Banks and FinTech disruptors haven’t always seen eye-to-eye, with some considering the two market segments competitors. After all, many FinTech startups — from alternative lending to payments automation players — emerge from the idea that traditional banks aren’t offering adequate services today.
But increasingly, the two markets engage in collaboration, as banks offer the infrastructure and market reach, while FinTech startups provide the technology and innovation.
A new report by KPMG and CB Insights highlights the rising role of traditional banks in the FinTech world and adds to the narrative that the two communities are on the same team.
As reported by American Banker, “The Pulse of Fintech” highlights the mounting participation among traditional banks in funding FinTech startups. The data found the highest level of bank-funded venture capital going to FinTech companies since the report first launched.
About a quarter of the money going to fund FinTech startups between Q2 2015 and Q2 2016 came from corporates, and that figure is rising, “The Pulse of Fintech” said. The data revealed that corporate VC made up a third of total FinTech investments in Q2 2016.
Banks are providing significant volume to startups as they look to get an early jump on the new technology that stands to disrupt or benefit traditional FinServ, researchers said.
Goldman Sachs was found to be the most active investor among traditional banks, having provided 11 investments in the FinTech space between Q2 2015 and Q2 2016. Both Santander and Citigroup participated in seven funding rounds in the industry, researchers found.
An Investment Shift
An increase in corporate investment in FinTech startups coincides with a decrease in venture capital investment, according to KPMG and CB Insights. Corporate venture capital differs from institutional venture capital due to corporate VCs’ direct connection to a corporation. According to Juniper Networks’ senior analyst in growth strategy and investments, Rita Waite, that leads to a shift in the relationship between a FinTech startup and its backers.
“The goal of a corporate VC is largely the same as an institutional VC: to invest in high-growth companies that drive value for the company,” Waite wrote in a blog post for CB Insights earlier this year. The difference, however, is that corporate VCs often have what Waite described as “strategic objectives” to align the corporation with the startup and provide industry expertise. VCs, on the other hand, generally invest purely for monetary returns.
According to KPMG and CB Insights’ latest report, the rise in bank-led corporate VC among FinTech startups is a sure sign banks want to cozy up to the companies that were once perceived as a threat.
“There is more money available from corporate VCs,” explained Manuel Silva, a partner at Santander’s corporate VC arm, Santander InnoVentures, in an interview with American Banker. “Firms that might find less receptiveness with traditional VC funds are also appreciating more what corporate VCs bring to the table.”
According to CB Insights Senior Analyst Matt Wong, this means investors in FinTech startups, like banks, are also more mindful of the business plans of their investment targets.
“We are definitely seeing venture capital paying closer attention to plans,” he told American Banker. “There is more scrutiny.”
While banks are stepping forward to lead VC investments in FinTechs, the industry itself is experiencing a “plateau,” KPMG and CB Insights declared. The data revealed that venture capital investments in the space in Q2 of this year were nearly half of what they were in Q1 or what they were in Q2 2015. The shift is likely the response of investors following a FinTech investment frenzy last year.
“In 2016, concerns about those high valuations, the lack of significant IPO exits and macroeconomic factors seem to have led investors to be more cautious,” the report concluded. “Over the first two quarters of the year, VC investors focused on more experienced companies with proven technologies or business models.”
With more banks participating in FinTech funding, while investors overall become more cautious about where they place their money, the space appears to be embracing a “quality-over-quantity” mentality in 2016.
Arik Speier, co-leader of the KPMG Enterprise Innovative Startups Network and head of technology for KPMG in Israel, described the current market climate as one where investors — like banks — are more interested in the business benefits of investment, not simply the financial returns.
“Instead of looking for a direct return, companies want to collaborate on products and be able to pilot technologies within their organization,” he stated.