As a growing number of technology startups and fintechs offer financial services outside the traditional banking system, institutions are bulking up their technology investments and launching strategic partnerships with fintechs to remain competitive.

But as the fintech sector grows, some banks have emerged as buyers, seizing opportunities to acquire tech and talent to stand out from other institutions. 

For banks with the means, acquiring a startup can be a quick way to keep up with consumer demand for new products, reach new customers and compete with nonbank entities.

KeyBank’s bid for doctors

KeyBank has made a series of acquisitions in the past several years that have helped the bank enhance its offerings for existing clients, as well as reach new customers in new markets. 

The $187 billion-asset bank entered the healthcare finance space last year, when it launched Laurel Road for Doctors, a niche digital banking platform that offers specialized services for healthcare professionals. 

The launch marked the realization of a two-year vision for the Cleveland-based bank, which purchased Laurel Road for an undisclosed sum in 2019.

Laurel Road’s existing partnerships with some of the nation’s largest medical associations and hospitals has brought high-quality loans to KeyBank’s portfolio.

During the bank’s first-quarter earnings report, CEO Chris Gorman said the subsidiary had a record quarter, with originations reaching $820 million.

With a recent addition of a rewards-based checking account geared toward nurses, Gorman said he expects Laurel Road’s reach will continue to grow, promising analysts the bank plans to disclose in September the number of households serviced by the platform.

“We're growing the number of doctors that we're serving, and a nice percentage of those doctors have decided to do more than one product,” said Jamie Warder, KeyBank’s executive vice president and head of digital banking. “We're seeing doctors use Laurel Road as their primary day-to-day bank, which is hard to do if you’re branch-based. I think it's even harder to do if you're a digital bank.”

When evaluating whether to bring Laurel Road under KeyBank’s umbrella, Warder said the bank identified several elements that made it an attractive acquisition target.

“They were targeted and they knew who they were focused on,” Warder said of the fintech, which brought to KeyBank relationships with the American Medical Association and the American Dental Association.

Laurel Road’s origin stems also from traditional banking, having been created and spun out by a small Connecticut bank. 

“They were a fintech within the bank regulatory framework,” Warder said. “We could always teach that, but we liked that they were there.”

Warder said KeyBank has no plans to spin out Laurel Road, as that’s not part of the bank’s strategy when it acquires a startup. 

“We’re not thinking of building a stand-alone business,” he said. “Although we won’t spin them out, we are thinking about scaling them.”

KeyBank gave Laurel Road more balance sheet space, invested in marketing and doubled its engineering team, Warder said, adding he expects Laurel Road will have 250,000 healthcare members by 2025.

Complementary deals

KeyBank has partners with dozens of fintechs — relationships the bank is constantly evaluating, Warder said.

“We get to know them, we can get to know what their capability is and we bring that capability to our clients,” said Warder, adding the bank will also make strategic investments in fintechs when it wants to help shape its roadmap. 

KeyBank will make an acquisition if it feels it's the best route to bring tailored services to existing clients, Warder said.

The bank purchased small-business lending platform Bolstr for an undisclosed sum in 2018. 

“We were doing hundreds of small-business loans every single month, and Bolstr made it easier for our clients to apply for a small-business loan,” Warder said. “It made our core business better.”

KeyBank’s acquisition of Bolstr became a “critical ingredient” in the bank’s participation in the Small Business Administration’s Paycheck Protection Program (PPP).

“If we hadn't acquired Bolstr, I don't think we would have had the success we had in PPP,” Warder said. KeyBank processed about 70,000 PPP loans totaling $11 billion.

KeyBank also purchased public service loan forgiveness counseling provider GradFin in May, a deal it says complements the services it provides through profession-focused Laurel Road.

Truist and Long Game

While banks are often the ones seeking investment and acquisition targets, occasionally it’s the fintech that approaches a bank with a proposal.

In the case of Truist’s purchase of gamified financial savings app Long Game, it was the fintech’s CEO who proposed turning the bank’s planned investment into an acquisition.

“They were looking for a bank platform to scale,” said Vanessa Vreeland, head of corporate development at Truist Ventures. “But they really were becoming frustrated because it was costing them more money to scale and reach as many people as they possibly could.”

The $545 billion-asset firm had initially planned to invest in the San Francisco-based startup, but after a lead investor fell through, the startup approached Truist about the possibility of pursuing a different type of structure.

“Lindsay Holden, the CEO, felt that being part of a broader bank platform and being able to scale technology to as many households and clients as possible was something that she wanted to focus on and the next iteration of Long Game,” Vreeland said.

Truist acquired the startup for an undisclosed amount in May, a deal the Charlotte, North Carolina-based bank hopes will help it reach a younger demographic. 

“We're always looking for opportunities to acquire new customers and to deepen relations with existing customers, which is one of the reasons we were so drawn to Long Game,” Vreeland said. 

Long Game’s average consumer spends seven to 10 minutes a day on the app, Vreeland said. 

“We come nowhere near that kind of engagement,” she said.

As part of the acquisition, Long Game’s engineers, designers and business leaders joined Truist’s innovation team. The startup is still headquartered in San Francisco, but Holden and her team make frequent trips to Truist’s Charlotte headquarters, Vreeland said.

“We’re thrilled because they brought in a different type of talent than banks normally attract,” Vreeland said.

Maintaining the startup culture

Truist focuses on granting transparency and access to the startups it acquires, Vreeland said.

“The fact that we can get our CEO to come and spend 20 or 30 minutes with a team of 10 people and talk to them about what it's like to be at Truist is really powerful,” she said.

Warder, however, cautioned that banks have to be thoughtful about how they operate companies they acquire.

“We generally will run them as startups within our scaled company. We won't try to integrate all that into KeyBank and make them look exactly like the rest of Key,” he said. “We really embrace the fact that they're fast and they're nimble.” 

In the end, a successful bank-fintech relationship — whether it be through partnerships, investment or acquisitions — is one that helps both parties accelerate their growth goals, Warder said.

“Building the national digital bank in a short period of time would have been hard to do if Laurel Road was trying to do it without KeyBank. And it would also be very difficult for KeyBank to try and do it without Laurel Road,” he said.