Making financial-tech collaborations work

Financial technology innovation (fintech) is one of the most promising and growing fields of entrepreneurship, as witnessed by the abundance of new ventures related to payments, investments, peer-to-peer lending, etc.

Many of these startups collaborate with large financial institutions such as banks and insurance companies. Such collaborations entail inherent challenges, but they also offer substantial opportunities.

Fintech collaboration: the challenges

Cooperation between two very distinct parties — large financial institutions and young startups — naturally face several difficulties:

Technology. Banks and similar organizations operate massive IT systems; many of these legacy systems are based on old infrastructures and ancient programming languages.

Startup founders, by contrast, are accustomed to mobile websites and apps, are used to cloud-based software, and are comfortable with open source software and APIs.

Regulation. Financial institutions such as banks, insurance companies, and pension funds operate in highly regulated environments.

Most entrepreneurs are used to markets driven by customers and competitors, not by regulators. Dealing with regulation is a challenge even for seasoned businesspeople, as evidenced by Metro Bank’s quest for a banking license in the U.K.

Industry knowledge. In some industry sectors, personal industry expertise is not required in order to launch successful startups (e.g. Waze and Get Taxi in the transportation arena).

Financial services, by contrast, are complex and risky. They require profound industry knowledge, as several industry professionals have attested.

Timeframes. New ventures are built for agility: small teams with low budgets build Minimum Viable Products and quickly seek customers. Long sales cycles are often considered the biggest frustration for startups.

Financial institutions are risk-averse and conservative. Every step of a new project — making decisions, budgeting, or implementing — may take a long time.

Expectations. Small startups often court large organizations, investing plenty of time and resources into the process. Many startups fail to realize that given the limited impact of such collaborations on large organizations, these deals are not very important for the 800-pound gorillas.

Culture. Proficiency in social media and the ability to leverage unique skills of all employees — regardless of the organizational hierarchy — have become a necessity. Most startups find this obvious, but many large financial institutions have been slow in adopting such trends.

So, how can established financial institutions and Fintech startups forge successful relationships?

Tips for both parties

1) Assess in advance the gaps between the parties.  

Every collaboration requires due diligence about the future partner. Unfortunately, startups eager to connect with industry leaders, and corporations excited by shiny new technologies, often fail to study their future partners.

There are various ways to perform such research, from due-diligence checklists to the hands-on approach demonstrated by Sberbank. Regardless of your preference, do not skip this important phase.

2) Plan the right size for the project

Massive, multi-phased projects may crash into icebergs that smaller projects can avoid. Instead of launching huge projects that force startups to quadruple their teams and get overwhelmed by unrealistic deliverables, it is often better to start small, by planning digestible mini-projects or pilots.

Tips for financial firms

3) Find startups that still have financial runway

Long cycles (for signing deals, implementing projects, and paying) may be a big issue for startups that are short on cash, since raising additional capital is not always a valid immediate option.

Startups that have already secured capital (e.g., through Fintech focused funds such as those of BBVA, Sberbank or Bank Hapoalim) or participate in Fintech acceleration programs are better positioned to cope with long cycles.

4) Identify startup founders with relevant skills

Collaborating with financial institutions often raises typical B2B challenges: dealing with multiple stakeholders (decision-makers, influencers, etc.) in the organization; understanding internal politics; etc.

Founders with strong people skills, who personally know many employees within the organization, recognize who the gatekeepers are, and gain their trust, can gain internal buy-in and acceptance. Try to identify such entrepreneurs.

5) Choose founding teams with industry insiders

Fintech ventures established by industry insiders are better positioned to notice ‘hot’ topics, find solutions for them, and get things done.

Indeed, many startups are formed by ex-bankers, who must adapt to the world of entrepreneurship — for instance, MarketInvoice, founded by former investment bankers from JP Morgan, Lehman Brothers, and Goldman Sachs.

Tips for fintech startups

6) Seek organizations that are experienced with startups

Fintech startups should check whether counterpart financial institutions have already collaborated successfully with technology startups.

For example, PayPerks partnered with MasterCard that regularly collaborates with Fintech ventures. International banks such as Deutsche Bank, Credit Agricole and Garanti, which separately launched App marketplaces, are experienced with technology ventures too.

7) Target internal innovation units  

Financial institutions that have dedicated innovation units are familiar with current trends and technologies and therefore fit young ventures well.

Citi, BBVA, Wells Fargo and Capital One, for example, have such dedicated units; BNP Paribas established a Silicon Valley office of ‘L’Atelier’, focused on disruptive innovation.

Eran Laniado is managing director of BMN! He advises multinational firms and mentors entrepreneurs. Previously he was Senior VP at a commercial bank and VP of Business Development & Strategy of a NYSE traded firm. He writes about strategy, innovation and change on the BMN! blog and can be followed at @EranLan.