A number of community banks are several years into a years-long experiment focused on innovation: Investing in venture capital funds that, in turn, invest in fintechs.
Carey Ransom oversees one of these strategic investment funds as managing director of BankTech Ventures. BankTech Ventures focuses on compelling technologies for community banks and is supported and endorsed by the Independent Community Bankers of America and The Venture Center, according to the fund’s website. The fund closed in 2022 with about $115 million from more than 100 banks.
Ransom says banks are interested in these funds because they see the innovation happening outside of the banking space and feel constricted by their own capabilities. Bank Director explored this issue in second quarter 2022 magazine, as many of these funds were fundraising. The funds help banks close the due diligence expertise gap they need to evaluate the viability of early-stage companies, while introducing them to prospective fintechs addressing their specific problems. It also gives them a financial stake in early-stage companies as they grow and attempt to reach viability.
“[Growth-minded banks are] trying to really orient around, ‘Where are we going? And how do we continue to grow our bank?’ They realize that the core alone is not a growth strategy that will help them stand out,” he says.
But these funds came at a unique time in the economy and valuation environment — the peak. In the first quarter of 2022, $1 out of every $5 of venture investment globally went to fintech companies, according to CB Insights. Banks too were feeling flush with cash — in the form of deposits. But that quickly changed in 2022 as the Federal Open Market Committee began raising rates — the consequences of which have radically altered the fintech and bank landscape.
Ransom says BankTech Ventures finds opportunities for investments by focusing intensely on fintechs with durable revenue streams that want to work with banks — not compete with them. BankTech Ventures’ first fund is now two-thirds invested and is in the process of raising funds for another investment vehicle, he says.
But Ransom knows that investing in a fintech fund isn’t enough to make a bank innovative — there is still a lot of work for the bank to do to keep up with the changing technology landscape. He cites vision, decision-making and agility as three key attributes that bankers need if they want to successfully innovate.
“To me, it really starts with that vision. Do you have a vision? Can you set a vision for the future of your institution? What are you trying to move toward?” he asks. “The other thing that I think we see [from banks] that are really moving forward and changing is an ability to make decisions. [Make] a decision, act on it, learn and iterate.
[W]e talk a fair bit about being agile, that agility is something that has eluded a lot of banks, but that will help them adapt and change. [That means] empowering people to think about incremental improvements and upgrades. There is no silver bullet.”
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