October 15, 2015
In one of our recent articles Banks and/or/vs FinTech Startups: Is There a Fight? we came across the number of $1 billion raised by payment companies just in Q1 2015. According to the SVB 2015 FinTech Report on investment trends in FinTech, $3.1 billion was invested into the FinTech sector in the last quarter of 2014 through 214 deals. The highest number of investments were made by corporates and angels—combined investments of $1.13 billion. The corporate world's rising interest in FinTech startups signifies the understanding of a common goal—to serve customers in the best way possible.
Moreover, according to Accenture’s latest report on the future of FinTech and banking, the global investment in FinTech ventures tripled to $12.21 billion in 2014, signifying a 201% global growth compared to the previous year.
The FinTech sector is becoming more competitive with numerous startups being imaginative on the way to satisfy the same needs in a better way. The growing number of FinTech companies leaves fewer runways for partnering with the corporates and scaling. SVB provides a number of examples serving various financial needs to demonstrate the competitive landscape:
An interesting quote picked up during Temenos’ presentation at the FinDEVr 2015 stated that Banks have something FinTech startups do not have but want—customers. What it means for both worlds is that there is innovation & technology that the FinTech sector can offer and there is a demand that banks can drive. Banks have an ability to scale up what startups have.
Both banks and FinTech have their strengths and weaknesses, and both will be better off by cooperating and combining the best they can offer to cover each other's weaknesses. Banks can guarantee rapid scaling with significant funding and access to demand. The FinTech sector can offer the most innovative and efficient solutions for better customer service. An interesting term, FinTech 2.0, is used in the paper recently published by Santander in collaboration with InnoVentures, Oliver Wyman and Anthemis Group called FinTech 2.0 Paper: Rebooting Financial Services. As stated in the paper, while some FinTechs today are focused on the race to build standalone Unicorns (a company with a $1 billion valuation), FinTech 2.0 represents a far broader opportunity to re-engineer the infrastructure and processes of the global financial services industry, in which the top 300 banks command a revenue pool worth $3.8 trillion. To realize the opportunity of FinTech 2.0, banks and FinTechs will need to collaborate, each providing the other with what it now lacks—be that data, brand, distribution or technical and regulatory expertise.
A number of global banks who have realized the importance of collaboration have already did it in various ways. Some of the examples are provided by Medium which charted the following findings:
The most preferred ways to collaborate is to create startup programs to incubate FinTech startups (43%), to set up venture funds to fund FinTech startups (20%) and to partner with FinTech companies (20%).
According to the WSJ, in 2014, Spanish banking giant Santander announced a $100-million venture capital fund to invest in FinTech startups globally. HSBC allocated up to $200 million for investment in early-stage tech companies with the aim of improving its technology. In 2013, two $100-million FinTech funds were set up—SBT Venture Capital by Russian bank Sberbank and BBVA Ventures (in Silicon Valley) by Spanish bank BBVA. Barclays launched an accelerator program in London for FinTech startups while Swiss bank UBS has created a system of internal working groups with dedicated funding to work on specific technology projects, using individuals from the bank and external technologists.
There are a number of other examples of funds provided by Medium such as Wells Fargo, which is making venture capital investments via Norwest Venture Partners with a focus on investments in Silicon Valley, India and Israel. FinTech investments have included 1010data, 41st Parameter, Nadex, Lending Club, Motif Investing and mPower. Among the examples is also Citibank that created Citi Ventures as a venture capital operation with the aim of investing in businesses that have the potential to transform the financial services industry although offices have so far only opened in New York and Silicon Valley. Announced investments include Ayasdi, Betterment, Chef, Click Security, Datameer, InvestLab, Jumio, M-DAQ, Platfora, Pindrop Security, Ready for Zero, Shopkick and Square. Travelex has created a $38-million digital growth fund to make seed investments and acquisitions in the mobile, payments, e-wallet, cryptocurrency and location technology space. Bankinter setup Fundacion Innovacion Bankinter in Madrid to explore innovations in the FinTech space and has made various investments in FinTech startups including Captio and Coinffeine.
Europe has an emerging way of collaboration between the banking industry and FinTech startups—mentorship programs. Bank of America Merrill Lynch, Citi, Barclays, HSBC, JPMorgan, Credit Suisse, Goldman Sachs and other banking industry giants got involved in FinTech Innovation Lab that is aimed to foster relationships between startups and banks through 12-week mentorships. Other examples from Medium include Startupbootcamp FinTech, which provides funding, mentorship, office space and access to investors and venture capitalists for FinTech startups from around the world. Lloyds Bank, Rabobank and MasterCard were sponsoring the 2014 edition in London. Barclays collaborated with Techstars on the creation of the Barclays Accelerator, providing 13-week incubator programs for FinTech startups in London with funding, space with participants having access to Barclays’ APIs and data. Citi’s Citi Ventures is partnering with Plug and Play to launch the Plug and Play FinTech Program, with locations in the US, Germany, Singapore, Brazil and Spain. The bank has also created Citi Accelerator Program in Tel Aviv providing four-month incubation program with mentoring, product development support and access to senior executives at Citibank.
There are many more examples of programs—BBVA, Commerzbank, Deutsche Börse, UniCredit, Bank of Ireland, EY, Deloitte, Lloyds Banking Group, Bank Leumi, Erste Group, etc. As traditional banking giants and innovative FinTech startups develop an understanding of the common goal of serving the customer in the best way possible, more and more collaborations will be found among both the parties.
Without a doubt, FinTech startups brought some disruptions to traditional banking, mainly in the areas of payments, credit and personal financial advice. However, changes in customer preferences, advances in technology and growing interest in FinTech along with investments from the corporate world and venture capitalists set the trend for an even more radical transformation. According to Santander, FinTech 2.0 could mean a seamless specialization across core elements of the value chain wherein a variety of providers combine to deliver cheaper and easier-to-use propositions to end-customers.
Banks must continue on their digital transformation journey, but they do not have to go through it alone. By understanding their core strengths and weaknesses, banks need to look for FinTech startups that can fill the gaps they are not able to fill themselves. FinTech startups are no exception. They may be on the cutting edge of innovations and efficiency, but there is more work to do. Market expertise, brand name and image, experience, market power, assets and expensive licensing required in the financial sector are a crucial necessity.
There is a single core message to both banks and FinTech—collaboration is key.