Banks embrace the venture model: VCJ

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Startup founders have long turned to banks for loans and second mortgages to fund their first months of operation. But when it comes time to scale, they look elsewhere for funding.

For fintech entrepreneurs, that may be changing.

Big banks and financial services companies have been scaling up internal venture divisions in recent quarters, seeking to fund and partner with startups that can help them beef up their backend technology or expand their customer base.

At least three have announced new fintech venture arms of $100 million or more since last year.

More are running or participating in fintech-focused incubator and accelerator programs, such as Capital One’s network of “digital innovation labs” and the three-city Fintech Innovation Lab organization.

Big banks and financial service providers have also participated in or led some of the largest recent fintech venture funding rounds for such companies as investment advisor Betterment, mobile payments provider Square and analytics provider Platfora.

“There’s a fairly major shift from, ‘We can build it in-house’ to ‘We won’t build it in-house,’ among big financial services players, said Maria Gotsch, CEO of the Partnership Fund for New York City, which oversees the city’s chapter of the Fintech Innovation Lab.

Gotsch compared the present situation in the financial services business to the pharmaceutical industry, where big players have reduced internal R&D spending on drugs in favor of working with startups for developing pharmaceuticals.

It’s much the same in fintech, Gotsch said. Large players find that startups excel at generating ideas and prototypes, but they want to be involved at later stages to help develop products robust enough for their massive, highly regulated markets.

The ramp-up in corporate fintech investments comes as the space in general is seeing sizeable funding activity.

In the past four quarters, 158 financial services companies have raised $968 million in venture funding, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters. However, that number doesn’t include companies that provide security, customer relationship management, or content services to multiple industries including the financial sector.

Corporate VCs in the financial services space are accounting for a growing share of committed capital. Some have been involved in venture dealmaking for many years, with few signs of slowing momentum. Others are relative newcomers.

In the first category, American Express, which has been making strategic venture investments for more than a decade, has cited financial inclusion as a core focus area. The originator of the Gold Card says on its website that it’s looking to entrepreneurs to further its goal of providing better access to financial services for underserved consumers and businesses.

AmEx is also looking to invest in companies that can improve its capabilities in fraud detection, customer acquisition, and mobile commerce, among other areas.

A longer version of this story first appeared in Reuters Venture Capital Journal. Subscribers can read the original story here. To subscribe to VCJ, click here for the Marketplace.

Photo illustration courtesy of Shutterstock.

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