Fintech Investment Tactics for Small FIs
November 21, 2024
By: Tyler Brown
Venture Capital
Nearly all respondents to CCG Catalyst’s New Frontiers Survey 2024 at minimum showed interest in making fintech investments, and nearly three quarters said they’d made at least one. Investing in fintechs is one prong of an innovation strategy that can bear fruit in several ways for financial institutions (FIs) of any size. Investments in fintechs make sense even for small FIs, though their approach will likely be different from their larger peers. While community banks may have little ability to acquire and absorb a fintech, making investments in them can help strengthen partnerships and create a strategy-driven technology pipeline that doesn’t depend on a handful of vendors.
Big challenges for small FIs that want to participate in fintech investments fall well outside of traditional banking lines of business. Acquiring the right talent, establishing a fintech investment process, and sourcing opportunities while handling the bank’s day-to-day business operations is a tall order. A solution is to collaborate by pooling financial resources and leveraging help from professional investors.
Consortia of FIs and venture capital firms that count small FIs as their limited partners are investment vehicles that fit this mold. As we noted, Curql Collective, a consortium of credit unions, participated in more than one top fintech equity round in Q2 of this year. Other fund managers and consortia include Btech Consortium, Canapi Ventures, JAM Fintop, and BankTech Ventures.
Some of the benefits of this model include:
A potential downside of investing in fintechs is losing money that’s been invested. We therefore advise against community FIs investing directly in a fintech without heavy due diligence. Exploring investments in fintech and bank technology via FI-specific pools is a way to mitigate risk while maximizing the likelihood that investments will lead to opportunities for the financial institution.
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