The news: Fintechs are entering 2023 with little hope for funding from their usual go-tos. Instead, community banks and credit unions are stepping in to keep fintechs alive while bringing their operations up to speed, per Forbes.
Run the bank: Fintech funding dropped to its lowest level in four years in Q4 2022, coming in at $10.7 billion, according to CB Insights. Though venture capitalists cooled on fintechs last year, some fintech firms benefited from a different source—community banks and credit unions.
While these financial institutions are investing directly with fintechs, they aren’t going it alone. Many seek guidance from VC firms and consortiums like Alloy Labs, which uses its network to support banks and help them grow. For example, last year Alloy Labs published a fintech playbook to assist banks with navigating bank-fintech partnerships.
Know your limits: VCs that help banks with their fintech investments outlined a few steps they should take before making this move.
VCs also suggest banks and credit unions consult VC firms on dealmaking, pricing, and due diligence. Though the financial institutions are making a direct investment into a fintech, they aren’t always experts in that space.
The bottom line: Community bank and credit union investment in fintechs comes at a crucial time for both parties.
Though it’s typically thought of as where the envelope is pushed, the fintech space may, for at least a while—or as long as the economic downturn lasts—do better by accepting a more technologically conservative role and serving as the place where smaller financial institutions turn to weather the storm.
This article originally appeared in Insider Intelligence’s Banking Innovation Briefing—a daily recap of top stories reshaping the banking industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.
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