Big banks continue to invest heavily in fintech startups that can help them stay competitive, reach new markets and improve efficiency, but the specific sectors they put money into are changing. Capital markets and wealth management fintechs are attracting bank investment, while blockchain companies appear to have gone out of favor, at least for now.
A recent CB Insights report found that last year, U.S. banks made more than 65 equity investments into fintech companies — about the same number as in 2018 and 2019. Goldman Sachs, JPMorgan Chase and Citi are the top bank investors in fintech. Citi participated in 22 fintech deals in 2020 and Goldman backed 18, according to CB Insights. (The firm tracks publicly announced deals; it’s possible the actual numbers are higher.) A look at where the most active bank investors in fintech indicates where the banks themselves are looking to innovate and the sectors of the fintech market that they perceive as having the healthiest potential of return.
Future-proofing the bank
As always, the big banks look for fintechs that can help them innovate and stay relevant in the face of growing competition from fintech and Big Tech competitors.
“The top U.S. banks are still looking to future-proof their businesses,” noted Oliver Yu, intelligence analyst at CB Insights.
Such future-proofing is the reason Citi Ventures exists, agreed Arvind Purushotham, global head of venture investing at Citi Ventures, the ventire capital arm of New York-based Citigroup, which has $2.2 trillion of assets. The unit, which was formed in 2010, recently made its 100th investment; it has about 70 companies in its portfolio. Its mission is to drive innovation by exploring, incubating and investing in fintechs, he said.
“A big part of what we do is bring that outside perspective,” he said. “In the early stages of fintech, a lot of these companies were saying, banks do things one way, they’re bad. We’re going to be the good guys. We’re doing it on our own and we don’t need banks to succeed. That’s evolved over time to much more of a collaborative relationship.”
Truist Ventures was set up last September to support innovation across Charlotte-based Truist Financial Corporation, according to Vanessa Vreeland, head of Truist Ventures. The bank, created in 2019 through the merger of BB&T and SunTrust Banks, has $509 billion of assets.
“Truist came about because SunTrust and BB&T acknowledged they needed to invest in more technology in a lot of ways,” Vreeland said. “Ventures is at the tip of that spear, helping to bring outside innovation in.”
Her group looks for innovative products and services it can bring to clients and employees, she said.
“We’re also looking for opportunities to learn,” Vreeland said. “Who is doing something really unique that we can learn from and where can we add our expertise to the conversation to add value to the fintechs that we’re working with?”
A recent case in point is Greenwood Financial, a challenger bank targeting Black and Hispanic people, for which Truist Ventures led a $40 million Series A last week. The ability to attract more customers of color would help any bank become more competitive as the U.S. population becomes more diverse.
Truist bankers have been learning from Greenwood’s leaders, Vreeland said.
“With Ryan [Glover, Greenwood’s CEO and former founder of Bounce TV, a broadcast network created to target African Americans] being the media mogul that he is, we’re excited to learn about how to connect with audiences in a different way, because we don’t have a media background,” Vreeland said. “We were fascinated by how quickly Greenwood’s waitlist grew and continues to grow.” As of last week it was at 550,000 people; the startup launched in October.
During the due diligence period for the Greenwood investment, 50 Truist bankers spent time with Greenwood’s staff of 17, sharing best practices and lessons learned about technology, compliance and auditing with the startup’s leaders.
One of JPMorgan Chase’s three major areas of focus for fintech investment, according to Ana Capella, managing director and head of strategic investments, is better serving customers and clients globally. (The other two are protecting the bank, e.g. cybersecurity software, and improving efficiency.)
The New York bank is among those that made an investment in Greenlight, a fintech whose app lets children maintain bank accounts while their parents monitor their spending, in 2019. Wells Fargo also joined the $54 million Series B funding round. JPMorgan Chase launched a Greenlight-based app and account for kids in October.
Last April, the bank, which has $3.4 trillion of assets, led a $4.3 million funding round for Trovata, a U.S. startup that provides automated cash reporting and forecasting to help corporate treasury departments better manage and automate their operations.
Russ Hutchinson, chief strategy officer at New York-based Goldman Sachs, which has $1.1 billion of assets, balks at the term “future proofing.”
“I like to think about it in terms of making our businesses better, serving our clients better, reducing latency and cost in the financial system,” he said. The three “pillars” under which Goldman makes all fintech investments are: strengthening its existing businesses, adding new products and services and operating more efficiently.
Citi Ventures backed 13 startups in capital markets from 2018 to 2020, according to CB Insights. JPMorgan Chase backed 12 companies in the sector during that time. These are startups offering technology solutions for all aspects of capital markets, from voice trading to instant messaging to trade settlement and post-trade processing.
“The core problem and challenge in capital markets is coordinating across multiple market participants and remaining compliant,” said Yu. “It’s a hard problem to solve. That’s why those tech solutions are seeing the most interest.”
At Goldman Sachs, the strategy team led by Hutchinson invests mainly in fintechs that provide critical market infrastructure “where often we’re investing alongside other market participants in something that we think is important for the development of a particular market, as well as growth companies that provide products and technology that are important to our business,” he said.
In December 2018, Goldman, JPMorgan Chase, Citigroup and Credit Suisse invested $17.5 million in Israeli startup AccessFintech. At the time, the startup had developed technology to help resolve exceptions and errors in trade processing, such as discrepancies on the financial terms of a trade between counterparties. Late last year, JPMorgan Chase began using AccessFintech’s technology to provide real-time payment statuses for dividend, income and cash wire movements the bank does for buy-side clients. The bank also uses the fintech’s technology to provide clients with real-time trade status updates.
Last May, JPMorgan Chase, BNY Mellon, Citi, HSBC and State Street were among the investors in the $20.5 million round for Proxymity, the fintech that originally was the brainchild of two Citi employees and was incubated within Citi’s Innovation Lab network. The London-based startup has an investor communications platform that includes an electronic proxy voting system, which is helpful for remote working arrangements, and a shareholder disclosure platform.
In June, JPMorgan Chase, Goldman Sachs, Barclays and Morgan Stanley participated in a $25 million Series B for Capital Markets Gateway, a fintech that says it is “modernizing the equity capital markets” with a platform that connects investors and underwriters and provides tools for data, analytics and workflow.
In September, Capitolis received funding from Citi, JPMorgan Chase and State Street. The company’s software is designed to help financial institutions free up capital and remove barriers that would otherwise restrict trading. The software helps banks eliminate unnecessary positions and find the most suitable party to hold the remaining positions.
In the past 10 years, big banks have made 33 investments in fintechs focused on wealth management, making this their second-biggest category of fintech investment. Wealth fintechs provide self-service technology — think robo-advisers — software investment advisers can use to better serve their clients, and tech for custody and back-office services.
“The reason why there’s this focus on wealth management is because of how competitive the space has gotten,” Yu said. “In 2020, we saw a lot of consolidation in the wealth management space, especially with the advent of zero-commission trading and zero-fee trading, that definitely compresses the margins banks are able to make. So they’re trying to figure out ways to optimize that system and get more customers on board.”
In May 2019, Goldman Sachs bought wealth management firm United Capital for $750 million. It bought Folio Investing, a digital custody provider to registered investment advisers, in May 2020 for an undisclosed sum.
The bank chose Folio for its digital-first, API-driven approach to custody, Hutchinson said.
“We’ve brought the capability into our organization and we’re combining it with the Goldman Sachs machinery to roll it out across our client base more broadly,” Hutchinson said.
In February 2021, Goldman launched Marcus Invest, a robo-adviser to compete with startups like Betterment and Wealthfront as well as other banks and brokerage firms offering robos
Payments fintechs of all sizes had a phenomenal 2020, as the pandemic pushed consumers and businesses to digital and mobile payments. U.S. banks invested more heavily in payments startups last year than they did any of the previous nine years, according to CB Insights’ research.
Truist Ventures, which launched last fall, made its first investment in a company called Veem, a service that helps small businesses make local and cross-border payments. (The VC unit also inherited a portfolio of fintech investments from its heritage banks, Suntrust and BB&T, including Finxact, Enigma, Apiture, Greenlight and Payrailz.)
“What I loved about what Marwan [Forzley, Veem’s co-founder and CEO] was doing was making it super easy for small businesses to send money internationally,” Vreeland said. “And they use cryptocurrency as one of their rails, which is pretty exciting.”
Truist is looking to bring innovation to its payments division, to serve consumer and business clients in all parts of the bank, she said. The bank is currently working towards a pilot with Veem.
Payments is one of three sectors in which Citi Ventures invests. (The other two are “next-generation financial services” and property technology.)
Citi Ventures invested in Honey Science Corporation, the makers of an e-commerce deal-finding browser add-on and app, about a year and a half ago. In November 2019, PayPal acquired the company for $4 billion.
CB Insights research found investment in blockchain technology is way down among the big banks.
This may be a hiatus.
“As the technology matures, I think the use cases will also get figured out,” Purushotham said. “If I were to look out for the next year or two, there probably will be a few use cases where using blockchain technology turns out to be the best choice and then they will get implemented.”
Citi has a few investments in trade finance companies that use distributed ledger technology.
“We’re quite bullish on them because that area of trade finance could be one of those use cases that ends up being a great fit for blockchain and distributed ledger technologies,” Purushotham said.
Citi has been watching the rise of cryptocurrencies and digital assets, he said.
“We also have clients coming to us, asking for services that are related to their crypto assets,” Purushotham said. “So we have been in wait, and watch mode. Currently, Citi Ventures does not have any investments in the crypto space.”
At Goldman Sachs, “we are constantly looking for places where we can use automation and data science to basically make our processes more efficient, run more smoothly, faster, with less human human interaction and with stringent risk management,” Hutchinson said.
To that end, Goldman has invested in tech companies that provide machine learning and natural language processing to make processes more accurate, more efficient, faster and cheaper, with less human interaction. It’s invested in technology platforms that help regulatory compliance. It helped form Symphony’s open source messaging technology. Symphony is now valued at more than $1.4 billion.