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Banks & Startups Collaboration: In the Search of Equilibrium for Sustainable Growth
By Damien Kopp, Senior Technology Advisor & Head of Products, Blue Pool
FinTech is all about collaboration between new entrants and incumbents. But what is collaboration and does it really work?
There are multiple ways to collaborate and popular models include:
• Partnerships & Co-creation: One of the most talked about, and also most challenging; an agreement between the institution and the FinTech firm to acquire or participate in the development of the solution. An example is Matchi, a FinTech matchmaking service portal (acquired by KPMG this year). Israeli startup Proov.io helps connect startups and corporations to initiate and support proof concepts as a first step of their collaboration journey. Challenges include the “proof of concept mania”: where institutions like to test things out but never commit; mostly focused on their own PR to show case their innovative culture but expect free resources and… end up killing the new born startup by lack funding and decisions.
• Startup Incubators (StartupBootCamp, Supercharger, Innotribe, FinTech Innovation Lab, etc.): they provide startups a platform to tune up their pitch, solution and increase their reach to prospects, clients and investors, meet up with mentors and advisors, in exchange for an equity stake. Challenges include keeping the pace of the self-imposed program schedule versus its own business priorities.
• Buying or Selling services: A traditional solution provider and client commercial relationship where white-labeling is often used. It includes challenges such as lengthy sales cycles on the institution side and the charter client syndrome where one single client has too much weight in influencing the product roadmap: this can lead to de-productization due to too many client specific features.
• Financing or Acquisition: Equity stake or full acquisition is another way many institutions decide to build up their new capabilities (this includes aqui-hiring: acquiring a startup just for its talents, not its products or clients). Integration challenges would be the most common, startups teams mixing up with large corporate IT teams may not always work best.
All these collaboration models are imperfect in nature and in practice. So what are the ingredients of a successful collaboration?
• Aligning Interests: Regardless of the collaboration model, it requires some form of alignment. Co-creation requires a strong joint interest in developing intellectual property.
Equity stake or full acquisition is another way many institutions decide to build up their new capabilities
• Ensure Market Relevance and Economy of Scale: A startup acting only as a vendor may become too focused on a single client’s needs and forget about its market. If the startup becomes a simple outsourced delivery center, it will lose its understanding of its clients and market and runs the risk of making the product just a “one off”. A product or platform is a one-to-many investment; it needs the economy of scale to generate revenue from multiple clients to cover for the initial investment and scale.
• Prepare for Capability Gaps: Incumbents can be slow to start but once the machine is started it may move faster than what the startup can chew. It can create tensions with the software engineering teams, missed deadlines, quality issues, etc. The startup team may also have ramped up too quickly, have too many new developers, not enough processes and discipline in place yet. When joint interests are at stake and the startup struggles to deliver, should the incumbent treat it as an underperforming vendor and drop immediately or find ways to provide assistance? After all, the incumbent is usually getting a good deal: inexpensive innovative solution, access to specialized talents, a platform for transforming their organization. So up to what point should the incumbent help or drop?
• Managing Failure and Reputational Risk: The startup may fail to deliver or go bankrupt due to lack of funding. This creates a risk for the incumbent. Dropping the startup when times are rough may also send a bad signal to the market for future collaborations with other startups; but stopping a project will impact the incumbent’s business as well. A startup can pivot and survive; an incumbent will face more challenges in case of failure such as bad press, unhappy customers or partners.
Finally, let's look at how banks and startups can play with their own strategic advantage:
• New entrants are focusing on rapid, agile, tech-enabled and low cost solutions. They operate subsidized business models (via external funding from Venture Capital or others) in a green field environment and for the most part, they try to focus on the non-regulated parts of Financial Services. They are provocative and controversial in nature, which creates a wind of change usually welcomed by both consumers and regulators.
• But incumbents have an established and captive customer base as well as their trusted brand (although eroded since the 2008 financial crisis). They understand and manage compliance to regulation, know how to operate secure and fire-walled environments, have huge amount of customer data and resources. They have an established brand, scale and usually a regional and often global footprint. Finally, Financial Institutions are systemic to our economies and benefit from a relative protection from most governments: no one knows what will happen if too many fail.
How much time before new entrants capitalize on their customer relationship? Create massive customer base and capture its data? Master and even influence regulation?
I believe that FinTech 3.0 will be about customer data, security and compliance to regulation. It is very likely that complementarities in the collaboration models will erode significantly over time.