Bank investment in FinTech firms: strategies and value effects

The rise of FinTech innovations has been significantly reshaping the business model of the financial industry over the recent decade. FinTech firms (FinTechs) provide innovative financial services at a lower cost through their consumer-centric platform. Banks have been investing in promising FinTechs to develop innovative solutions and compete in the new landscape. Nevertheless, a bank’s investment behavior to achieve these goals and the perception of bank shareholders on such cooperation type are less understood. This thesis attempts to investigate the entry and exit strategy of banks for the FinTech industry in terms of FinTech sectors, entry modes, and partnership types and measure the market reactions to provide the value effects over the investment period.
Using a novel and hand-collected investment dataset in FinTechs by the top 300 banks worldwide, this study shows that banks diversify their investment across various FinTech sectors primarily via equity financing and partnering with non-bank financial firms as an investment strategy. The most active investors are larger, better capitalized, and operate a more diversified income structure. The thesis also identifies significant complementarities across FinTech sectors, entry modes, and partnership types in the investment choices of banks to reduce investment uncertainty.
Despite diversification as a risk-sharing mechanism in the investment approach and the potential competitive gains from innovative technologies, investing in FinTechs is perceived as value-decreasing by bank shareholders. The stock market negatively reacts to FinTech investment announcements, and this decline is mainly driven when banks acquire FinTechs or invest in FinTechs jointly with non-bank financial firms. The long-term value analysis further shows that the decrease in bank shareholder wealth following the FinTech investment persists over the first post-investment year. However, smaller and better-capitalized banks appear to experience the least value-destroying in the long-run horizon. Lastly, the analysis of FinTech exits shows heterogeneous exit probability and time to exit across FinTech sectors and equity stages. Banks experience more frequent exits over a shorter period in the investment in Payment and RegTech sectors and the later stage of equity financing. This finding suggests that each sector has a different speed of developing innovations via banks-FinTechs cooperation, and the staged financing plays an essential role in a bank’s FinTech exits.