Established lenders have seen the rise of fintech challengers over the past several years begin to threaten many of the higher margin products and services they rely on to generate a profit. From foreign currency transfers being undercut by technology-based and online only rising financial services starts such as TransferWise and Monzo to the P2P lenders such as newly-listed Funding Circle taking a chunk of small business loans market, high street banks are seeing their market share of profitable services eroded.
Traditional banks have always ‘supported’ fintech challengers when it comes to their public utterances and involvement in and sponsorship of investment and accelerator programs for promising new companies. However, it is not difficult to argue that this has represented more of an exercise in keeping up to date with developments and dipping a toe in the water than representative of any major financial or operational commitment.
That now looks to be changing, probably in large part due to the fact that some of the most promising fintechs have now attracted a level of investment capital and growth to be taken seriously as a threat by traditional banks. Banks are now making more serious investments in fledgling fintechs. This can be considered as recognition that any existential threat these companies might pose to the traditional sector can be mitigated by banks holding a significant stake in them. The second conclusion is that banks see enough potential in these companies to consider putting millions into them a potentially profitable investment.
The most recent example of traditional banks investing in fintech is £26 million investment raise of fintech MarketInvoice, which has been jointly led by Barclays and Santander, through the Spanish bank’s InnoVentures venture capital unit. MarketInvoice offers invoice-based finance, lending to SMEs against their outstanding invoices. This helps smaller companies smooth out cash flow, with irregular or late payments often leaving them in a tricky situation while they grow. The fintech also offers unsecured loans, with its portfolio of those now totalling more than £2 billion.
It is believed that MarketInvoice’s latest raise values the company at around £85 million, though as a private company this is only an estimation based on Companies House records. Barclays has been trialling offering MarketInvoice to its own business customer base over the past several months. The trial appears to have been successful with Barclays increasing the minority stake investment in the company compared to its original intention before the trial. MarketInvoice will also piggyback on Santander’s international presence and hopes to move into new markets with its investor’s help.
The partnership demonstrates the advantages to both sides of the fintech/traditional banking divide that can come through teaming up. Traditional banks are still huge and even the smallest usually dwarf the value of the most successful fintechs. They have finance and access to existing and substantial customer bases. Fintechs on the other hand tend to specialise in one or just a few particular components of the traditional banking service.
This greater focus means they are more specialised, allowing them to develop products and services consumers prefer. They are also a lot leaner and efficient than the big corporate structures of banks and are also able to take risks. This means fintechs can develop and bring to market new tech-based products much more quickly and cost efficiently than traditional banks.
Investing in fintechs, initially with small sums that can be increased as the new companies develop and prove themselves, is a very convenient way for traditional banks to combat their lack of success in efficiently developing specialist digital services. It also protects them from the risk of hefty regulatory repercussions if these start-ups cross the line in their risk taking as they build their business, or that the leaner fintech model turns out to lack sustainable business viability.
Barclays and Santander’s investment in MarketInvoice is unlikely to prove to be the last major fintech investment by traditional banks we see over the coming months.