Fintech companies have had a major role in the digital transformation of financial institutions. Legacy technology providers are making it easier for new fintech players to connect to their systems, and some newer core entrants are designed to be open to fintech providers of all kinds.
For financial institutions focused on new technology solutions and connecting into existing technology ecosystems, there have never been more options available. Some have taken it up a notch by becoming direct investors in fintech ventures themselves.
Venture capital (VC) firms have been around in their current form since at least the 1960s and helped birth what is now Silicon Valley. VC firms are made up of general partners (GP), a small group of individuals who operate the fund, analyze potential deals, decide how the fund’s capital is allocated and get paid through management fees and distributions from the fund.
Limited partners (LP) are the investors that provide money to the fund to be invested by the GPs. LPs are typically wealthy individuals, pension funds, family offices or insurance companies and have no active involvement in decisions and investments.
Banking fintech niche
A relatively recent development is the increasing number of specialty VC funds focused on banking fintech where all or most of the LPs are financial institutions. Unlike a typical VC fund, the bank LPs are the natural customers of the fintechs that these funds invest in, and the LPs become a useful testing ground for utility and market messaging. Most critically, they help the GPs in their search for companies that solve real problems.
Jam Fintop, Bank Tech Ventures and Mendon Venture Partners are just a few examples of funds that focus on banks. And more funds are currently in formation, although their focus hasn’t been publicly announced yet.
The business case for structuring an investment fund where the financial institution is also an investor results in tremendous value, from selection of the initial investments to honing the product and the messaging.
While it is technically possible for banks to invest in these kinds of funds, typically the investments are made at the bank holding company level. Regulatory requirements for direct bank investment are strict, making it far easier to use the holding company.
Investing in fintech startups through a VC fund may not make sense for every institution, but for those who are interested in a front-row seat to innovation in the industry with the chance for some outsized financial results, these funds can be a good place to allocate a small percentage of capital.
How Wipfli can help
As fintech firms play an increasingly influential role in the financial landscape, Wipfli’s team is well-positioned to help your institution understand growing opportunities for financial institutions and the implications in becoming a fintech investor. Contact us to learn how we can support financial institutions and fintechs.
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