While the biggest U.S. banks are continuing to invest millions of dollars in technology, they are also investing in the financial technology companies themselves. The top ten banks are on pace t be a part of at least thirty financial technology equity deals in 2019, which would be almost three times more than in 2017.
While Goldman Sachs, Citigroup and J.P. Morgan are the most active, Wells Fargo and Bank of America have also been active in the market over the last five years.
Two key reasons for banks to invest in fintech firms are both potential profits as well as strategic partnerships. Many technology analysts think the biggest threats to traditional banks come from new startup companies that perform many of the functions a traditional bank offers. It hedges the banks’ bets for the future depending on how the market grows.
One major area the large banks are focusing on is payment solutions with Square getting over $600 million in funding from five of the top ten U.S. based banks. Equity investments in these firms show another competitive advantage that large Wall Street banks have over community banks.
In addition to these players, Citi has focused more on the blockchain market investing in multiple startups in the sector in addition to several payments focused newcomers. In contrast, Goldman Sachs is set up to analyze a more diversified portfolio of startups, but focused primarily on the digital consumer sector.
Much like movie companies that operate under different brands based on the production, Goldman leads with Marcus in order to take advantage of the consumer end of the banking industry while protecting the Goldman Sachs brand. Marcus allows Goldman Sachs to invest in data analytics and real estate sources to strengthen its consumer strength with online customers.
Banks look to financial technology firms to do what they might struggle to do. These firms are excellent at gathering niche data from consumers that can be of tremendous value to a bank when it comes to investment as well as consumer trends. The banks leverage not only the data but also the knowledge to acquire the data without directly infringing on their present customers.
The M&A market is expected to continue to rise with large banks leading the way in 2020.