Big banks are shifting their investments to fintech, taking stakes in financial disruptors, lured by falling prices, and unlocking potentially game-changing technology.
Just a few weeks ago, HSBC becoming the latest bank to take a stake in a fintech, when it took a minority stake in Monese in a high-profile deal that saw it invest $35 million in fintech. HSBC followed in the footsteps of Lloyds, Bank of America, National and others – who bet on fintech by taking stakes.
Other major banks, such as UBS and JP Morgan, go even further, hovering up to entire fintechs, in the form of wealth front and Nutmeg.
Banks take stakes in rising fintech
And experts expect the trend to intensify in the near future, amid the lure of falling fintech valuations and the search for the next game-changing technology.
Brad GoodallCEO and co-founder of the London-based fintech Cashed, said: “I think the market is probably showing that the banks have a lot of capital now. It is therefore an opportunity for the banks to build. And they’re likely facing opportunities in the fintech market that can’t access capital to grow like they’ve been able to over the past five years.
“So I think as a result, that will lead to more banks being more optimistic about how they can partner with fintechs.”
The reason HSBC took its stake in Monese
HBSC’s decision to invest $35 million in Monese IIn exchange for a minority stake, the bank hooked up with Monese’s banking-as-a-service (BaaS) proposition to expand its banking operations.
BaaS has been in vogue for several years in the world of finance and Monese had previously courted funding from Investec with a similar type agreement (the BaaS offer of Monese feeding Investec’s current accounts for businesses and consolidating its retail savings products).
HSBC said its deal with Monese, which offers current accounts and focuses on customers who find it difficult to obtain financial services from traditional banks, will help it deliver “digital wealth and banking tools at the pace and At scale”.
Taylor Turan, The Head of Retail Banking and Strategy, Wealth Banking and Personal Banking at HSBC said: “This new partnership is a key step in helping us deliver digital wealth management and banking tools at the pace and scale, combining Monese’s fintech credentials with our own global wealth management and banking capabilities. .”
Increasingly popular strategic partnerships
These so-called “strategic partnerships” between fintech and banks have gained popularity in recent years because they have potential advantages for both parties: the fintech obtains financing, uses the banking expertise of the banks and obtains the congratulations from an important client; on the other hand, banks have access to cutting-edge technology and cutting-edge thinking.
I think fintechs that can work with banks will have more resilience and longer-term support.
An example is Lloyds investing £11 million in thinking machine in exchange for a 10% stake, as part of a deal to leverage its cloud-based core banking platform Skip.
Another example is Banked, which earlier this year won a $20 million investment round led by the $387 billion Wall Street giant. Bank of America. A notable feature of the deal is that the banking giant is not known to invest in European technology.
The deal came amid Bank of America leveraging Banked’s technology, which allows users to pay online directly from their bank accounts, as opposed to using a credit or debit card. or a third party such as PayPal Where Klarna.
More “mature” banking thanks to the investment of Bank of America
Goodall says he had the foresight to want an investment from Bank of America at an early stage in Banked’s development, securing a Series A investment, saying he believed it would mature his fintech. He says it helped him professionalize his own organization, instead of trying to grow Banked without Bank of America’s support.
Goodall says, “I’m a big believer in strategic investing. I believe fintechs that can work with banks will have more resilience and longer-term support. »
He says the benefits of having a major bank as a backer are many, such as leveraging the bank’s banking infrastructure, regulatory support and leveraging the Bank of America name to help open doors. .
Change is on the way
According Adam Davis, associated partner Bath & Companythe management consultancy, the attitude of banks towards fintech investments has changed lately, and they are now on their radar and, due to, for example, structured finance cycles, are not considered more risky investments than they used to be.
He says fintech’s modus operandi of rapidly launching new products and services is a major asset for banks when considering investment options.
“Especially when it comes to BaaS, many of these organizations simply don’t have the capabilities to launch new propositions quickly,” Davis says. “Buying this capability and technology that has been scaled, especially at a potentially distressed price point, is quite attractive [to banks]”.
In addition to leveraging a fintech’s technology, there are other reasons why banks might want to take an equity stake in a fintech.
Sarah Kocianski, a fintech strategy consultant, said: “In many cases it is simply because the bank thinks they will get a good return on their investment. In others, it may be because they want to learn from the fintech in question, whether it’s how to use new technologies, new ways of working, or how to serve a new demographic, for example.
Potential pitfalls for banks partnering with fintechs
Like all partnerships, there are obvious risks associated with such combinations. There is no doubt that fintechs and traditional banks are no longer the uncomfortable bedfellows of yesteryear and have become more aligned in their thinking lately.
Goodall says, “I think banks have certainly matured in their thinking about investing in businesses. I think they recognize that they can’t be the roadblock.
That said, there are graveyards full of banks that failed to integrate fintech operations into their legacy system, while a new red flag could be a danger of an ego clash between fintech and the bank.
Davis says fintechs might still prefer non-bank investments: “There’s probably a willingness of fintechs to seek funding only from venture capitalists or private equity firms because they can interfere, but they might not. interfere with the product.
Goodall adds that fintechs looking to get backing from a big bank should be aware that traditional banks are big, process-driven companies, not necessarily the fastest.
As such, he advises fintechs not to grow following a positive meeting with a bank, warning of the need to wait until there is “full engagement from all bank stakeholders who must sign” before spending funds. .
With cash-rich banks on the hunt for the next game-changing technology, it seems like fintech is firmly on their radar, especially since they are proven operators in various areas of finance.
Fintechs, on the other hand, aware of the requirements of investors to achieve profitability, may well be attracted by the expertise and infrastructure that banks can offer them.