If you can’t beat ’em, buy ’em, or maybe incubate ’em.
This is corporate banking’s attitude toward the fintech that is competing with them, making traditional banking and its customers things of the past. Slower to innovate, bound by regulations and size, banks are increasingly investing money and time in fintech startups to benefit from the agility and creativity of outsiders who have grown up digital.
Joe Walent, senior analyst of Mercator Advisory Group’s emerging technologies advisory service, says don’t forget that one of the world’s largest payment facilitators and game changers was once just a great idea.
“It wasn’t too long ago that PayPal was an upstart, part of eBay, and now it’s almost becoming a financial institution in and of itself, by technical definition as well as its sheer size and role in the payments ecosystem,” Walent says of the giant payment facilitator.
BNP Paribas, BBVA, Citigroup, Goldman Sachs, Santander, and J.P. Morgan Chase are among the leaders in banks who are looking not just for monetary returns from fintech investment – unlike venture capitalists – but also, and maybe only, ways to benefit strategically from the cutting edge technology disrupting the financial world. From the second quarter of 2015 and the second quarter of 2016, bank-funded venture capital accounted for a quarter of funding for fintech startups, according to a report by KPMG and CB Insights.
Walent says banks are simply saying better late than never.
“It’s not a new thing but it’s more pronounced,” Walent says. “What you have in many cases is people being a little bit more sensitive to what’s going on with technology and how it might be considered as nibbling away at banking businesses or financial institutions. They’re a lot more sensitive to it and I think that’s a result of being caught flat-footed when the Internet first came on the scene. A lot of businesses including financial services were slow to get in the game.
“I think the thesis that these banks are in many ways looking to buy or build financial technology rings very true. How they go about it is a case by case basis defined by senior management and how they like to approach problems.”
There can be investment, there can be purchasing, and there can be providing resources, both human and capital, to startups in a “lab” setting, such as J.P. Morgan Chase’s recent launch of In-Residence.
“Technical companies have a bit more of an edge because they know how to nurture ideas and bring them along,” says Walent. “Banks, just from the sheer personality of a corporation, run a little bit counter to that idea.”