Startups are chippinginto every line of business big banks enjoyed leading up to the financial crisis.
The banks know it. A recent Goldman Sachs report suggested that $US4.7 trillion of the financial services industry’s business is jeopardized smaller competitors.
Online brokerages threaten banks’ broker-dealer businesses. Wealth management apps have sprung up to claim millennials that are distrustful of big money managers. Personal finance startups are helping consumers balance their checkbooks online. Refinancing startups are taking advantage of cheap debt to offer students better rates on loans.
All of it is taking bit business away from banks.
And the biggest firms on Wall Street are employing all sorts of tactics to defend their top line from invasions taking place on both coasts.
Virtually every big bank has invested in startups. Increasingly, seed-stage ventures and accelerators have been formed as Wall Street firms snap up a piece of hundreds of pre-IPO companies.
After launching its first finch incubator in Tel Aviv in 2013, and by the end of the next year Citi Ventures has expanded accelerator efforts to Spain, Germany, Singapore, Brazil and the US. Barclays Accelerator operates in two countries, in part thanks to TechStars’ management expertise. Even Capital One has an accelerator of its own, Capital One Labs.
Wells Fargo has backed a handful of startups through its accelerator. One has the potential to help big banks get slimmer on staffing. Kasisto is a platform for financial institutions providing clients virtual personal assistants. And Bank of America has sponsored tech accelerators in New York, London and Charlotte.
Sometimes banks wind up jointly investing in the same startup, like Motif Investing, an online broker. Both JP Morgan and Goldman Sachs backed that platform. JP Morgan also backed Square, along with numerous big banks’ investment arms (Morgan Stanley joined in that investment, as well). And even Morgan Stanley, which has had a relatively muted presence in the investing scene, has struck deals to back companies like messaging platform Perzo and Eris Exchange. Eris sells interest rate swap futures.
Some view it as Wall Street finally acknowledging that customer acquisition requires their not being deaf to Silicon Valley. Others think it is less about changing culture than it is about suppressing competition.
“Because we’re a not a retail bank, we view all disruption opportunities as being great,” Reetika Grewal of Commerce.Innovated said to Business Insider. Commerce.Innovated is an accelerator run by Silicon Valley Bank and MasterCard.
But not everyone does. We spoke with a number of players in the startup space, as well as Wall Street veterans. Here’s what they had to say:
- “Banks are looking towards earlier stage investments and opportunities,” says one investor who has worked with banks on deals. “Even if they don’t take equity in the companies but rather use the accelerator as a way to understand the innovation going on outside of their walls, it’s totally worth it. The investment is relatively minuscule in relation to the insight they will gain.”
- “One of the reasons some firms may be eager to do more early stage deals is that banks are being regulated out of building larger stakes in pre-IPO companies,” a banking sector source said. He referred to this in the broader scope of post-crisis regulation like the Dodd Frank Reform and Consumer Protection Act. It requires that banks either fund outside investments entirely with their own money, or with three per cent of client funds. That, the source said, makes it very difficult for banks to participate in late-stage investing.
- One investor notes that part of banks’ strategy of backing early-stage companies is to reap future business. “[Banks] have always tried to service early tech companies as much as possible as lead generation,” one Silicon Valley source said.
- “There’s this appetite for credit that banks can’t satisfy,” the investor said. “Banks either need to build competing products or invest in new ones.”
- “Banks are finally admitting they don’t have it all figured out,” says another investor in the space.