Global investment in fintech startups hit $16.6 billion in 2017, according to the analytics firm CB Insights, based in New York. And the biggest banks in the U.S. are among the investors in the space. These investments indicate a few things about the nation’s largest banks, according to Lex Sokolin, global director of fintech strategy and a partner at London-based Autonomous Research. First, the bank’s investment indicates that it believes the technology holds promise, and that the company’s performance indicates it will be successful in delivering that technology. Also, “it may be a way for the bank to pre-acquire a company, by getting visibility through the board and incremental control of ownership,” he says, with the bank acquiring the company outright later on, or continuing to watch the company and replicate the product.
This second approach appears to be most similar to the strategy so far for Wells Fargo & Co., which came in as the second most innovative bank in Bank Director’s 2018 Ranking Banking study, released in November 2017. At the time, Bank Director cited the bank’s direct work with startup companies, including its accelerator program. Wells Fargo has continued to invest in fintech firms, with an eye to improving the capabilities of the organization. These investments include R3—the New York-based blockchain consortium that last year attracted a $106 million investment from 43 companies—and the data analytics firm Kensho, in Cambridge, Massachusetts, which last year received $50 million from nine investors, including six U.S. banks, in a Series B round. In early March, S&P Global, which was among Kensho’s investors, announced that it would acquire the startup for $550 million.
At Wells Fargo, innovation investment occurs at two different levels within its corporate structure. While both are focused on emerging technologies that will ultimately improve the customer experience, the two areas differ when it comes to tactics.
Wells Fargo Securities houses the fintech investment arm that participates in larger investments. “We want to partner with relevant, emerging technologies, and then invest in the appropriate fintech and enterprise IT companies whereby we can serve our clients better,” says Tom Richardson, managing director and head of market structure and electronic trading services. “Our primary mandate is that it’s strategic—that the target is a company we’ll have a commercial relationship with and where our investment dollars can facilitate deeper partnership.”
Richardson’s unit has more skin in the game, so it’s seeking a closer relationship with the companies it invests in, which could include board representation and more C-suite interaction. Due to this high level of interaction, “we’re more selective,” says Richardson.
The investments made by Wells Fargo’s innovation group are limited to the low- to mid-six figures, and its goals differ. Bipin Sahni, the group’s head of head of innovation R&D, says his performance is judged on finding and working with budding innovative companies, and bringing those solutions into the fold—not on a financial or strategic return. “The landscape for our customers is changing. They’re looking for better solutions and seamless experiences from a bank of our size, [so it’s] a perfect time to collaborate and partner with these startups,” says Sahni. Wells Fargo brings with it a sizeable customer base to work with, and the startups provide the innovative solutions.
To help identify these companies, Sahni says he has regular conversations with venture capital firms. It’s a collaborative discussion—he wants to know which companies venture capitalists are interested in, and he also shares his knowledge of promising startups.
A potential partner that Wells’ innovation group might invest in has to have a few key traits. First, Sahni says that he’s seeking a strong management team with a vision—he wants to know that the company can execute on the technology. He also wants to ensure that the startup understands Wells Fargo’s needs, as well as those of the consumer. “The whole premise for us to invest in these companies is … to use these products and services in our road map,” says Sahni. “That’s a big win for us and for them.”
He says he’s seeing some “cool stuff” coming out of the startup world, citing newer forms of customer authentication, including various forms of biometrics. Wells Fargo also sees promise in blockchain’s potential to create efficiencies, and has deep interest in data analytics and artificial intelligence. Two specific startups, Kensho and H2O.ai, another Wells Fargo investment based in Mountain View, California, offer developments in predictive analytics and better understanding of behaviors.
Sahni believes that the digital evolution is still in relatively early stages, and there’s still too much paper used in the industry. “From a trends perspective, paper to electronic—we have not completed the journey yet.” Advancements in wearable technology, like the Apple Watch, and smart home assistants like Amazon’s Alexa, continue to change consumer interactions, and their expectations for the seamless delivery of products and services. Truly smart technology should predict behaviors and do what consumers want automatically, without being asked, but the technology isn’t there yet, says Sahni. Wells Fargo’s continued investment in and monitoring of the startup space will help the company find these up-and-coming innovators.