Startups, Big Financial Institutions Play Nice in the Sandbox

Data is the lifeblood of financial technology and more established companies frequently supply data to fintech startups for free as part of their growth model.

A Boston business incubator is basing its operations on that dynamic.

FinTech Sandbox, a non-profit group, launched two years ago and now claims more than 30 data sources that it calls partners for the startups going through its six-month program that benefits both data providers and users.

Testing new technology under a load of data is an important factor facing fintech startups so there’s a tradeoff: established financial services companies are providing data in exchange for a glimpse of the latest tech tools being developed.

FinTech Sandbox participants get to test drive their technology with large amounts of free financial data, which can be crucial step before taking on customers real time, Executive Director Jean Donnelly told deBanked.

“In order to be taken seriously, you have to test. That’s why we came about,” she said. “It’s for beta testing, to get feedback.”

Without partnerships, startups would need to buy data or scrape it from the Internet. However, providers generally don’t want to deal with the small amounts startups need versus larger paying customers. As a result, programs such as FinTech Sandbox’s can play an important role in the fintech ecosystem.

To date, four FinTech Sandbox portfolio companies have been acquired by larger companies. Most recently, machine learning company DataRobot Inc. bought software maker Nutonian in May.

Data sources for FinTech Sandbox’s startups include Fidelity Investments, F-Prime Capital, Thomson Reuters and Silicon Valley Bank.

Several banking and financial services companies operate accelerator programs and gain access to the latest technology by doing so. They include Deutsche Bank Innovation Labs, Barclays Accelerator and the Wells Fargo Startup Accelerator.

Earlier this year, Pricewaterhouse Coopers reported that the demand for data analytics is fueling the trend of traditional financial institutions folding fintech startups—and the tools they develop—into their companies.

“FinTech companies create an ecosystem that fosters the collection of vast amounts of data and builds trusted relationships with clientele. Financial institutions have realized the importance of these ecosystems and are attempting to engage with and bring innovation inside their companies. Partnering with FinTech companies is up from 32 percent in 2016 to 45 percent this year on average, but large discrepancies by country do exist.”

Ninety-eight startups have participated in FinTech Sandbox’s six-month program. They’ve raised a combined $380 million in funding, Donnelly said.

Artificial intelligence may be the hottest trend in the technology industry. But tech tools related to environmental, social and governance, also called ESG or socially conscious business models, are fueling the strongest growth trend with fintech entrepreneurs, she said.

One such startup, California-based Data Simply Inc., went through the FinTech Sandbox program in fall 2015 and now provides data to sustainability-focused companies.

The financial technology sector has changed over time to become one in which legacy and startups regularly team up, Data Simply CEO Michelle Bonat told deBanked.

“It used to be more of a competitive environment, but it’s now more collaborative,” she said. “Each realizes they can gain more from the other.”

FinTech Sandbox also collaborates with 11 accelerator programs such as Techstars, Startup Bootcamp and FinTex Chicago. Partnering with larger fintech companies turbo charges the growth of a business, Bonat said.

“It started so many useful discussions and it happened so much faster than it would have happened otherwise,” she said. “It’s all about an ecosystem and accelerating that in different ways.”

In July, Boston-based investment analytics startup FinMason Inc. disclosed that it was making its enterprise software available to FinTechSandbox participants.

The software is a suite of investment analytics with access to more than 700 analytical data types, including risk and performance metrics, aggregate factor exposures, scenario analyses and stress testing.

CEO Kendrick Wakeman told deBanked FinMason is partnering with the accelerator’s portfolio companies with a plan that such startups are prospective customers in the future.

Startup partnerships are more common in the financial services industry because an aversion to risk has slowed the adoption of innovation. Now, the industry is playing catch up and working with startups and young entrepreneurs is one way to close the innovation gap faster than developing products in house, Wakeman said.

“Institutions know they have to innovate. Consumers demand it and regulators demand it,” he said. “They have a long ways to go.”