMA, in our estimation, too-narrowly defined the equity crowdfunding opportunity, and at the same time put both platforms, and the wider fintech funding environment, at risk.
The AltFi Leader is a new weekly view for 2021 from our editorial team. We’d love to hear your ideas, thoughts, feedback and constructive criticism: firstname.lastname@example.org
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