Corporate venture capital: the big new attraction for fintech start-ups?

There has never been a richer, more varied environment for FinTech entrepreneurs to access funding and with the latest research showing corporate VC accounted for a quarter of all deals across the sector globally last year, conventional institutional venture capitalists are clearly up against a new kid on their block.

According to the research by CB Insights, increasingly active corporate VC units – mainly from the financial, telecoms and tech sectors – contributed to funding for FinTech in 2015 ballooning by more than 100% to $13.8bn across 653 deals, up from $6.7bn and 586 deals in 2014.

Among European banks Spain’s Santander is a leading CVC player with its $100m venture capital fund Santander InnoVentures. Recent investments include settlement expert Ripple and distributed ledger maker Digital Asset. Mariano Belinky, Managing Partner of the fund, says the two deals highlight Santander’s commitment to blockchain technology, a space it believes holds “massive potential”, especially for international payments and settlement.

While FinTech startups might seem an obvious threat for banks many believe tech giants like Google, Apple, Facebook and Amazon present a much bigger danger, boasting as they do – huge, loyal customer bases and platforms through which they can engage customers and test and deliver new banking services. Belinky reckons if any tech giant were to succeed it would be one of these ‘big four’: “Consumers don’t want separate providers using different apps for each of their individual financial needs. Companies like Apple are extremely effective at fulfilling people’s needs on one platform and they’ll be more of a threat to incumbent banks than any other ‘challengers’.”

Much is expected from the rise of Internet of Things (IoT) and that in turn has led to exciting ideas as to how financial services might interface with IoT to offer “Banking of Things” (BoT), whereby data captured by devices is used, for instance, to provide customers with real-time information about their personal finances and customised products and solutions.

Belinky is enthusiastic about BoT, especially its cost-cutting potential for both banking and commerce: “IoT technology will provide banks with real-time access to trade data, eliminating the need for manual checks and paper documentation such as bills of lading, and allow near-instant verification of smart contracts. International trade is expected to grow by 8% per annum until 2020, with associated trade finance revenues growing to $70bn. That represents a massive opportunity for banks to use IoT to streamline trade finance processes and cut operating costs. Improved data and analysis of exposures will also reduce losses and, by increasing the scope of potential clients, increase revenues.”

Across the pond Citibank has been one of the most active banking investors in FinTech over the past five years. In considering the potential threat to banks posed by tech giants, Ramneek Gupta, MD of Citi Ventures, concedes they have many enviable strengths. But he cannot see any of these companies mounting a serious threat in their current form as “they lack a whole range of other capabilities – such as underwriting, liquidity management, risk management, regulatory compliance – that are necessary before they can succeed as a global bank.”

He has reservations about BoT too, pointing out the need for new capabilities in areas like user andmachine authentication, security, low cost micro payments infrastructure and banking services that can be accessed by ‘things’ via APIs before that particular vision can be realised.

Samsung keen on VR for banking
Among the tech giants, Samsung has one of the most active CVC operations, Samsung Ventures. Its forays into FinTech are focused on areas such as IoT and human-computer interfaces. Albert Creixell, Head of Samsung’s financial services in Europe, says the company’s most important FinTech acquisition so far is LoopPay, a platform that enables Samsung Galaxy devices to perform mobile payments at old point-of-sales terminals that only accept credit cards using magnetic technology.

Not surprisingly given that physical technology is core to its business, Samsung is taking IoT very seriously, positioning itself to take advantage of the developing space. It views IoT as four interconnected pillars: people; data; things (such as customer smartphones and employee PCs); and a process that connects these three elements. The process pillar, however, is sorely lacking at the moment: “It is essential to be able to deliver the right information to the right person or machine at the right time so the process pillar is vital,” says Creixell. “Companies which get this fourth element right in banking will succeed with BoT.”

He is convinced tech companies can bring their research, know-how and expertise in user experience to bear on efforts to re-engineer banking: “It’s a service-driven industry. We believe technology companies that are able to build world-class service experiences will be well positioned to succeed and disrupt banking.”

Creixell concedes many existing tech giants may not be willing to take on the challenge of becoming regulated banks as this may jeopardize other parts of their business but he points to an interesting, trend breaking development in South Korea as encouraging for techs: “The regulator there has issued a different set of regulations for digital-only banks, making it easier and more enticing for digital groups to become banks. Companies like Kakao, South Korea’s leading messaging group, are already committing large amounts of capital to banking initiatives.”

Looking ahead Creixell is convinced that over the near term mobile will have a massive impact on the way consumers pay and track their spending and engage with services. Further out, he sees virtual reality bringing about another major shift in the retail banking experience: “As VR matures and reaches a critical mass it will be more normal to see younger customers using it to deal with complex financial events that in the past involved visiting a branch. As millennials move away from physical branches there will be opportunities to bring new engagement experiences through VR.”

Corporate VCs “unfair advantage” is their close proximity to end customers and significant existing distribution channels and consequently institutional VCs can, it seems, only look on as corporates increasingly encroach upon their space. And with no sign of the CVC juggernaut letting up, FinTech entrepreneurs themselves can look forward to an even greater range of choice as they try and decide which of them is their best ally.

Eddie Harding can be contacted @ eddie@iconcorpfin.co.uk
ICON’s FinTech headline deals include: The sale of Parmenion to Aberdeen Asset Management, the recap of Merit Software from Synova Capital & the funding of SynerScope from Mangrove Capital.