NBC Fintech Insights – CVCs, SMB Banking, and Embedded Finance – March 2022 Newsletter
In this issue, we cover:
What is Strategic Corporate Venture Capital (CVC) Anyways?
The Canadian SMB Banking Revolution at our Doorstep
Embedded Finance & Canada’s Solution
Click, Click, Loan! The Future of Lending
Excerpt of the Month: The Messy Middle
What We're Reading / Listening to this Month
1. What is Strategic Corporate Venture Capital (CVC) Anyways?
Most of our readers are familiar with Venture Capital: The act of providing capital (and guidance) to high-growth early-stage companies in the hope of sharing in the financial upside if the company succeeds.
Once dominated by venture capital funds, the asset class is increasingly seeing large companies launch their own corporate venture capital (CVC) arms to invest directly into start-ups rather than investing indirectly through a General Partner.
While the high fees (typically a 2% management fee and a 20% performance fee) of investing in the asset class can provide a financial motive for internalizing the fund, many corporations have switched to direct investing for strategic reasons – not financial ones.
Let's take NBC as an example. NBC invests in venture capital directly, via our corporate venture capital arm NAventures, and indirectly by investing money in Canada’s most prominent venture capital funds. The latter is primarily for financial purposes – groups like NBC’s employee pension fund are diversifying our holdings and seeking the upside offered by the asset class.
NAventures, while still interested in generating positive financial results, seeks to help NBC gain a competitive advantage by identifying and partnering with innovative companies that we believe can accelerate NBC's digital transformation and disrupt the financial services industry.
Corporate venture capital has three key non-financial levers to unlock strategic value for its parent corporation:
A. Expand its product and service offerings faster or at a lower cost
e.g., NAventures invested in Flinks to accelerate our Open Banking strategy.
B. Learn about the latest technologies, growth tactics and business models
e.g., NAventures invested in KOHO to learn from & partner with high-growth neo banks that have a deep understanding of digital customer acquisition at scale.
C. Increase distribution by partnering with high-growth start-ups to distribute NBC's products and services
e.g., NAventures invested in Borrowell for its referral potential and for access to Borrowell’s 2M+ members across Canada.
So how does NAventures select what companies to invest in and partner with? We look at the strategic fit, the company’s product differentiation, the type and size of the company’s market, the company's maturity, and of course, the team (the weight attributed to each varies by maturity & industry).
1. Strategic Fit: We look at companies that clearly respond to the needs of NBC clients and business lines, enabling NBC to innovate at a lower cost and at a faster pace.
2. Product Differentiation: Is this product significantly different than what is available on the market today? Will customers be willing to pay for it? In addition to assessing the breakthrough nature of the product, we also evaluate the following:
Technology: Is the company built around best-in-class technology?
Growth / Scalability: Is the product robust enough to scale within the NBC network?
Cybersecurity: Will NBC clients, employees, partners and all of their data be safe & secure?
3. Market: Is the market big enough to generate huge revenues? We want companies that target well-defined markets, preferably with revenue potential exceeding $1B.
4. People and Team: Does the company have the right management team in place to succeed? We will evaluate management’s ability to succeed through:
Expertise in the targeted market
Experience building products and scaling companies
Skillset and leadership abilities
Vision, commitment and confidence in the product/service
Depth of network
5. Maturity: NAventures typically invests in early-stage companies (Seed, Series A), providing companies with much-needed venture capital and an early major customer to grant credibility (and direction) to the venture.
Venture capital rounds are broadly defined by what the funds will be used for:
Pre-Seed: To confirm idea viability (often via prototypes.)
E.g., NAventures invested in Workind.
Seed: To develop the product, business plan, and management team.
E.g., NAventures invested in Flinks.
Series A: To scale its product and customer base.
E.g., NAventures invested in Dialogue.
Series B: To support growth (product manufacturing, marketing and sales operations)
NAventures invested in MX, our first unicorn investment.
Growth Stages (Series C and Beyond): Build new products, enter new markets, and tackle new customer segments. A notable success is already achieved, and the company is on a strong growth trajectory.
So where is NAventures seeking to invest next?
Fintech is the hottest area of venture capital right now, with $134B invested in the second half of last year, and the key area of interest for NAventures. While the fund is interested in investing across the sector, we are particularly bullish on Cybersecurity, Crypto/Blockchain, Embedded Finance, ESG, Wealth Tech, Proptech, Banking infrastructure, and SMB banking technology.
We always have our eyes open for new companies. If you are looking for a new partner to accelerate your innovation or know of an excellent fintech company you think we may want to invest in, please let us know!
2. The Canadian SMB Banking Revolution at our Doorstep
Back in 2020, we began noticing a shift in the Canadian Small and Medium Business (SMB) banking landscape.
Whereas previous recessions resulted in banks reducing their exposure to SMB banking and lending, the global pandemic had a different outcome. Banks, fintechs, and platforms doubled down on the sector (supported by abundant cheap capital and government programs.)
By mid-2021, we had entrepreneurs interested in launching SMB banking offerings knocking on our door on a near-monthly basis, seeking seed capital and a banking partner. And unlike prior iterations (think NorthOne, which moved to the US), many of these companies had the business models or partnerships required to launch an offering in the Canadian market.
Fast-forward a few months and many have products in market or in development. Here are a few examples:
Caary offers a corporate card supported by a spend management platform, seamless receipt management, automated accounting integration, and 100% digital onboarding
Pillar launched a beta version of their new business accounts supported by an all-in-one financial platform for business owners and the self-employed
Benji offers free business operating accounts with bookkeeping and spend features
Orchid-B opened its waitlist for their fully integrated one-stop-shop for administration services, including business registration, banking, insurance, and payroll
Vault is developing a free multicurrency account for Canadian Startups and SMBs supported by corporate cards and international transfers
And digital challengers are only part of the evolution happening in the Canadian SMB Banking market. Platforms that had previously restricted their banking offering in the country (i.e., Intuit, Shopify) are expanding in Canada. Canadian Banks are expanding their services beyond banking to include SMB dashboards, insights and analytics tools, enhanced digital services, accounting, and tax tools. Even the Canadian Crown Corporations BDC and EDC are evolving their digital offerings.
While this presents an important threat to SMB banking revenue streams, it also provides a massive opportunity. Over 44% of survey respondents would prefer digital platforms to offer their banking services in partnership with a traditional bank.
Canadian banks have an opportunity to partner with digital platforms to reach massive pools of SMB customers, potentially creating significant revenue streams without incurring the costs of end-to-end distribution.
According to Accenture, the question for banks isn’t if they should offer embedded finance solutions for SMBs, it’s “where should they compete under their own brand with their own products and services, and where to collaborate with digital platform players to solve SMB challenges and reach new customers.”
3. Embedded Finance & Canada’s Opportunity
With all the attention that the Metaverse, BNPL and Fintech SuperApps are getting these days, it’s easy to forget the quieter, yet industry transformative trend of Embedded Finance looming just around the corner.
According to a report from Deal Room & ABN AMRO ventures, the Banking-as-a-Service sector received 3.8 times more VC funding than in 2020 for a total of $3B, and that’s excluding adjacent sectors such as embedded payments, insurance, lending and open banking providers such as Flinks.
Embedded finance, or sometimes called contextual banking is the idea that financial services can be inserted into the products and experiences of non-bank providers, within a customer journey that contextualizes it at precisely the time and place of need. To add a twist on the Bill Gates’ quote, it’s Banking, just not at a bank.
The idea of embedding financial services isn't new, in fact it's quite old and was horrendously executed, but technology has exponentially changed out how these offerings could be delivered. Just think automotive industry, retail point of sales or E-commerce payments.
For Non-FS brands, embedded finance provides an opportunity to generate significant value, mainly by:
1. Generating more revenue from existing or new customers, by
Generating new revenues through sharing of the embedded accounts, payments, cards, lending, investments or insurance value created
Increasing core sales conversion / shopping cart size through better financing options
Encouraging repeat purchases or increased loyalty through rewards
Increase customer stickiness - if your customers never have to leave your ecosystem, they’re less exposed to discovering alternatives
2. Improving business efficiency through closed-loop payment solutions, that allow your business to reduce interchange fees and better fund your loyalty programs (i.e. think Starbucks)
And so, if “embedded” is so compelling, why aren't more providers offering it? They are, in fact. A LOT of them (remember my first point). Here’s what the space looks like across North America (bonus a few global notables and core banking platforms poised to get in the game):
Source: NAventures Analysis
That’s right. There aren't many Canadian horses in that race. With Canada’s oligopolistic nature and slower mandated open banking, it’s been slower. Eventually, as Research and Markets has pointed out, an expected 25% CAGR market growth to ~ $16 Billion in 2029 (that’s $4.7B in 2022) will attract the next Narwhal (aka, 🇨🇦🦄).
Enter Finaptic. Combining the power of modern technology and trust of a tier 1 licensed financial institution into a one-stop shop BaaS provider, it’s the closest thing Canadian companies might have to empower them (at least, for anyone who takes technology AND banking seriously).
Why would banks risk shifting from the traditional banking model to this SaaS-like model? Because the winners of the past, aren’t necessarily the leaders of the future. Because a shift might be happening in the finance space. Because those who can, could do both.
Don’t take my word for it. Finastra surveyed 1,600 industry participants and 85% of senior executives are already implementing BaaS solutions, or plan to do so within 12-18 months
4. Click, Click, Loan! The Future of Lending
Reading our newsletters (including the article above), you may be thinking that we are quite bullish on embedded finance.
We are.
But we also believe that customers still look at banks first for certain products, and all things being equal would prefer to deal directly with Financial Institutions for certain offerings. One of these offerings is commercial lending.
However, a key element here is all things being equal.
Fintechs and embedded finance providers are increasingly offering loans - with many offering loans in just a few clicks and with a response as quickly as under 24 hours. Here are a few examples of fintechs that stand out:
ClearCo offers up to $10M in Marketing Capital or $1M in Inventory Capital in 24 hours, making the credit decision by connecting directly to their customers’ apps and data
Novel Capital provides loans for up to 30% of a company’s total annual revenue or 30% of their subscription revenue by connecting to their banking and accounting data
Pipe turns recurring revenue into up-front capital by connecting to companies’ payment processor
And this is without mentioning Swoop, Shopify, Lendified, Ondeck, and Meta’s activity in the space.
Companies achieve such speed by connecting directly to company data sources rather than relying on manual document sharing (this can be done via solutions offered by the likes of Codat or BossInsights) and by automating much of the decisioning process.
Some of you may think this isn’t an important threat to banks, as banks offer better rates to clients. But what happens when these providers begin to leverage data to offer loans to customers before they even realize they need it? A trend known as contextual financing. What happens when these providers use the data to develop better risk models enabling them to compete on price? Or what happens when other Canadian incumbents offer commercial loans in under 24 hours?
Because its only a matter of time..
5. Excerpt of the Month: The Messy Middle
Ever wonder what it feels like to venture into a new business?
People focus on the exciting start or the glorious finish... but the never the messy middle - Scott Belsky
6. What We're Reading / Listening to this Month
This month we enjoyed listening to some of our own:
1. Joshuah from NAventures was featured on Fintech Insider Episode 611 Insights: Running the Canadian Fintech ‘Ultramarathon’
2. Richard from Finaptic was featured on The Finnovate Show:
That’s all for this month :) Happy April Fool’s!