Big banks are shifting investment into fintech, snapping up stakes in financial disruptors, seduced by depressed prices and unlocking potentially game-changing technology.
Just weeks ago, HSBC become the latest bank to take a stake a fintech, when it bagged a minority stake in Monese as part of a wide-ranging deal which saw it plough $35million into the fintech. HSBC was following in the footsteps of Lloyds, Bank of America, Nationwide and others – which are placing bets on fintech by acquiring stakes.
Other big banks, like UBS and JP Morgan, are going a step further, hovering up entire fintechs, in the shape of Wealthfront and Nutmeg.
Banks taking stakes in fintech on rise
And experts expect the trend to be ramped up in the near future, amid the lure of falling fintech valuations and the search for the next groundbreaking technology.
Brad Goodall, CEO and co-founder of London-based fintech Banked, said: “I think the market is probably showing that the banks are holding a lot of capital now. And so this is an opportunity for banks to build. And they are probably faced with opportunities in the market for fintechs that are unable to access the capital to grow that they were able to over the last five years.
“So I think as a result of that it is going to lead to more banks being more bullish about seeing how they can partner with fintechs.”
HSBC’s reason for bagging stake in Monese
HBSC’s decision to plough $35million into Monese in exchange for a minority stake was hooked on the bank plugging into Monese’s banking as a service (BaaS) proposition to expand its banking operations.
BaaS has been hot for several years in the world of finance and Monese had previously wooed funding from Investec with a similar type deal (Monese’s BaaS offering powering Investec’s current accounts for business and consolidating its retail saving products).
HSBC said its deal with Monese, which offers current accounts and focuses on customers who struggle to get financial services from mainstream banks, will help it deliver “digital wealth and banking tools at pace and scale”.
Taylan Turan, group head of retail banking and strategy, wealth and personal banking at HSBC said: “This new partnership is a key step towards helping us deliver digital wealth and banking tools at pace and scale, combining Monese’s fintech credentials with our own global wealth and banking capabilities.”
Strategic partnerships growing in popularity
These so-called ‘strategic partnerships’ between fintech and banks have grown in popularity in recent years as they boast potential benefits for both parties: fintech gets funding, taps into banks banking expertise and gets kudos of a big-ticket client; on the flip side, banks get access to leading-edge tech and leading-edge thinking.
I do believe that fintechs that can work with banks are going to have more resilience and support in the longer term.
One example is Lloyds making an £11million investment in Thought Machine in return for a 10 per cent stake, as part of a deal to leverage its cloud-based core banking services platform Vault.
Another example is Banked, which earlier this year bagged a $20million investment round led by $387billion Wall Street giant Bank of America. One notable feature of the deal is that the banking giant is not noted for investing in European tech.
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 third party like PayPal or Klarna.
Banked more ‘mature’ on back of Bank of America investment
Goodall says he had the foresight to want investment from Bank of America at an early stage of Banked’s development, securing Series A investment, saying he believed it would mature his fintech. He says it helped him professionalise his own organisation, as opposed to trying to grow Banked without Bank of America’s support.
Goodall says: “I do strongly believe in strategic investment. I do believe that fintechs that can work with banks are going to have more resilience and support in the longer term.”
He says the advantages of having a big bank as a backer are plentiful, for example leveraging the bank’s banking infrastructure, regulatory support, and harnessing the Bank of America name to help open doors.
Change is afoot
According to Adam Davis, associate partner Bain & Company, the management consultancy firm, banks’ attitude to investment in fintech has shifted of late, and they are now on their radar and, due to, for example, structured funding rounds, no longer seen as risky investments they previously were.
He says fintechs’ modus operandi of launching new products and services quickly is a big pull for banks when considering investment options.
“Especially when it comes to BaaS, a lot of these organisations just don’t have the requisite capabilities to launch new propositions quickly,” Davis says. “Buying in that capability and that technology which has been scaled, especially at a potentially distressed price, is pretty attractive [to banks]”.
Alongside leveraging a fintech’s tech, there are other reasons banks might want to bag a stake in a fintech.
Sarah Kocianski, a fintech strategy consultant, said: “In many cases it’s simply because the bank thinks it will get a good return on its investment. In others, it can be because it wants to learn from the fintech in question — whether that’s how to use new technology, new ways of working or how to serve a new demographic, for example.”
Potential pitfalls to banks teaming up with fintechs
Like all partnerships, there are obvious risks associated with such combinations. There is little doubt that fintechs and traditional banks are no longer uncomfortable bedfellows of yesteryear and have become more aligned in their thinking in recent times.
Goodall says: “I think banks have certainly matured in their thinking around investing in businesses. I think they recognise they can’t be the road block.”
That said, there are graveyards full of banks which have failed to integrate fintech operations into their legacy system, while a further red flag could be a danger of a clash of egos between fintech and bank.
Davis says fintechs might still prefer non-bank investment: “There is probably a willingness of fintechs to seek funding just from venture capitalists or private equity firms because they may interfere, but they might not interfere with the product.”
Goodall adds that fintechs looking to secure the backing of a big bank should be cognisant that traditional banks are big, process-driven businesses, not necessarily the most fleet of foot.
As such, he advises fintechs not to scale-up on the back of a positive meeting with a bank, cautioning the need to wait until there is “full commitment from all of the stakeholders in the banks that need to sign off” before spending funds.
With cash-rich banks on the hunt for the next breakthrough tech, it seems that fintech is firmly on their radar, particularly given they are proven operators across various areas of finance.
Fintechs, meanwhile, conscious of investor demands to hit profitability, could well be attracted by the expertise and infrastructure that banks can offer them.