Big banks are investing and partnering with financial-technology startups, partly to keep up with potentially disruptive changes that could be ahead for their industry.
SAN FRANCISCO — The small office on the edge of San Francisco’s financial district serves as a kind of listening post for a giant Spanish bank.
This is where BBVA of Bilbao gathers intelligence on Silicon Valley startups threatening to disrupt the traditional banking system.
BBVA, which operates in the United States under its Compass subsidiary, is one of many big banks trying to decode the ever-evolving world of financial technology, or “fin tech,” covering realms as varied as payment systems and debt collection.
BBVA Ventures, which was started in 2011, has been making relatively small investments in startups, allowing the bank to gain access to the companies’ founders and early insights into how their technologies are playing out.
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Bank executives say they are most interested in forming partnerships with the startups by making investments of as little as $500,000, rather than focusing entirely on scoring huge profits like a traditional venture-capital fund.
While many of BBVA’s investments fly below the radar of Silicon Valley dealmakers, the bank has also made a few larger, splashier investments.
Last year, BBVA acquired the startup Simple — a Portland-based bank that operates entirely online — for $117 million. And in January, BBVA Ventures and a group of other large investors put $75 million into Coinbase, an exchange for virtual currencies like Bitcoin.
“We want to be backing the best entrepreneurs,” said Jay Reinemann, the head of BBVA Ventures, “the ones that will have the best success at disrupting the industry.”
Herein lies the central paradox for big banks pushing into Silicon Valley. Some want to borrow ideas from the startups — or even buy their technologies outright.
But the startups that are having the most success at disrupting the industry’s profitable business lines may not be easily persuaded about the merits of teaming up with an established bank.
For one thing, the culture of big, lumbering banks is antithetical to nimble startups. And, at the moment, startups have their pick of venture-capital investors.
But Reinemann, who used to run Visa’s venture-capital program, says BBVA and other large banks have something that most startups need: a banking license.
“These little companies really don’t want to be a bank,” Reinemann said. “They don’t want the regulatory burden. They want somebody to step in to be that bank.”
Other big banks have slightly different strategies in courting startups.
Citigroup’s venture unit, Citi Ventures, in downtown Palo Alto, Calif., focuses on investing in technologies like information security systems that it may be able to use across the global bank.
Wells Fargo, based in San Francisco, runs an accelerator that startups can use to test out their technologies with the big bank’s executives.
One startup has been working in the Wells Fargo accelerator program to develop a biometric security feature that scans someone’s eye.
Wells Fargo executives say the accelerator offers small companies access to real-life banking situations that they could not recreate on their own.
Wells Fargo has also been investing for decades in startups through the venture-capital fund it owns called Norwest Venture Partners. The $4 billion fund has notched some big successes in fin tech, including its investment in Lending Club, an online marketplace that matches people who are seeking loans with investors wanting to provide them.
Building a brand
BBVA, which is well known in Europe, is trying to build its brand globally by focusing on technology.
That was one of the driving forces behind its acquisition of Simple, which has no bank branches, provides no paper checks and offers unique data analysis to customers.
But can this “anti-bank” thrive as a tiny unit of one of the world’s biggest banks?
If Simple is swallowed up in BBVA’s bureaucracy, not only does it risk losing its loyal customers, but it also may lose the engineers and programmers who went to work at the startup precisely because it was different from a traditional bank. Those technology experts have been vital to Simple’s success.
BBVA executives say Simple will preserve its independence by maintaining its own board (although BBVA will have a majority of the seats). The expectation is that Simple accounts will be transferred to BBVA Compass from its current partner bank, Bancorp. The real test for a branchless bank like Simple is whether customers will feel comfortable conducting complex transactions like mortgages entirely online.
Larger banks say the majority of customers still insist on doing much of their banking in the branches. But BBVA is not convinced.
Bank Chairman Francisco González Rodriguez, a former programmer at IBM, says most banks are woefully behind the technological curve.
While just about every large bank offers customers mobile access to their accounts, González wants to go further.
For example, he envisions that one day customers would be able to take a photograph of a house from the street, email the image to a loan officer and be approved for a mortgage in a matter of minutes.
“Our biggest competitors are not necessarily other banks,” González said in an interview. “They are Amazon and Google. Those are the companies setting the expectations of our customers.”
Keeping up with technology
But identifying the latest technology in Silicon Valley and then using it to improve customer service is a far cry from tapping into the startups that are trying to upend the financial system.
Still, BBVA took the leap into funding Coinbase, which provides a virtual exchange where Bitcoins and other currencies can trade.
USAA and the New York Stock Exchange also invested in Coinbase in a recent round of fundraising.
Regulators have strongly cautioned banks against providing banking services to virtual-currency companies because it is difficult to track the flow of the money. Regulators have been cracking down on banks that have faulty money-laundering controls or checks against money flowing into countries that are under U.S. sanctions.
At the same time, Reinemann said, banks need to be involved in the virtual-currency industry on some level or they could lose out as the industry evolves.
Investments by banks in online-currency startups do not lead to the same intense scrutiny that would come if BBVA were helping transmit money or holding accounts for Coinbase.
These investments could eventually lead to a deeper relationship if the virtual-currency industry receives wider regulatory approval to use banks for more back-office services.
At the very least, the investment will very likely yield more intelligence about how this industry functions than if BBVA hired a consultant to study it.
“Investing is the first step in a working relationship,” Reinemann said.