Banks increase Fintech investments lured by falling prices and technical potential

Big banks are shifting investments to fintech, taking up stakes in financial disruptions, seduced by depressed prices and unlocking potentially game-changing technology.

Just weeks ago, HSBC became the last bank to take a fintech stake, when it got a minority stake Monese as part of a sweeping deal that saw it plow $35 million into fintech. HSBC followed in the footsteps of Lloyds, Bank of America, Nationwide and others – who are betting on fintech by raising stakes.

Other major banks, such as UBS and JP Morgan, goes a step further, levitating entire fintechs, in the form of Wealth front and Nutmeg.

Banks taking stakes in fintech are increasing

And experts expect the trend to increase in the near future, amid the lure of falling fintech values ​​and the hunt for the next breakthrough technology.

Brad GoodallCEO and co-founder of London-based fintech the banquet, said: “I think the market probably shows that the banks are sitting on a lot of capital now. And so this is an opportunity for the banks to build. And they likely face opportunities in the fintech market that are unable to access the capital to grow as they were able to over the past five years.

“So I think as a result of that, it will lead to more banks being more positive about looking at how they can partner with fintech.”

HSBC’s reason for taking up the stake in Monese

HBSC’s decision to plow $35 million into Monese In exchange for a minority stake, the bank was hooked on Monese’s banking as a service (BaaS) proposal to expand its banking business.

BaaS has been hot for several years in the financial world and Monese had previously requested funding from Investec with a similar deal (Monese’s BaaS offering running Investec’s current accounts for business and consolidating retail savings products).

HSBC said the 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 an important 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 bank capacity.”

Strategic partnerships are growing in popularity

These so-called “strategic partnerships” between fintechs and banks have grown in popularity in recent years as they boast potential benefits for both parties: the fintech gets funding, taps into banking expertise and gets the honor of a big customer; on the other hand, the banks get access to leading technology and leading thinking.

I think fintechs that can work with banks are going to have more resilience and support in the longer term.

One example is Lloyds, which invests £11 million in Thinking machine in return for a 10 percent stake, as part of an agreement to leverage its cloud-based core banking services platform Vault.

Another example is Banked, which earlier this year raised 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 for investing 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 third party that PayPal or Klarna.

Bank more “mature” on the back of Bank of America investments

Goodall says he had the foresight to seek investment from Bank of America at an early stage of Banked’s development, and secured Series A investment, saying he believed it would mature his fintech. He says it helped him professionalize his own organization, as opposed to trying to grow Banked without Bank of America’s support.

Goodall says: “I strongly believe in strategic investments. I think fintech that can work with banks will have more resilience and support in the longer term.”

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 open doors.

Change is underway

In accordance Adam Davis, associate partner Bain & Companymanagement consulting firm, banks’ attitude to investing in fintech has changed recently, and they are now on the radar and, due to, for example, structured financing rounds, no longer seen as the risky investments they once were.

He says fintechs’ modus operandi of launching new products and services quickly is a big draw for banks when considering investment options.

“Especially when it comes to BaaS, many of these organizations simply don’t have the necessary capabilities to launch new propositions quickly,” says Davis. “Buying in that opportunity and that technology that has been scaled, especially at a potentially difficult price, is quite attractive [to banks]”.

Besides leveraging a fintech technology, there are other reasons why banks might want to take a stake in a fintech.

Sarah Kocianski, a fintech strategy consultant, said: “In many cases it is simply because the bank believes it will get a good return on investment. In others, it may be because it wants to learn from the fintech in question – whether it is how to use new technology, new ways of working or how to serve a new demographic, for example.”

Potential pitfalls for 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 the uncomfortable bedfellows of earlier times and have become more aligned in their thinking in recent times.

Goodall says: “I think the banks have certainly matured their thinking around investing in businesses. I think they realize they can’t be the roadblock.”

That said, there are graveyards full of banks that have failed to integrate fintech operations into their legacy system, while a further red flag could be the danger of a clash of egos between fintech and banking.

Davis says fintechs may still prefer non-bank investments: “There’s probably a willingness on the part of fintechs to seek funding only from venture capitalists or private equity firms because they may disrupt, but they may not disrupt the product.”

Goodall adds that fintechs looking to secure the backing of a large bank should be aware that traditional banks are large, process-driven businesses, not necessarily the largest fleet.

As such, he advises fintechs not to scale up on the back of a positive meeting with a bank, warning of the need to wait until there is “full commitment from all the stakeholders in the banks who have to sign” before using funds.

Conclusion

With cash-rich banks looking for the next cutting-edge technology, fintech seems to be well on their radar, especially given that they are proven operators across various areas of finance.

Fintechs, aware of investor demands to frame profitability, may well be attracted by the expertise and infrastructure that banks can offer them.