What is stopping banks from investing in FinTechs?

The FinTech sector is booming. Last year, FinTech investment increased at more than three times the rate of overall venture capital investment, with particularly high growth rates in the United Kingdom.

As already seen in the payments sector, FinTechs are more likely to be backed by a technology innovator rather than a traditional financial institution – especially when it comes to innovation in mobile payments.

Banks may be unwilling to finance FinTechs for a number of reasons. The first and most obvious is that they see FinTechs as disruptors; companies that are trying to get a slice of banks’ ‘bread and butter’ services and products. Banks may also be wary of investing in FinTechs due to the risk of backing businesses from a background that they may know little about. These high risk investments are not perceived as being worthwhile when banks could build a department dedicated to improving the way in which they perform day to day business on their own.

But that could be set to change.  It seems that a number of banks are now venturing into FinTech.  However, are they making this move solely to protect their own interests and profitability?  For example, consider the huge direct investment funds being made available to FinTechs by HSBC and Santander. And Barclays has set up its Accelerator Programme to show support for FinTech startups.  But could these initiatives simply be a clever way of the banks entering into commercial arrangements with the participating companies after the programme has finished and before they have the chance to speak with other potential investors.

It seems that the ‘if you can’t beat them, join them’ mentality is becoming commonplace in the financial sector as banks struggle to innovate at the same pace as the more agile FinTechs.

Collaboration appears to be the best solution for both banks and FinTechs – banks need to move quickly to develop new services, or improve on existing ones, and FinTechs not only require financial backing but also need to meet regulatory requirements to be able to provide truly disruptive solutions in the banking sector.

Despite the benefits of working with major banks, many FinTechs do not want to be burdened with partnering with a single financial institution. Restrictions that come with a large, regulated organisation that must answer to shareholders are not typically a good breeding ground for innovation.

The best possible outcome for both parties is to be backed by a financial institution that gives FinTechs the tools that they need to conduct business in a secure and regulated manner, without encroaching on their business models. By creating an eco-system that acts as an incubator for FinTechs while letting them focus on their core business, everyone can benefit.

Banks have the opportunity to extend their value chain by offering customers better ways of conducting their business through new technologies provided by the FinTechs, leaving them free to improve the running of financial services less impacted by disruptors.

Incumbent banks are beginning to realise that working with FinTechs rather than against them will work in their best interests in the long term, but only time will tell as to what models they will adopt to bring these innovators into their fold.

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