Tuesday, November 17, 2020
International fintech funding slowed in 2020.1 Whereas this may be primarily as a result of COVID-19 pandemic, there have been indicators even earlier than the pandemic that enterprise capital financing was tightening for early-stage fintech firms.2 On the identical time, banks’ curiosity in fintech continues to develop. If these developments proceed, banks of all sizes shall be poised to grow to be vital suppliers of development capital to the fintech trade.
Giant banks have invested in fintech firms for a very long time. As we speak, most of the largest banks have devoted fintech funding packages. Adjustments this yr to the Volcker Rule permitting banking entities to spend money on and sponsor enterprise capital funds are anticipated to extend the quantity of fintech funding by giant banks.3
Extra lately, regional and neighborhood banks have joined the fray. These smaller banks have come to comprehend that know-how is essential to their long-term success. Many have “partnered” not directly with a fintech firm, normally to boost the bank’s merchandise, providers, or operations, however generally to facilitate these of the fintech firm. There may be increasingly more symbiosis between the fintech and banking industries day-after-day.
For a fintech firm that wants development capital, a bank may be a pure match. Whereas banks are usually not within the enterprise of creating speculative investments, they’ll and do make investments in bank know-how. A bank that has partnered with a fintech firm and believes in its know-how may want to purchase an possession stake that can enable the bank to reap the monetary rewards of the fintech firm’s success. If the bank has come to depend on the fintech firm, the bank may additionally resolve to take a position as a way to preserve the fintech firm financially sturdy and capable of carry out its relationship with the bank.
Acquiring an funding from a bank can considerably speed up a fintech firm’s development. Startup fintech firms typically try to determine a partnership with a bank as a way to display proof of idea to potential traders. Having not solely a industrial relationship but in addition an funding from a bank companion can function highly effective validation that the fintech firm is “investment ready.”
Early-stage fintech firms might be nicely served to “incubate” inside or alongside a bank. This could present precious alternatives to check new know-how on the bank’s techniques and prospects, with the help of the bank’s data know-how assets. It additionally permits a fintech firm to be taught firsthand about bank tradition, threat administration, and regulatory expectations. The FDIC’s current request for remark about whether or not to implement a certification program for fintech firms in search of to companion with banks underscores the value of a fintech firm changing into proficient in these areas early in its lifecycle.4
Banks usually have the authorized authority to make fairness investments in fintech firms, and joint ventures with fintech firms, if they’re engaged in actions that will be permissible for the bank to interact in itself. Equally, bank holding firms are permitted to make controlling investments in firms engaged in banking and “closely related” actions, in addition to non-controlling investments in firms engaged in different actions. Adjustments earlier this yr to the Federal Reserve’s rules make clear the circumstances below which a bank holding firm is deemed to “control” one other firm.5
The present regulatory atmosphere is supportive of banks collaborating with fintech firms. The OCC, the Federal Reserve, and the FDIC have established places of work or teams charged with fostering innovation and know-how in banking. The Comptroller of the Foreign money and the Chairman of the FDIC have every publicly expressed sturdy help for fintech. Earlier this yr, the FDIC printed a information designed to assist fintech firms companion with banks.6 From a regulatory perspective, it’s pretty much as good a time as ever for banks to contemplate investing in fintech.
The COVID-19 pandemic disrupted many fintech firms’ companies and financing plans. As the true economic system continues to undergo and early-stage financing turns into tougher to return by, it’s as opportune a time as ever for fintech firms to hunt funding from banks.
For additional studying about structuring bank and fintech collaborations, please see our article linked right here.
1 See Penny Crossman, Funding for Fintech Startups: Down however Not Out, American Banker, 20 April 2020 (reporting that globally, enterprise capital funding in fintech firms throughout the first quarter of 2020 was down 45 % from the fourth quarter of 2019 and down 25 % from the primary quarter of 2019).
2 See, e.g., PitchBook – NVCA Enterprise Monitor, 3Q 2019 (reporting that fintechs are attracting more and more later-stage enterprise capital financing).
3 See Prohibitions and Restrictions on Proprietary Buying and selling and Sure Pursuits in, and Relationships with, Hedge Funds and Non-public Fairness Funds, 85 Fed. Reg. 46,422 (31 July 2020).
4 See Request for Info on Commonplace Setting and Voluntary Certification for Models and Third-Occasion Suppliers of Expertise and Different Companies, 85 Fed. Reg. 44,890 (24 July 2020).
5 See Management and Divestiture Proceedings, 85 Fed. Reg. 12,398 (2 March 2020).
6 See FDIC, Conducting Enterprise with Banks: A Information for Fintechs and Third Events (February 2020).