The rise of the corporate venture capital (CVC) investor in the financial services technology sector is one of the most significant investment trends in the global VC ecosystem over the past decade.
In recent years, CVC investment in fintech startups has sky-rocketed as a result of the growing technological threats and opportunities faced by traditional financial services industry players, including bulge bracket investment banks. CVC investment into fintech startups has provided these financial services industry incumbents with strategic market insight on the emerging financial technologies that are disrupting their industry, as well as with opportunities to contribute to the development of fintech ecosystems across geographic markets. Fintech startups have also benefited from financial services industry CVC investment, as it has provided these startups with opportunities with which to enhance their performance and market reach.
From a geographic perspective, cross-border investment from European and US financial services industry CVC investors into European and US fintech startups has increased the value and volume of fintech deals between the two regions and has cultivated the development of a robust transatlantic fintech ecosystem. This article will provide a brief overview of the rise of CVC investment in the fintech sector, highlighting the impact of this category of investor on the transatlantic fintech marketplace.
Technological disruption to the financial services industry
There is increasing recognition that the financial services industry is faced with a “deep and permanent digital transformation”, as GCV put it in November 2019, that has altered customer demands and increased competition among banks, as well as between banks and non-banks that leverage technology to deliver financial services at lower costs. Deloitte, for example, in its 2020 Banking and Capital Markets Outlook, projects that banking will become more “open, transparent, real-time, intelligent, tailored, secure, seamless, and deeply integrated into consumers’ lives and institutional clients’ operations” in the short term, and that as a consequence, the banking industry will be faced with a new phase of disruption over the next decade that is “more forceful and more pervasive.” Forefront technologies, including artificial intelligence, distributed ledger technology and quantum computing, in particular, are expected to transform the way that banking services are provided, thereby creating new risks and opportunities for incumbent banks. As a result, banks have recognised that if they are unable to differentiate themselves from their competitors on a technological basis, they likely will find themselves at a severe competitive disadvantage in the marketplace.
The CVC fintech investor perspective
The increased recognition on the part of banks that technological differentiation is necessary in order to survive in a rapidly changing financial services industry has fundamentally changed bank perception of fintech startups, said GCV. Once perceived as competitors, fintech startups are now increasingly sought after by banks as partners, as they can provide banks with a window into the emerging technologies and market practices that are transforming the competitive landscape of the banking industry. Banks are increasingly collaborating with early-stage fintech startups through non-controlling CVC investments, which can provide banks with access to emerging technologies that can complement existing products and services, as well as with a window into potential future acquisition targets. Bank collaboration with fintech startups through CVC investment can also help to cultivate an ecosystem of investors, startups and other stakeholders who can collaborate to bring technologies to market and who can cross-pollinate these technologies between regional ecosystems.
The fintech startup perspective
Fintech startups also increasingly view collaboration with banks via CVC investment as valuable since banks can provide access to established customer networks, as well as provide support with respect to financial regulatory compliance, which could otherwise stand as a barrier to market entry. Collaboration with banks through CVC investment can also have a positive signalling effect on prospective customers and future investors, including CVC investors at other banks. In the aggregate, the support and credibility that fintech startups can gain as a result of bank CVC investment can help to improve their performance and increase the likelihood of a profitable exit in the future. For these reasons, CVC investment into fintech startups has increased substantially in recent years as both banks and fintech startups welcome this form of collaboration in order to compete in a rapidly evolving global financial services marketplace, according to American Banker.
Transatlantic CVC fintech investment levels
Venture financing of fintech startups reached an “inflection point on a global scale” in 2019, said CB Insights, with approximately $44.6bn invested across 1,813 deals globally, representing the second largest year ever in terms of total deal value, as well as the largest year ever in terms of total deal volume, according to FT Partners’ 2019 Fintech Almanac.
Global Corporate Venturing data indicates 2019 CVC investment levels into fintech startups amounted to approximately $14.6bn invested across 464 deals globally, representing year-over-year increases of 20% and 18%, respectively. From a regional standpoint, CVC fintech investment in North America amounted to approximately $4.6bn in 2019, representing 42% of global deal value, while 2019 CVC fintech investment in Europe amounted to approximately $2.6B, representing 23% of global deal value, said CB Insights. As illustrated by Global Corporate Venturing, global CVC investment levels in the fintech sector have risen steadily since 2014:
These steadily rising levels of investment from CVC investors have likely provided fintech startups with opportunities with which to enhance their product development, market reach and exit potential.
From an investor standpoint, among the most active financial services industry CVC fintech investors in 2019 were Goldman Sachs with 18 total investments, followed by Citi Ventures (15), Visa Ventures (11), MassMutual Ventures (11), JP Morgan Chase (11), Santander InnoVentures (11) and Mastercard (10), according to the 2019 Fintech Almanac. Select examples of CVC investment from European and US financial services industry CVC investors into European and US fintech startups in 2019 include Barclays Ventures’ participation in US-based OpenFin’s $17m series C round in May 2019, Citi Ventures’ participation in UK-based Fidel API’s $18m series A round in September 2019, Goldman Sachs Principal Strategic Investments’ participation in Germany-based Raisin’s €25m ($28m) follow-on Series D investment in July 2019, and Santander InnoVentures’ participation in US-based Securitize’s $14m post-series A financing round in September 2019.
Despite the record-breaking levels of CVC investment into fintech startups that were observed in 2019, 2020 CVC investment projections have become guarded as a result of the global onset of the coronavirus disease 2019 pandemic, according to PitchBook. While the full impact of the pandemic on CVC fintech investment remains unclear at the time of writing, there is light at the end of the tunnel for European and US fintech startups in 2020 for at least three reasons. First, overall demand for fintech products and services has dramatically increased as a result of covid-19-related quarantine and social distancing measures. Second, fintech startups are likely to draw continued strong long-term investment interest from financial services industry CVC investors in light of Q1 2020 US fintech M&A transactions, including Visa’s $5.3bn acquisition of Plaid and Morgan Stanley’s $13bn acquisition of E*TRADE, which are projected to collectively alter the competitive landscape of the financial services industry even further. Third, given the record-breaking levels of CVC investment that European and US fintech startups have received in the recent past, combined with their access to a burgeoning transatlantic fintech ecosystem, many have already been equipped with the tools necessary to accelerate their growth and will likely
be in a position to pursue successful exits in the future. As such, given the strong long-term impact that CVC investment has had on the fintech sector to date, CVC investors, fintech startups and service providers on both sides of the Atlantic should pay close attention to developments in this space in the future.
The views and opinions expressed in this article are those of the author alone, and do not necessarily reflect the views of Stanford University, the University of Vienna, the American Bar Association or Crowell & Moring LLP. This article has been prepared for informational purposes only and is not intended to serve as legal or investment advice