In 2021, the online personal-loan company LendingClub completed its acquisition of Radius Bank, effectively becoming a bank itself. At the very start of 2022, the one-stop-shop financial-services company SoFi completed its acquisition of the small Sacramento-based bank Golden Pacific Bancorp, also becoming a bank. 

It looked like bank-fintech deals were going to be the big new trend in the industry, combining the fast customer-acquisition capabilities of a tech company with the stable profitability and cheaper deposits of a bank. But this year has been a different story. Bank-fintech deals ran into isolated complications, as well as difficulty from regulators. Let's take a look at what happened in 2022 and the outlook moving forward.

Deals fall apart

Heading into 2022, it looked like bank-fintech deals would have another strong year. There were several promising announcements, all of which came in November of 2021.

First Internet Bancorp (INBK 2.65%) announced its plans to acquire First Century Bancorp, a tech-driven company that had niche lines of business including payments, tax-product lending, sponsored card programs, and homeowners-association services. The idea was to marry First Internet's diverse and growing lending verticals with First Century's low-cost deposit base.

Person looking at computer monitors.

Image source: Getty Images.

Under the merger agreement, the deal needed to close by April 30. However, the Federal Reserve didn't approve the deal until April 29, and then the parties could not close due to statutory waiting periods. The two parties would have needed to extend the merger agreement, but that never happened because it looked like First Century wanted a higher purchase price than First Internet was willing to pay.

Also in November, another small bank called Patriot National Bancorp (PNBK -2.64%) announced its plan to acquire American Challenger Development Corp and form the largest digital challenger bank in the U.S. American Challenger had a strong board of directors and wanted to grow quickly.

But come July, Patriot and American Challenger called off the merger "in light of the parties' expected inability to satisfy certain of the closing conditions to the Merger and Recapitalization." The release also said American Challenger is exploring a sale of the company, but I haven't seen any news since then.

The latest blunder comes from the fintech-company BM Technologies (BMTX -1.14%), which runs a student disbursement and banking-as-a-service business. BM Technologies has had success on the deposit-gathering side but wanted to acquire a bank charter so it could put its deposits on its balance sheet and begin making loans to grow margins.

BM Technologies announced that it would acquire a small bank in Seattle called First Sound Bank (FSWA). But just recently, BM announced that both it and First Sound had mutually agreed to terminate the deal due to a "prolonged" regulatory process.

The outlook

I definitely think bank-fintech deals have taken a step back this year with these three implosions. It looks like the Patriot and American Challenger deal failed due to a potential mistake or miscommunication with Credit Suisse, the investment bank handling the deal. American Challenger sued Credit Suisse after the deal fell apart.

Regulatory issues definitely played a role in the failure of the BM Technologies and First Internet deals. As regulators started to take a hard look at how they would approach large bank deals, a backlog of pending deals developed in the Fed's pipeline.

Now, First Internet may have still been able to get a deal done, but by the time it had approval, First Century's deposits had likely gotten more valuable in the rapidly rising interest-rate environment -- which is why they may have wanted more money. Still, the fact that the Fed waited until the day before the merger agreement expired shows that it isn't making any effort to really support bank-fintech deals.

BM Technologies took a whole year to try and complete the acquisition before calling it off. When mergers and acquisitions take too long to close, deals start to lose some of their financial merits, and many of them are already diluting shareholders.

From what I've seen this year, I would expect bank mergers to continue to face scrutiny and require a very long regulatory-approval process. This may make them less appealing in 2023.