Banks’ Strategy to Invest in Startups through Venture Capital

Through venture capital, banks can channel various financing schemes, expand into digital services, and reach people who have not yet access to the bank. Several banks in Indonesia are currently expanding their business lines by forming venture capital companies. They generally invest in startups engaged in financial technology (fin-tech).

Bank Mandiri operates Mandiri Capital Indonesia since January 2016. The company has invested IDR 950 billion in 12 startups including Moka, PrivyID, and KoinWorks. One year later, Bank Central Asia (BCA) formed Central Capital Ventura which now has 15 startups in its portfolio.

Meanwhile, new players continue to emerge. Bank Rakyat Indonesia’s BRI Ventures currently injected IDR 1 trillion into LinkAja and another fin-tech startup. Bank Negara Indonesia (BNI) and Bank Tabungan Negara (BTN) are also forming a venture capital company. Then, why banks start to have it?

There are some reasons why banks eventually decide to have venture capital. One of the reasons is to channel a variety of financing schemes aside from giving credit to the community. Another reason is to expand its business to digital services.

The Reasons Why Banks Decided to Have Venture Capital

Aside from the reasons mentioned previously, several other reasons are available. One of the good reasons for having venture capital and invest in fin-tech startups is to reach people who have not access to banks. Most fin-tech startups have this ability, so it could be a good investment.

Furthermore, banks have venture capital to improve banking penetration. Meanwhile, survey results from consultancy agency McKinsey & Co. stated that half of the world’s banks were already in a weak position even before facing an economic slowdown that might occur soon or later.

“The majority of banks worldwide may not be economically viable because the return on their equity is not in line with the costs,” McKinsey said in an industry annual review release. Therefore, this institution urges banks to take steps to maintain their business.

In this case, banks should start to developing technology, improving operations, and increasing mergers in advance. “We believe we are in the final economic cycle and banks must take bold steps now because they are not in good condition,” Kausik Rajgopal, senior partner at McKinsey said.

Having venture capital and collaborate with fin-tech startups could be a good idea too. This way, banks can penetrate to digital financing platform without inventing it themselves. That is why recently the average bank considers fin-tech not as competitors. Instead, they cooperate with it to collaborate.

Banks and Fin-tech Startups Are Not Opponents but Friends

The financial technology company (fin-tech) initially predicted to erode the banking business. However, on average the national banks do not consider this company as a competitor. They have prepared a special strategy in dealing with this competition and survive in the financial sector.

Recent research from Accenture said that this year’s global payments business will reach USD 1.5 trillion and increase to USD 2 trillion by 2025. About 14% or USD 280 billion of this value will be controlled by fin-tech payments. Thus, it may reduce the need for credit and debit cards.

With digital server-based payment system technology offered by fin-tech, users can trade directly with their business partners. In Indonesia, the average banks stated that they did not consider fin-tech as a business threat. They will instead work together or hold these companies to expand their businesses and reach many customers.

Bank Mandiri’s Senior Vice President of Transaction Banking and Retail Sales, Thomas Wahyudi, said financial digitalization is a necessity and is developing very fast driven by the flourishing growth of the fin-tech industry. Therefore, banks must be able to be adaptive and be more alert in dealing with this dynamic.