How do banks invest in fintechs? Evidence from advanced economies

Abstract

Using data on a sample of 803 investment rounds in fintech companies (FTCs) held between 2008 and 2018 at the global level, where each company received investment from at least one financial institution, we investigate how banks react to digital transformation through the direct investment channel. Each round is treated as an independent event; hence, we examine 1,078 bank-FTC observations. Employing OLS regressions, we explore the determinants of deal size, both in absolute (i.e., monetary flows) and relative terms (i.e., the proportion of the total funding that the target has cumulatively received). Conversely, with probit analysis, we investigate the determinants of banks’ choices to invest in “fin-native” vs. “tech-native” FTCs and those of their decisions to use equity (i.e., capital injections) vs. debt (i.e., credit lines). We find that investments are enhanced by an FTC’s specialisation in financial rather than technological services, by the presence of other investors, and — to some extent — when the target is in a later stage of development and the bank is large. Additionally, the nature of a target depends largely (but not exclusively) on the corresponding bank’s risk-return profile, as fin-native companies and debt financing are perceived as safer than tech-native companies and equity financing, respectively. Finally, we find that a limited but non-negligible role is played by the regulatory framework, which mainly affects the choice of financing tool by prompting banks to choose equity — i.e., a bolder risk-return profile — when they face harsher competition from unlicensed lenders.