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VC funding for fintechs is down, but big banks are quietly investing in startups


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VC funding for fintechs is down, but big banks are quietly investing in startups

Venture capital funding available for fintechs may have dropped during the pandemic, but major European banks are set to remain consistent if low-key investors in the sector. Lenders such as UniCredit SpA, ABN AMRO Bank NV and Groupe BPCE have participated in a variety of venture and growth funding rounds for up-and-coming fintechs, even in the depths of the COVID-19 crisis, and industry insiders expect that there is more to come.

The motivations for banks to make investments, most of them below the €10 million mark, range from assessing the most promising fintechs with a view to buying them later, to simply viewing fintechs as assets that will generate a solid return.

Sarah Kocianski, head of research at 11:FS, a London-based consultancy firm, said banks investing in fintechs is by no means a new phenomenon, and has many advantages.

"The bank may simply be looking for a sound investment that will give it a good return and therefore financial profit. Beyond that, investing at a very early stage enables the bank to get a foot in the door, making it easier to increase its stake as time goes on and putting it in an advantageous position to acquire the fintech should it decide to sell," she said in an email.

It could even be a precursor to M&A, she said.

"In some cases, acquiring a minority stake will also allow the bank to guide the direction of the fintech, ensuring its products and services align with the bank's own strategic direction. That makes the fintech a more appealing acquisition target for the bank, benefiting both parties as the fintech founders look for an exit and the bank looks for an easier way to enhance its own customer offering," she said.

"For those reasons, I don't see bank participation in fintech funding rounds declining any time soon," Kocianski said.

Venture capital funding drops

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Volumes of venture capital money going into European fintech were down to €3.8 billion in the first half of 2020 from €5.6 billion during the same period of 2019, according to McKinsey & Company. Funding for fintechs has gone from "surplus to scarcity" due to the COVID-19 crisis, and has created an "existential threat" to the sector, according to a McKinsey report from September. Fintechs that are not yet profitable and still need to tap investors for capital in order to complete their innovation cycle will find themselves with little room for maneuver, the report said.

While European fintechs brace for a drop in venture capital funding, European banks are still drawn to the sector.

Despite the fallout from both the Wirecard scandal and the pandemic, German fintech solarisBank AG — a banking infrastructure provider which, like Wirecard, also provides prepaid and debit cards — raised €60 million in a Series C funding round in June, with participation from Banco Bilbao Vizcaya Argentaria, SA and ABN AMRO. The amounts contributed by each investor were not disclosed.

Santander UK Group Holdings PLC, the immediate parent company of Santander UK PLC, along with the Santander InnoVentures, Banco Santander SA's corporate venture arm, participated in a funding round for German credit scoring fintech Forteil GmbH in August.

Crédit Agricole Corporate & Investment Bank along with Nordea Investment Management AB invested €10 million into Financial Transaction Services BV — which trades as Cobase — in June. Cobase offers a platform that allows international bank customers to manage multiple accounts, and clinched €7.5 million in funding from ING Groep NV in 2018 after graduating from the Dutch bank's accelerator program.

Caixa Central de Crédito Agrícola Mútuo CRL joined UniCredit and Groupe BPCE in a €8.5 million funding round in May for British fintech Meniga Ltd., which provides white label digital banking services.

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Preparing for a new world

Travers Clarke-Walker, chief marketing officer at Thought Machine, a British fintech that provides core banking infrastructure, also believes that the trend of banks investing in fintech companies is here to stay. Banks are starting to wake up to the ways that the pandemic has shaken up their business operations, with consumers demanding a better digital experience and looking for greater flexibility — for example, around loan moratoria and mortgage holidays. Banks are using investment in fintechs as part of their strategy of adapting to this new world, he said.

"The pandemic, like other economic and societal shocks, is shifting consumer habits, and changing the ways people manage their money, assets and liabilities — and they need systems which are flexible and resilient enough to support those changes," he said in an email.

"Banks around the world can view investment into fintech companies as a form of longer-tail hedge against those shocks — as the cost of fundamentally failing to support customers in times of need, far outweighs the relatively small cost of investing into these technologies which build resilience and flexibility into a financial institution," he said.

Thought Machine, the business name of Being Technologies Ltd, raised €112.2 million in a Series B funding round in February, with Lloyds Banking Group PLC among the participants.