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Community Banks Emerge as New Venture Capitalists and M&A Deals Soar in the New Year

Rise and shine Rain Makers,

Time is of the essence and I’ve got a jam-packed update for you this week. So, grab your coffee and let’s dive right in!

🍿 Quick Snack

  • 🏦 Community banks are becoming the new venture capitalists, investing in fintech startups, and fueling the growth of enterprise fintech.

  • 🔥 2023 will see an influx of skilled workers laid off from tech and fintech firms, leading to increased innovation and democratization of financial services through open banking and embedded finance.

  • 🤯 Discover the latest innovation in wealth management: tactical asset allocation for retail investors.

  • 🤝 A new fintech platform aims to match small-business owners with banks and make the commercial lending process more efficient and accessible.

  • 📈 We are not even a full month in and the Fintech Space is already seeing a surge of M&A deals.

  • 💰 +4 new exciting funding rounds.

🍔 The Full Meal

Community Banks Step Up As Fintech Investors, Fueling Growth in Enterprise Fintech

  • Community banks and credit unions are filling the void created by venture capitalists in funding fintech startups. (As we covered last week, global fintech funding declined by 46% in 2022)

  • According to Cornerstone Advisors, about 500 community banks and credit unions are making direct investments into fintech startups.

  • The average investment was nearly $3m per bank in 2022, and is expected to grow by about a third to approximately $4m in 2023.

  • Most investments being made by these banks are in a segment of fintechs called “enterprise fintech” which Blackrock defines as software and platforms for financial institutions that streamline and/or automate operational and business processes.

  • In 2023, community banks alone are expected account for two-thirds to three-quarters of the total 2022 funding for the enterprise fintech category.

  • Read more about it here.

⚡️ To make these strategic investments, banks are utilizing specialized firms such as:

  • Alloy Labs: a consortium of 80 mid-size community banks that has made 13 investments in fintech companies, focusing on “the edge of money versus the center of transaction.”

  • BankTech Ventures: a fund with over 100 banks as members, which has invested in 8 fintechs and includes its banks in the entire innovation process from strategy development to business case validation.

  • JAM Fintop: a group of 90 banks that invest in banktech and blockchain companies to allow financial institutions to compete and serve customers effectively, with 33 active investments and over $700 million in committed capital.

2023: The Year of Centaurs, Embedded Fintech, and Challenger Banks

Here are the top 5 trends that will drive Fintech this year:

Trend #1: The fintech industry is likely to see an influx of highly skilled workers who were laid off from big tech and fintech start-ups in 2022.

  • This talent pool could be beneficial for smaller banks and credit unions as they look to digitize their operations to keep up with fintechs and challenger banks.

Trend #2: Consumers will be presented with more ways to save and invest than ever through various apps, mobile wallets, and credit cards.

  • This could speed up the democratization of wealth accumulation and financial services.

Trend #3: Open banking is predicted to become a reality in 2023, allowing for more customization of financial services for consumers and merchants.

  • Open banking is a practice that grants third-party financial service providers access to customer banking, transaction and other financial data from banks and other financial institutions.

Trend #4: 2023 will be the beginning of the age of centaurs, a combination of Fintech and other sectors like banks, retailers, telecoms and tech companies.

  • For example, APIs can help social platforms create value at the place of engagement, meeting the consumer with customized products precisely at their time of need, regardless of the channel. An example of this is Facebook or Instagram allowing its users to shop for stuff without leaving the social network.

Trend #5: The tokenization of private equity funds will make it easier for retail investors to access the asset class, with firms like KKR, Hamilton Lane and others using blockchain technology for automation and increased efficiency, leading to lower investment minimums and greater potential for liquidity via secondary exchanges like Securitize.

Revolutionary Robo-Advisor Platform to Solve Multi-Trillion Dollar Problem

  • Sidepocket, a deep-tech financial startup, announced that its platform will launch on iOS on February 13, 2023.

  • Sidepocket is the only robo-advisor to offer tactical asset allocation to the retail investor, solving the multi-trillion-dollar drawdown problem.

  • Their platform will offer investors a marketplace of proprietary asset allocation strategies, each designed with different performance parameters, and will rebalance these assets monthly.

  • The platform uses Sidepocket’s core proprietary technology, consisting of models that apply advanced statistical analysis, quantitative modeling, and predictive analytics with the goal of minimizing drawdowns and improving risk-adjusted returns.

  • The company also plans to integrate crypto strategies into the platform to make crypto more reliable as an investment asset class for both the seasoned and casual investor.

  • Read more about it here.

Foro Emerges from Stealth Mode with Revolutionary Digital Commercial Lending Platform

  • Foro, a Charlotte-based fintech startup, has emerged from stealth mode with the national launch of its digital commercial lending platform.

  • Target Market: small and middle-market borrowers looking for loans of $1 million to $25 million.

  • Foro’s platform fosters connections between businesses and lenders based solely on fit, anonymizing the initial part of the lending process and then introducing the two parties once the interest is mutual.

  • By using Foro, businesses can secure capital more efficiently and with more support than the current model, while lenders can access a pre-screened pool of businesses that already fit their lending parameters.

  • The anonymous nature of Foro’s platform ensures that borrowers are judged solely on the merits of their business and nothing more, while also providing guidance to those who may not have the prior knowledge and experience needed to navigate the commercial lending process effectively.

  • Foro has previously secured $8 million in Series A funding led by TTV Capital, with participation from Fin Capital, Correlation Ventures, AME Cloud Ventures and U.S. Bank.

  • Read more about it here.

🖤 M&A Transactions

  • BlackRock announced it was acquiring a minority stake in SMB 401(k) provider startup Human Interest. (link)

  • Deel enters equity management space with acquisition of Capbase. (link)

  • Investment giant Fidelity acquired Shoobx, marking its first buy in 7 years. (link)

  • Vouch, an insurtech focused on startups, acquired lending startup Level for an undisclosed amount. (link)

  • American Express announced that it has entered into an agreement to acquire Nipendo, a company that aims to automate and streamline business-to-business (B2B) payments processes for global businesses. (link)

💸 Funding Rounds

  • Method | $16m Series A: Embed loan repayment, data, balance transfers and automation — all through a single API. (link)

  • PayEm | $220m: global procurement and spend management platform that automates finance and procurement processes from request to reconciliation. (link)

  • HatchFi | $1.2m Pre-Seed: crypto integration platform to future-proof fintech apps. (link)

  • Sika Health | $6.2m: payment platform that allows users to unlock funds that are tied to their flexible spending account (FSA) and health savings account (HSA) health wallets. (link)

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