• Agustín Rubini, Digital Programme Manager at HSBC Commercial Banking


• 15.09.2016 02:00 pm
Fintech

Financial Technology companies (Fintechs) intend to make the financial services industry more efficient. They come into an ecosystem where big banks and insurance firms have been dominant, and where barriers to entry have prevailed. Over the past years, incumbents have admitted that fintechs are here to stay and that banks need to consider them carefully. Not all fintechs are created the same, some of them have a business model that can integrate nicely with banks, whilst others compete directly with them. For the former, banks are looking at creating win-win alliances and investing in them. Alliances increase the chances that that their own business models remain current and avoid what happened for incumbents in other industries, such as music sales, video rentals and travel booking.

Accelerating start-ups

Banks and corporations are keen to obtain the best solutions available, and one of the approaches taken is to set up an accelerator, startup or innovation lab. Established players can provide resources, trust, credibility, access to clients and scale.

Barclays have created Techstars Accelerator, an intensive 13 week programme that allows start-ups in different locations to get access to mentoring, funds, and technical expertise. More than 50 companies have been helped, the most notable being Everledger, but also including AgentCash, Cuvva, Cashforce and Social Lender.

Visa has created Visa Europe Collab, an accelerator that works with banks, start-ups and innovators to create new products and services. They have created six priority themes: B2C, Blockchain, Smart Cities, Inclusion, Authentication, and Emerging Retail Journeys.

Other interesting examples are Scotiabank’s Digital Factory, Royal Bank’s Innovation Bank, Deutsche Borse DB1 Ventures and State Bank of India’s InCube.

In June, the Bank of England has also announced the creation of an accelerator to work on topics of machine learning, data protection and data analysis. They will provide fintechs access to the central bank payment settlement system, something which was limited to 48 big firms so far.

Investing in Fintech

Banks also invest in fintechs. Some will use their standard M&A teams to look into companies in a discretionary fashion, and consider investment opportunities as they have traditionally done. When start-ups provide services to a bank, a minority stake in a fintech provider can be sound to make sure that the bank receives continued service, and the fintech firm does not struggle with their cash flow as it grows. There have been enough cases of fintechs failing so far. Other banks are putting cash aside and creating funds in order to invest in an ecosystem of companies, hoping that some of these make it.

A good example of this is Santander Innoventures, a venture capital firm setup which started in 2014 and invested in Kabbage, Ripple, iZettle and Elliptic. They’ve already invested in lending and payment solutions, and are now looking at expanding onto Artificial Intelligence and cognitive computing.

 Let's look at the most popular investment areas over the past 3 years:

Alternative Lending

Lending is one of the main revenue sources of the banking industry, and with one of the highest disruption potential, thanks to opportunities in peer to peer, peer to business, SME lending and online scoring opportunities. This category has been the biggest investment category, getting $17.7 billion in funding. The main companies invested have been Lufax.com, SoFi and LendingClub. J.P. Morgan acquired nearly $1B worth of Lending Club loans. Other key bank investors in this area are ING, British Business Bank and Scotiabank.

Insurance

Insurance has been traditionally an old fashioned, inefficient industry full of agents that don’t add value. More than 150 startups have been created. The opportunities are enormous, especially communicating using the Internet of Things and cyber security devices.This category has received $4.2 billion in funding. Top invested companies have been Zhong An Insurance, Oscar and Zenefits.  Morgan Stanley bet heavily in Zhong An Insurance, investing almost a $1 billion together with other investers. Other key investors in this area have been Commerzbank and RBC Royal Bank.

Banking Technologies

This category encompasses technologies used for banking, which includes challenger banks and neobanks. It has received $3 billion in funding. Top invested companies have been Atom bank, Cardlytics and Yodlee.  BBVA has acquired Simple and also participated in Atom Bank funding and Holvi. Other key bank investors have been Santander, through its VC fund, and Standard Bank.

Remittances

This category has received $1 billion in funding. You won’t have the top bank names in this category, as they represent great competition in this area. Top invested companies have been Worldremit, Ebury and Transferwise. Key bank investors have been Silicon Valley Bank and Bankinter. Several of the big banks (Bank of America, Barclays, Mayban, SEB, Standard Bank) are using AIM listed Earthport’s services

Robo Advisors

This category has received $710 million in funding. Top invested companies have been Betterment, Wealthfront and Personal Capital. Key bank investors have been Goldman Sachs, Citigroup and J.P. Morgan, and this is quite understandable as the best use cases developed so far in this area has been creating equity portfolios effectively. We are likely to see Robo Advisors to expand to other products and also be used as servicing ‘chat bots’

What we can expect in the future

The investment trend from major financial institutions on fintech is likely to continue. Big players can't afford to let companies grow unattended, so they will seek for partnering or acquisitions opportunities. I expect to see big investments in Big Data, Crowdinvesting, Insurtech and BaaS in the near future.