Can banks capitalize on the fintech fallout?

Like so many financial technology companies, German neobroker Nextmarkets raised capital in 2021 on a wave of optimism. Christian Angermayer, a German biotech entrepreneur with an interest in commercializing medical use of psychedelic drugs, invested alongside a group of fintech and cryptocurrency enthusiasts, including British hedge fund billionaire Alan Howard.

The $30 million series-B funding round was designed to propel the international expansion of Nextmarkets’ commission-free share-trading platform, making it a pan-European rival to Robinhood in the US.

In early 2023, however, Nextmarkets was facing some tough choices. Despite robust revenue growth, cost cuts had left it with fewer staff than it had during its 2021 capital raising. Amid a much less forgiving funding environment for fintech companies, it was still losing money. If it couldn’t raise more capital, its future as an independent company was in question.

The situation looked particularly dire when its holding company decided in March to liquidate its underlying assets. That decision was communicated in stock market announcements by Nextmarkets AG’s two biggest shareholders: German fintech incubator Finlab and Malta-based Samara Asset Management, founded by Angermayer and US crypto investor Mike Novogratz.

Nextmarkets chief executive Manuel Heyden, who co-founded the firm with his brother Dominic in 2014, tells Euromoney that the firm has valuable assets, notably its tech stack. But Finlab and Samara’s announcements warned their investments, including €3.7 million in convertible lending by Samara, might not be recovered.

In the end, Angermayer’s Maltese family office, Apeiron, offered Nextmarkets vital funding; and Samara and Finlab remain shareholders alongside other early investors including German PayPal billionaire Peter Thiel’s Founder Fund.

“We made Nextmarkets a European player in the past three years,” Heyden says in late April. “We are definitely working on further growth – and not only in Europe but also internationally.”

It is a story that has been repeated in various forms across hundreds of the firms that have grown up as part of the fintech boom of the past 10 years, driven by cheap money and accompanying venture-capital largesse.

A lot of fintech businesses were built on an infinite supply of capital. Venture capital businesses have found it too embarrassing for them to go to the wall

Aman Behzad, Royal Park Partners

Nextmarkets is far from the only fintech company faced with a much shorter list of investors willing to offer more support to its growth plans, particularly on the consumer side. Many of these firms aren’t lucky enough to have existing backers with as much commitment and access to capital as Angermayer.

In the UK, there have been rumours of an imminent takeover of another neobroker, Freetrade, with JPMorgan suggested to be among the possible acquirers.

Freetrade raised series-B funding at the same time as Nextmarkets and took a £30 million convertible loan from its existing investors early last year to avoid raising capital at a lower valuation than before.

It has since cut staff and raised fees to further extend its cash runway.

More strained funding and growth dynamics are also evident among the neobanks that have symbolized the sector’s growth in recent years. Revolut, Europe’s biggest neobank by customer numbers, could find it harder to get a coveted UK banking licence after its auditor questioned the reliability of its revenue numbers this year.

Germany’s financial regulator BaFin also capped German neobank N26’s customer acquisitions at well below its previous growth rate in late 2021, reflecting a tougher stance by the regulator towards fintech in the wake of the 2020 collapse of national payments company Wirecard.

In February this year, BaFin imposed a new requirement for national banking-as-a-service (BaaS) company Solarisbank to seek permission to onboard new customers.

In the UK, the Financial Conduct Authority wrote to payments firms under its supervision on March 16 urging them to keep controls tight, betraying a similar new nervousness towards fintech. It was sent days after the entry into a pre-pack insolvency of Railsr, formerly Railsbank, a BaaS firm that bought Wirecard’s UK assets in 2020.

Rate pain

None of Europe’s biggest neobanks – Monzo, N26 and Revolut – have tapped new funding rounds since global interest rates started rising last year. As they focus more on profitability and less on growth at all costs, it brings relief to the banking incumbents.

These incumbents, in addition, could take over fintech players at lower – perhaps even distressed – prices. Interest rates and share valuations have already moved more in favour of established firms and large deposit-gathering franchises.

The venture funding squeeze could also allow bigger fintech companies to consolidate. Firms that haven’t got millions of customers may find it much harder to get there on their own now. Selling to a rival could be an alternative to winding down or bankruptcy.

“The question will come about those businesses, which didn’t reach scale, which are still burning through a fair bit of capital and where scale is critical to profitability,” says Tim Levene, chief executive of Augmentum, a listed UK fintech investor with stakes in iwoca, Monese, Tide and Zopa. “That’s where you’ll see consolidation and M&A.”

UK neobanks Zopa, Tide, Monzo and Revolut are all more likely than before to look at acquisitions that could add to their tech or product set, according to Levene.

Zopa acquired the point-of-sale technology and lending platform of buy-now-pay-later (BNPL) firm DivideBuy this February in a cash deal, shortly after raising £75 million from existing investors.

“As capital is harder to get, a lot of firms will be thinking about their strategic options,” Jaidev Janardana, Zopa’s chief executive, told Euromoney on the day the bank announced the capital raising.

Even for fintech players in a position to acquire, valuations have fallen – although it is hard to gauge by how much, given so many of them in Europe are still unlisted.

There is a secondary market in privately held fintech firms, albeit a rather opaque one, through brokers such as Setter Capital in Toronto.

Revolut is widely known to trade way below the $33 billion it achieved at its 2021 funding round, with Setter marketing its shares at a 50% discount, according to one recent report. German insurer Allianz was reported in April to have mandated advisers to sell its 5% stake in N26 at less than half of its $9 billion 2021 valuation.

Even these discounts may underestimate the real dip in investor sentiment.

When Swedish BNPL company Klarna raised money last summer, it said its 85% valuation drop compared with its 2021 round was in line with the sector – and there was evidence to support that from listed fintech firms in the US.

In early 2023, US stocks such as Robinhood, payments company Block and neobanks Dave and Sofi, were all yet to recover from similar falls from peaks in 2021 and early 2022.

On the side lines

Any downturn in the public market for tech firms, including fintech, has a direct impact on private fundraising as many investors ultimately hope to exit via an IPO.

The US venture capital industry had a record $289 billion of dry powder at the end of last year, according to PitchBook. But fundraising fell from $74 billion in the first quarter of 2022 to just $12 billion in the first quarter of this year. European fundraising has also seen a 45% fall to €3.4 billion and an 80% fall in exit volumes to €1.6 billion.

Many investors are sitting on the sidelines, perhaps waiting for a more marked rebound in publicly listed fintech stocks as a signal that a recovery is underway.

US payments processor Stripe raised $6.5 billion in March, albeit at almost half the valuation it achieved two years ago. But globally this was an outlier.

In total, there were only €3 billion of venture capital deals in European fintech in the first quarter of this year, according to Pitchbook, a fall of more than 60% compared with the first quarter of 2022.

As the deal drought continues, industry insiders warn more fintech firms risk running out of money in 2023 – perhaps including some of the larger consumer-facing firms.

“We all raised tons of capital in 2022,” says Renaud Laplanche, a French fintech veteran who founded Lending Club in 2006 and is now chief executive and founder of Upgrade, a US online consumer lender. “If you’ve been burning cash, you had enough for the past 18 months. Things will be different this year if rates remain high, valuations stay low and the economy slows down.”

Thankfully, the fintech sector appears to have moved on from the initial panic that followed the collapse of Silicon Valley Bank (SVB), although there are still worries in Europe about whether the old SVB UK will remain as an important early supporter of startups, after its government-brokered takeover by HSBC.

The SVB collapse has made a difficult capital raising environment even more difficult

Ruth Foxe Blader, Anthemis

More optimistic voices argue that it shouldn’t negatively impact the venture capital industry that its house bank triggered a wider banking industry crisis this spring, because losses on the treasury book were the ultimate trigger for SVB’s collapse.

Yet it was the sharp slowdown in VC investment that was a trigger for SVB’s troubles, as it led to slower deposit inflows, as well as greater fear for losses on its loans.

Clearly, SVB’s collapse has further undermined confidence in venture-led firms in a higher-rate environment; and in Europe fintech could be the sector hardest hit. London is a global hub for fintech. Fintech would naturally have been more prominent at SVB in the UK than in the US.

Slowing velocity

“The SVB collapse has made a difficult capital raising environment even more difficult,” says Ruth Foxe Blader, partner at fintech investor Anthemis. “Prices of venture debt ticked up immediately. It contributed to the slowing velocity of deals.”

Today’s lower valuations are most problematic for later-stage firms, which had funding rounds in 2021 and early 2022, rather than those raising for the first time. Anti-dilution clauses and founders’ pride can put firms off from raising capital in a down round.

In addition to a greater reliance on venture debt, existing investors have had to play a much bigger role in fundraising over the past year. These deals are often structured as an extension of the previous funding round or as a precursor to the next one – and much less widely advertised – says Faÿçal Hafied, chief executive of Klymb, a French venture debt adviser.

GoHenry deal signals new wave of consolidation

GoHenry’s takeover by Acorns is one of the most prominent fintech-to-fintech M&A deals agreed since the rise in global interest rates early last year. Announced in early April, it came just a month after the collapse of Silicon Valley Bank (SVB) triggered a further dive in fintech and venture capital investor sentiment.

But according to GoHenry founder Louise Hill, the two sides had been talking to each other since 2021. In other words, it wasn’t a fire sale but an example of a possible new wave of cross-border fintech consolidation.

Acorns, a micro-investment and savings provider, talked to about 100 potential partners as it looked to expand outside the US. GoHenry, a UK spending card and money-education firm for under-18s, seemed like a good fit.

GoHenry had acquired the teen banking company PixPay, which operates in continental Europe, last July. It also launched in the US in 2018. The acquisition would, therefore, have happened without the rates and VC shakeout, according to Hill.

“It was not influenced by that at all,” she says. “It was about the opportunity for each of us to open up our various countries.”

GoHenry raised $55 million in a series-B round last October, led by Italian payments firm Nexi, shortly after notching up two million members.

Aside from the Pixpay deal, it was eyeing a move towards adults – its users’ parents said their children were learning things they didn’t know, according to Hill. Acorns will help with that and with the US expansion of its under-18s offering.

Lost in layers

Could a bank have bought GoHenry?

NatWest acquired rival RoosterMoney in 2021. Hill says her firm had conversations with most of the UK high-street banks and some continental European banks.

“The conversations quickly got lost in layers of decision-making,” she says.

After GoHenry’s 2012 launch, Hill feared UK banks would take notice and offer a similar service for free as a way to pick up customers who might remain into their adulthood, effectively wiping out her firm.

Conversations with banks and others have more recently led her to believe that is unlikely.

“Their sweet spot is people going to university,” she says.

“Companies have tended to do internal rounds, while before existing investors would shy away from supporting their existing portfolio because there was no need for it,” he says.

Convertible notes – credit lines that convert to equity at a preferred ratio at the next funding round – are common in internal rounds. Another instrument that insiders say has been popular among firms tapping existing investors is the simple agreement for future equity (Safe), which brings in new equity through offering a discount to the next funding round.

Avoiding negotiations on valuation during the downturn is a key benefit of convertible notes and Safes.

Augmentum’s Levene says these instruments have offered a useful bridge to the next funding round if the firm’s longer-term prospects remain good and there is a good chance to “grow into” a high valuation achieved at the market peak.

“We recognize that the market is more cautious,” he says. “As such we’ve said to our portfolio companies: ‘If you’ve got 18 months of runway or 12 months, extend into 24 or 36 months to give yourself more time.'”

In other cases, however, venture capitalists see such funding as merely delaying more painful measures.

“A lot of fintech businesses were built on an infinite supply of capital,” says Aman Behzad at fintech-focused corporate finance advisory firm Royal Park Partners in London. “Venture capital businesses have found it too embarrassing for them to go to the wall. There’s always been a convertible note to allow them to survive.

“That stopped in January and February this year. Now they’re saying you need to make it work, either through a funding round at an unattractive valuation or by focusing on the cost base or by exploring a potential trade sale.

“They’re saying: ‘You decide; we’ve done what we can for you.’ They need to see movement.”

The more structured, internal fundraising over the past year has certainly been a much less public affair than before, says Manuel Silva Martinez, general partner at Mouro Capital, Banco Santander’s fintech venture capital spinoff. “In 2021 and early 2022, a company raising capital would rush to the tech media and brag about their new investors. Now deals tend to be more tailored and behind the scenes.”

Governance inducements have become more common for new investors joining fundraising exercises alongside existing investors, he adds. Pay-to-play provisions, for example, can convert existing shareholders from preferred to common stock if they don’t put in new money on a pro-rata basis. Milestone-based disbursements and ratchet provisions – which can retroactively lower the price an investor made if certain targets aren’t met – are also in fashion again.

“It was very common for structures to have a price-adjustment ratchet five years ago,” says Silva. “It disappeared, but it’s coming back.”

Bitter taste

Some fintech specialists, including Silva, fear that some less focused or experienced investors who deployed cash in European fintech during the hype won’t be as willing or able to return now.

“A lot of investors who created the valuation inflation have retrenched from the asset class, and there’s some acrimony among the more traditional venture capital community about what they have left behind,” says Silva.

A lot of fintech companies have just been adding new gadgets to traditional products. After a while, the novelty wears off

Ruth Wandhöfer, Gauss Ventures

Tech-orientated hedge funds Tiger Global and Coatue, together with SoftBank’s Vision Fund 2, played a prominent role in funding European fintech at the end of the boom.

SoftBank and Tiger were the two new investors in Revolut that led the neobank’s $800 million series-E round in 2021, increasing its valuation from $5.5 billion in its 2020 round to $33 billion.

Coatue led N26’s $900 million series-E round later that year, alongside Third Point Ventures, taking its valuation from €3.5 billion to $9 billion.

As UK fintech aroused global interest in the late 2010s, there was also wave of investment by family offices, particularly from Asia, taking stakes directly rather than via funds, says Devin Kohli, co-head of Outward VC, which has invested in firms including Monese and PrimaryBid.

“There will be a reduction in the supply of capital,” Kohli warns. “First-time funds may struggle as the market they went into was frothy. Some of them may not be able to raise second or third funds.”

For fintech firms predicated on raising cheap VC funding for loss-making growth, tighter funding is a strategic issue that requires a fundamental change of approach.

“Trying to turn the ship around so it can make money is really hard, especially as these businesses have been run on a culture that didn’t work like that,” says Adam French, partner at Houghton Street Ventures and co-founder of neobroker Scalable Capital.

There’s a realization by the large global financial services incumbents that they cannot fully transform from within and as such they will become increasingly acquisitive

Tim Levene, Augmentum

In some cases, like in the BNPL space, the job is even harder, as rivals including incumbent banks can easily replicate the technology, Kohli adds.

Today’s more rational valuations are not necessarily a bad thing, argues Ruth Wandhöfer, partner at Gauss Ventures and visiting professor at the London Institute of Banking and Finance.

Wandhöfer thinks the funding crunch is accelerating a shift to more professional managers, who are more aware of the duty of care that comes with running large financial businesses.

“A lot of fintech companies have just been adding new gadgets to traditional products,” she says. “After a while, the novelty wears off. But we need to make sure the good fintechs with truly innovative projects survive. There’s more need for a consortium approach and a bigger role for institutional money such as the corporate venture capital arms of the banks.”

Wandhöfer compares the 2000s with the 2010s.

“We’ve gone from a banking craze to a fintech craze,” she says. “Now we’re moving to something more in the middle.”

B2B appetite

Mouro’s Silva agrees that the consortium approach Wandhöfer describes is coming more to the fore, with structures allowing banks and others to club together to capitalize a common provider, as in some blockchain projects.

However, this is less suited to business-to-consumer (B2C) fintech, which is the part of the market that has seen the sharpest turn in investor sentiment.

Big banks have not passed on the benefit of higher rates. That’s helped drive deposit growth for us

Jaidev Janardana, Zopa

Business-to-business (B2B) fintech still enjoys a relatively healthy amount of appetite from traditional VC, despite the troubles at Railsbank, now called Railsr. It is also better able to turn to venture debt as an alternative to the now pricier levels of equity funding, because B2B firms are more likely to offer venture debt lenders the comfort of long-term contracts and predictable renewals.

“When there are dozens of direct-to-consumer lending platforms and there’s not enough differentiation between them, we’d rather lend to their financial infrastructure providers, the rails that they all use,” says Ross Ahlgren, co-founding partner at Kreos Capital, a lender to venture-backed businesses in Europe.

And if bank-backed corporate VC is also becoming more important as a funding source, this capital will also tend more towards B2B, because of fear that banks would otherwise be funding rivals.

Corporate VC is, in any case, a small part of the overall VC market. Almost 80% of European VC deals in 2022 had no corporate VC involvement, according to PitchBook.

These funds will not normally invest on their own, not least because they like third-party validation for the business case and valuation.

Bigger exits

Banks could be important as strategic acquirers of later-stage fintech companies of course. In 2021, JPMorgan took over UK robo-adviser Nutmeg for a rumoured $1 billion. More recently, BNP Paribas acquired currency-risk fintech Kantox and NatWest acquired workplace savings and pensions fintech Cushon for £144 million in February.

After years of tightening regulation and restructuring, and thanks to rising profitability, long-suffering banks – even in Europe – are richer in capital than they have been for years.

“There’s a realization by the large global financial services incumbents that they cannot fully transform from within and as such they will become increasingly acquisitive,” says Levene at Augmentum, previously an investor in Cushon. “Look at the top six UK and US banks, and you’ve got about $2 trillion of combined cash. With net interest margins where they are, that cash pile is going to continue to grow.”

How SVB’s collapse triggered a rollercoaster weekend at Upgrade

Silicon Valley Bank (SVB) was the obvious choice as banker for San Francisco-based consumer loans company Upgrade when Renaud Laplanche founded the firm in 2017.

Laplanche recalls “a good symbiosis” between venture capital funds, SVB and startups.

“SVB was an important cog of the Silicon Valley ecosystem. It was the de facto bank for tech startups,” he says.

It is a similar story in Europe. When Adam French co-founded neobroker Scalable Capital in 2014, the firm couldn’t open an account with any other bank. SVB’s familiarity with tech industry dynamics helped it look beyond Scalable’s lack of profitability.

“It’s not easy for tech businesses to open a bank account in the UK,” French tells Euromoney.

Upgrade stayed with SVB as it grew, even after it reached a $6 billion valuation in a 2021 funding round. Upgrade didn’t just deposit its own money at SVB, it also used the bank to collect its customer’s debt repayments, opening a separate SVB account for each of the roughly 250 small banks and credit unions across the US that buy Upgrade’s loans.

Pulling out

On Tuesday, March 7, as concerns about SVB grew, Upgrade started pulling out its own money and that of its clients. Most of that money was withdrawn by the Thursday. It also suspended its clients’ debt repayments: spending the Friday, Saturday and Sunday working to replicate the debt servicing structure by opening accounts at Citi.

By the time SVB went into receivership on Friday morning, Upgrade had sent wire requests for all the remaining funds, although that became a moot point when the government announced on Sunday that SVB’s deposits would be guaranteed. By Monday, the money was available, even if SVB’s website kept crashing, Laplanche recalls.

“We only lost one day of servicing,” he says. “Payments were made on Monday instead of Friday. But it was a ton of work.”

Nevertheless, most people think banks will not have enough appetite to take over fintech firms worth billions of dollars, like Revolut, partly because the valuation of bank shares still compares so poorly with fintech rivals.

Leaving aside the normal image of banks as slow and bureaucratic acquirers, listed companies may also be at a potential disadvantage as acquirers versus unlisted fintech players, according to Behzad at Royal Park Partners. That is because the latter can strike all-share deals that are less likely to involve big mark downs by the target’s VC owners, he says.

“There will be quite a lot of paper-to-paper deals involving unlisted companies,” he predicts. “Big unlisted fintech players do have an acquisition currency – and they’re using it. They have made offers based on their equity. You can say: ‘We will issue shares at a valuation of $22 billion rather than $30 billion.’ Even if it’s at half the valuation at the last funding round, it still doesn’t translate into a fair market valuation of that business.”

In the longer term, many see a reduction in the competitors within each fintech sub-sector, particularly on the B2C side, so that the number of top contenders per category goes from four or five to as few as one or two.

This could involve more cross-border M&A activity, particularly for European firms, given the small scale of Europe’s domestic markets.

“Each country in Europe has its king of a particular category,” says Silva at Mouro. “Venture capital firms will promote consolidation within Europe so that their eventual exit can be bigger.”

More transatlantic M&A is also possible as part of this. One recent example is the all-stock acquisition of GoHenry, a pre-paid card and money-management app for children. It is one of the biggest ever private-to-private consumer fintech M&A deals, according to FT Partners, which advised acquirer Acorns, a US-based micro-investing and savings provider.

“The first thing they will do is roll out GoHenry to Acorns customers in the US, and we want to bring Acorns to the UK and Europe,” says GoHenry co-founder Louise Hill.

A few sub-sectors are still sufficiently hyped to attract enough funding to support a larger number of competitors. Open-banking firms appear to be gaining a bigger share of interest in the fintech market than before, while last year’s launch of ChatGPT has led to new excitement about artificial intelligence.

“We’re about to enter a new bubble, the AI bubble,” says Brett King, author and co-founder of US banking platform Moven. “We’re going into a new phase in which fintechs require very low capital injections, based on artificial intelligence. Before, you would have needed a team of 20 or 30 people to launch a financial services startup. You can do that now with maybe four or five people and a bunch of AI tech.”

There are also exceptions in some of the less favoured sub-sectors such as neobanks. Zopa’s latest capital raising, for example, is thought to have been at a slightly higher valuation than its 2021 round, despite SoftBank’s decision not to return for the 2023 round. Like other former peer-to-peer lenders such as Funding Circle, Zopa has moved to a more traditional lending business in recent years – boosted by its 2020 acquisition of a full UK banking licence.

Fintech is as intrinsic to the future of UK banking as the Bank of England

Mark Mullen, Atom Bank

“As things have been harder, consumers have been more mindful about how they manage their spending and who they borrow from, not just going to their current account provider,” says chief executive Janardana. “Big banks have not passed on the benefit of higher rates. That’s helped drive deposit growth for us.”

Similarly, BBVA-backed Atom Bank – which like Zopa has a full UK banking licence – managed to secure an additional £30 million in equity funding late last year.

Speaking to Euromoney in mid April, Atom chief executive Mark Mullen says he is in discussions for another capital raising to meet the regulatory requirements that come with growing its balance sheet, after it made its a first annual profit in 2022.

“There are unrealistic expectations about the impact of fintech on banking,” says Mullen. “Compared to the dominant banks, we’ve been alive for a blink.”

Still, he thinks the incumbent banks’ lower customer satisfaction ratings, higher deposit betas and cost-efficiency ratios continue to make them vulnerable.

“Fintech is as intrinsic to the future of UK banking as the Bank of England,” he says.

In general, however, B2C fintechs such as neobanks remain much less favoured by VC than before the interest-rate cycle turned.

Rates upside

When there are questions about the big neobanks, some second- and third-tier consumer fintech players will be even more challenged if they’re reliant on fresh funding.

In the UK auditors have flagged uncertainty over Pockit’s ability to continue as a going concern, for example, while Dozens closed its banking app last summer.

“In the search for yield, consumer fintech players seemed to be able to grow much faster than B2B peers,” says Behzad. “There was an expectation of an upward spiral of customer acquisition and monetization. If your cost of acquisition is very low and your cost of capital is low, you can take a long-term approach to making your money back.

“The payback periods from customer acquisition could be two, three or four years. Now the concept of time value of money has returned.”

We see lending businesses getting working capital or loan-book financing quite cheaply, while others are having to pay 500 or 600 basis points more than a year ago

Johan Kampe, Claret Capital Partners

One important upside of higher rates for spending and current account providers is that they are now better able to earn interest income from the money left on their accounts – even if it is shared with a treasury-management partner – rather than relying on card interchange fees.

But the tighter funding environment means some credit-focused fintech firms will struggle to offer attractive prices, especially if they lack access to retail deposit funding.

Wholesale funding for fintech lenders has become prohibitively expensive – rising well into double digits in terms of all-in percentage cost, according to one credit-focused founder in London – because of higher base rates and higher margins to compensate for higher perceived risk.

“We see lending businesses getting working capital or loan-book financing quite cheaply, while others are having to pay 500 or 600 basis points more than a year ago,” says Johan Kampe, managing partner at Claret Capital Partners, a tech-focused growth-capital provider.

In the US, even retail deposit funding has become much scarcer – perhaps indicating what could follow in Europe.

Upgrade’s Laplanche says his firm launched a savings product in October that it uses to sweep deposit funding onto its partner banks and credit unions, encouraging the latter to continue buying its loans at affordable prices, while others rely more on sources such as securitization and hedge funds.

This higher cost for funds for on-lending, according to Laplanche, is one reason why fintech has suffered more from higher rates than tech generally.

“All high-beta stocks went down, but there’s compounding effect of higher rates on fintech,” he says.

Bank investors lose their stigma

As many fintech investors flee the sector, will incumbent banks prove to be more committed, picking up businesses, technology, staff and customers on the cheap?

HSBC’s swoop on Silicon Valley Bank’s UK arm suggests so. But there is also an extent to which banks themselves got caught up in the hype around fintech over the past decade.

“It always takes a lot of courage to act countercyclically and make a move when everyone else is being more cautious,” says Alex Manson, head of SC Ventures, part of Standard Chartered.

He caveats that the venture-capital funding crunch won’t detract from his firm’s ambitions.

Open and close

ING epitomized the excitement about fintech at incumbent banks until former chief executive Ralph Hamers left to run UBS in 2020. His successor at ING, Steven van Rijswijk, has scrapped much of Hamers’ flagship IT integration programme, sold its digital retail banks in France and elsewhere, and closed Yolt, a UK open-banking platform.

Recently, ING has also closed its innovation labs in London and Singapore, leaving only Amsterdam and Brussels.

“We still see a lot of opportunity to connect and work together with fintechs,” insists Jeroen Plag, ING’s head of corporate strategy.

Tech enthusiast Hamers – once dubbed the ‘Steve Jobs of banking’ – has lately seen his star fade at UBS. Chairman Colm Kelleher replaced Hamers with Sergio Ermotti in March to oversee its Credit Suisse integration. Last year, UBS backed down on a plan under Hamers to acquire US robo-adviser Wealthfront, not long after Kelleher’s arrival.

Clearly, the falling valuations of fintech rivals should be an opportunity for banks.

“Smart banks and insurance companies will recognize that their dollars will go further than in the hype environment,” says Ruth Foxe Blader, partner at Anthemis, a fintech investor partnering with BNP Paribas, UBS, BBVA and other established financial institutions.

Layoffs in the tech sector also give older firms more scope to attract tech talent, she adds.

Bank-backed corporate VC investors are less motivated by bets on the future value of a particular company than by strategic concerns about the importance of a particular technology to their business.

Those strategic concerns make them less affected by dips in market sentiment, argues Manuel Silva Martinez, general partner at Banco Santander’s fintech VC spin-off, Mouro Capital. Silva adds that banks may also invest in fintech, sometimes as part of a consortium, to ensure a core vendor is on a stable financial footing or to prevent it being taken over by a rival.

“Implementing a startup’s capabilities inside a bank can take between three and five years at scale,” says Silva. “Banks worry about what happens if they put a team to work on a fintech project, invest time and money, and then the company runs out of funds and files for bankruptcy.”

Meanwhile, banks say there is more demand for their money nowadays and less stigma around partnering with them than before.

Barclays, like ING, has pivoted away from fintech investments it deems less relevant to the bank. Nonetheless, it still seeks to help some fintech firms with commercialization and access to investment through its Rise Start-Up Academy and Fintech Venture Studio.

“These programmes are no longer seen as ‘nice to have’ or a distraction but as a game-changer for founders,” says Sonal Lakhani, who heads the programmes globally for Barclays. “There’s more appetite from founders to work with banks and collaborate to find mutual commercial opportunities. That can lead to investment but also sustainable revenue lines for the fintech and corporate, which is very important in today’s environment.”

Paul Morgenthaler, managing partner at CommerzVentures, says its link to Commerzbank has also been appreciated by a broader group recently.

“Access to a banking group helps us pinpoint the risks and unknowns of a particular product or proposition, help with due diligence, and help with access to key decision-makers for partnerships,” he says. “That’s always been a pull for experienced teams. Now we are seeing an awareness of the importance of these things across the board.”