Startups And Banks: Friend Or Foe?

“The holy grail for banks is to become the best at ‘fintegration’.” This quote by Andreas Wolberg-Stok of Citibank, an important player in investment banking and financial services from the U.S., is proof that the banking system has started to recognize the importance of innovation in finance also, although it was rather slow to do so. The wakeup call has most likely been the insurgence of so called FinTech startups, which aim to make financial services more efficient. Customers’ demands have also changed lately, with a preference for mobile payments, or expectations of being able to open an account without visiting a bank branch.

Now many banks are eager to form partnerships with FinTech startups in order to not fall behind competition. Others, such as Citi, decided to instead form their own elite team that would be made up of some of the bank’s employees. The idea behind “Citi FinTech” was that this group would be able to move much faster, much more like a startup and bring fast change to the group.

Although ideally banks and startups would see each other as allies, a partner to count on, the reaction is often negative. Especially startups see partnering with a bank like giving in to incumbents, while some banks feel threatened by their innovative counterparts. But whether they like it or not they both have to find common ground as banks are here to stay, while at the same time, major change in the financial system is inevitable. The latter was proved by the enthusiasm for peer-to-peer lending, or the appearance of the Bitcoin as a new way for people to transact with no need to pay fees.

Here, we put together a list of the most frequent advantages but also disadvantages of this rather unusual, yet possibly very profitable pairing:

The Bright Side Of The Partnership

1. Banks already have a large pool of established clients, many of which would enjoy better quality services if their bank worked closely with FinTech startups. In this regard, the partnership can be beneficial for everyone: startups don’t have to find their own clients which takes time and money, banks can cut down costs, and benefit from higher customer satisfaction. So basically, banks already have the infrastructure that FinTech startups need in order to grow., and let’s not forget about their experience with regulators.
2. Another advantage of working with a bank is that their name is well known and as such, there is an established trust. People will not be wondering as much if it’s safe to use the mobile payment system offered by a bank, but they will surely have their doubts when they hear of the same service offered by an unknown brand.
3. Smart, new ways of assessing risk are offered by the FinTech industry. For this they use data from reviews available on social-media about a company to logistic firms’ usage in order to evaluate the health of small businesses. This kind of information could be very useful for banks as they can benefit from being informed on how their customers are doing, but also asses potential customers.
4.  Having deep pockets is not a bad thing to have! One of the problems startups face is that of funding. Partnering up with a bank should make that much less of a headache.

The Dark Side When Pairing With A Bank

1. Many startups simply don’t like the idea of working with banks, and have a not so shinny picture with them (remember 2008?), banks often come off as greedy and as such many working in FinTech only accept banks as partners hoping it would be temporary. Like Lenda CEO, Jason van den Brand says, “If I get my way, we take over the entire mortgage business from them and do it the right way “.
2. That kind of attitude towards banks is no secret. Banks are of course all too aware of this and it’s possibly the reason some prefer to found their own fintech startups instead of working with those that already exist. As such, this lead to bands and fintech startups becoming competitors rather than allies.
3. Another concern of startups would be that banks would use them just until they bring enough innovation in the financial system, innovation that banks will have access to, so that after implementing the ideas startups will not be needed anymore, making them redundant.

So there you have it, both bright and dark side of the moon! Of course, this relationship is much too complicated to be able to capture every aspect of it in an article. But it’s interesting to follow it’s dynamics and see what are banks and startups really: partners or foes?

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