Fintech Firms' Future Depends On Banks They Sought to Displace

(Bloomberg Gadfly) -- Brexit has dented the attraction of fintech start-ups in Europe.

Investors are reining back their spending in the face of possible barriers to the single market and to hiring top engineering talent.

One advantage London still enjoys is an open-minded regulator -- as explained by Bloomberg News on Tuesday. But what really counts are those old-school banks fintech firms have sought to displace.

Lenders have proven resilient backers of fintech start-ups -- on the principle that if you can't beat 'em, join 'em or, better, buy 'em.

Corporate and strategic participation in European venture capital deals in the fintech industry rose for the third straight quarter in the three months to September, accounting for 26 percent of all transactions, according to CBInsights/KPMG. Meanwhile, overall investments in fintech firms fell to their lowest level in more than a year.

Over the past five quarters, Citigroup Inc., Banco Santander SA and Goldman Sachs Group Inc. have each completed seven or more investments in VC-backed fintech companies. While big bank mergers have dried up, lenders' acquisitions of small tech-savvy challengers has perked up. Banco Bilbao Vizcaya Argentaria SA bought U.S. banking app Simple in 2014, while France's BPCE SA bought Germany's Fidor earlier this year.

Supposedly disruptive models like peer-to-peer lending have become dependent on demand from traditional financial firms. LendingClub Corp.'s shares recently soared the most since its IPO after the company announced a $1.3 billion loan-purchasing deal with National Bank of Canada. British robo-advisor Nutmeg got the bulk of its latest funding round from Asian financial advisory firm Convoy.

If fintech firms' battle for survival is getting tougher, there should be a silver lining in the form of the recent rally in lenders' stocks. The Stoxx Europe 600 index of bank stocks has gained 5.4 percent and the S&P 500 Financials index 11 percent since the U.S. election amid rising bond yields and growing hopes the worst of the additional regulation that's dogged the industry since the financial crisis is behind it. A stronger stock price would help make future investments in fintech firms more palatable for banks.

And even if the regulatory burden on banks lessens, the likelihood is they will still need new ideas to simplify their IT systems, cut costs and create more efficient distribution channels. Lenders know that innovation will help them protect market share.

An open-minded regulator is certainly helpful. But there are now more than 40 challenger banks in the U.K. chasing a market that threatens to be cut off from the rest of Europe. The key to survival will be attracting funding and strengthening ties with the banks that are investing and acquiring to defend their own competitive advantage.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Lionel Laurent in London at llaurent2@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.