Financial institutions are more and more aware that they need to lead in innovation. Rather than shutting startups out to secure their position, banks are opening up and inviting startups in.
Santander Group announced this week that it had raised another $100 million for Santander InnoVentures, its London based fintech venture capital fund.
Since inception in 2014, the fund has already invested globally in startups in digital identity, wealth management, blockchain, online lending and payments.
Santander isn’t the only bank with a corporate venture capital arm meant to foster startups and technologies that can provide banks with a competitive advantage. Barclays operates a network of fintech-focused accelerators in the U.S., Europe and Africa. Citi runs Citi Ventures and BBVA operates Propel Venture Partners, formerly BBVA Ventures.
What’s is next for the banking industry?
What will the banking industry look like in 5 or 10 years? What trends do banks foresee?
To identify which trends banks think will shape the future of finance, we analyzed over 100 startups backed by VC arms of big banks by sampling data from the investors’ own websites.
Looking at bank CVCs only provides part of the picture on future trends, as banks can swallow and incorporate innovative private companies through private equity arms or through mergers and acquisitions.
Lending related startups are the biggest group of companies (12%) backed by banks’ venture funds. Not surprisingly, cybersecurity and IT infrastructure are the next largest cohort (11%). In an industry powered by trust, banks can’t afford to be a single step behind the hackers.
Analytics and big data solutions that enable banks to better serve their clients with products and services were next (10%). Other notable categories include payments (10%), blockchain technology (8%), and authentication, identity management and fraud prevention (8%)
Wealth management and personal finance platforms, marketing tech and user experience also received investment from the financial industry’s corporate venture capital arms.
This data set isn’t perfect. It does, however, offer a glimpse into the collective psyche of banks in regards to the changing landscape.
Investing in millennials
Ph.Ds will be written about millennials and generations to come: Their mobility — geographic, in the job market, in the way they communicate, purchase and do business — is already established as one of their pivotal traits.
Banks are capitalizing on this mobility and reacting to it. By exploring new ways of financing, enhancing the hardware and software the global economy relies on and leveraging the vast and profound data sets this mobility produces, banks are making sure they will stay ahead.
On the big data side, many banks use IBM’s cognitive computing platform, Watson Analytics, to better analyze customer data. This allows a bank to better understand the value of its customers and build tailored offers, credit lines and marketing campaigns. Clients include BBVA, Citi, Standard Bank and ANZ bank.
Japan’s Mizuho Bank has deployed robots supercharged by IBM’s Watson in several of its branches, bringing AI out from the shadows.
On the UX side, banks are expanding their mobile offerings, continually adding more services to their online and mobile platforms. Santander, for example, also operates Openbank, a branchless bank in Spain.
Collaboration, not disruption
Banks can’t innovate alone. Saddled with legacy systems, heavy regulations and cumbersome workflows, banks just can’t move as fast as startups. But startups, in turn, need the banks…The future is about partnerships.
BBVA, for example, launched Innova Challenge, an initiative that promotes open and collaborative culture between the bank and developers, with the aim of including a larger community in creative and technological development. BBVA opened its platform to the developer community through an API. Citi also opened up its APIs to developers through its Citi Mobile Challenge.
“Many fintechs have succeeded but today they are still operating only at the edges of banking,” explains the Santander Group in a recently published white paper about the future of fintech, titled Fintech 2.0. “To help engineer more fundamental improvements to the banking industry, they must now be invited inside, to contribute to reinventing our industry’s core infrastructure and processes. That can succeed only as a collaborative endeavour, with banks and fintechs working together as partners.”
Santander explores a few problems in the financial industry that startups and banks will need to work together to solve. Among them are streamlining processes by leveraging data gathered by connected devices, embedding distributed ledger technology (blockchain) and creating frictionless processes for the consumer.
Funny enough, Deutsche Bank also recently published a white paper under the same title and a similar theme, though focused on payments.
“The time has come for one further change,” writes the German bank, “a shift in mindset from one of competition to collaboration. By exploring strategic partnerships, traditional banking providers and new innovators can together create long-term success and revolutionize the payments market and wider financial sector for the benefit of all.”
The banks are calling for more collaboration. Will startups follow?