When Fintechs first arrived on the scene back in 2011, they weren’t exactly disrupters to larger banks (i.e., incumbents). But that would all change by 2014, with global investment into Fintechs reaching $12 billion, up from less than $3 billion in 2011, as reported by the Economist. As investments into Fintechs grew, so did the services provided by Fintechs.
Unlike banks, which were overly burdened by regulations after the financial crisis, Fintechs offered faster and more convenient services with little government regulation to contend with. This allowed them to move fast and soon banks found themselves in direct competition with Fintechs.
Those days are larger gone now. Many Fintechs have been absorbed into banks or are working more closely with banks. The rhetoric used in previous years of Fintechs promising to “crush the banks” has been replaced by building successful partnerships with the incubents, paving the way for customers to benefit immensely and get the best of both worlds.
In this article, you’ll learn about three Fintechs that have created successful partnerships with large banks and how each are benefiting from the relationship.
Visible Alpha is a platform to interpret and forecast stock data. Their insights complement the research of investment firms. Morgan Stanley, Bank of America and Citibank all agree as each has invested in the company. Goldman Sachs led a $38 billion fundraise for the company, as reported by Business Insider.
Why wouldn’t these large banks simply develop the same technology in-house? Mainly due to resource constraints. While large banks have many employees, the services that Fintechs provide are very specialized. A bank would need to spin up a new department focused specifically on the technology offering by the Fintech, hire people with the necessary skills and manage the project. Even for a large bank, this isn’t a small endeavor.
By investing in a Fintech with a working product, banks spend far less than if they created everything from scratch. Additionally, Fintechs are likely to already have a small customer base.
Square is a mobile payments company. For smaller businesses that need a method for accepting payments, Square provides a comprehensive solution. Their technology is composed of a complete backend payment system and a front-end user interface. For business owners, the process is as simple as plugging in a small credit card swipe device into their mobile phone or iPad. They swipe a customer’s card, the payment is processed and the business owner then texts the customer’s receipt to them.
What Square has done is to create a POS or point of sale system without the complexity and cost of traditional POSs. Square has since grown from payments and POS into payroll and capital services for businesses.
Goldman Sachs, Citi Ventures, JPMorgan Chase and Morgan Stanley have all invested in the company to gain access to its innovative technology.
In some cases, banks investing in Fintechs may not directly make use of the Fintech’s technology but will take an equity stake in the company and benefit from its growth. Goldman Sachs led the IPO of Square back in 2015, as reported by Business Insider. Morgan Stanley was hired as an advisor on the IPO and JPMorgan was involved in as well. Specifically for Goldman Sachs, they have strong ties to Square. Jack Dorsey, the CEO of Square is also the founder of Twitter, which Goldman Sachs helped take public. The chief financial officer of Square, Sarah Friar, spent time at Goldman Sachs as well.
Motif Investing is an online brokerage firm that describes itself as, “a Technology-Driven Thematic Investing Company.” Thematic investing means creating portfolios of companies that are aligned with a specific goal or cause. If you believe in that goal or cause, you can invest in the related portfolio created by Motif Investing.
JPMorgan Chase and Goldman Sachs have all invested in Motif. JPMorgan went a step further and created an exclusive partnership that offers access to IPOs led by JPMorgan through Motif Investing’s platform.
“We are pleased with our partnership with Motif, which will broaden access to IPOs to more individual investors,” Michael Millman, Co-Head of Americas Equity Capital Markets and Head of Technology Investment Banking at J.P. Morgan, said in a Motif Investing press release. “Motif’s innovative and easy to use platform is a cutting-edge, differentiated way for issuers to reach investors.”
A Symbiotic Relation
Most Fintechs and banks don’t look at each other as competitors. They see that the pie is large enough for both to benefit from mutual partnerships. Fintechs often get an infusion of needed cash through investments from larger banks while the banks gain access to innovative technologies or equity stakes in high growth companies.
Fintechs that are receiving investments from banks already have products and are live in the market. This greatly reduces the risk for banks and can lead to high company valuations and investments for Fintechs.