Banks Partnering With Startups? A Minefield For Both Sides

Banks Partnering With Startups? A Minefield For Both Sides

Some startups want nothing to do with big banks. Others see them as possible partners or customers.

From the point-of-view of big banks, investments in startups (or even partnerships) can serve as a kind of outsourced R&D.

However, regulatory and security issues can make partnering a minefield for both sides.

Moderator Maria Gotsch, president and CEO at the Partnership Fund for New York City opened the panel with an anecdote about a recent security breach that saw a bank fined a million dollars. She asked why a bank would share their data with a startup when it might heighten the vulnerability of that data.

“For better or worse,” she said, “the first place that a bank executive often goes is, ‘But I’m the one paying the $1 million fine.’”

She was speaking on a panel at CB Insights’ Future of Fintech Conference earlier this month. The panel also included Jaidev Shergill, head of ventures for Capital One Ventures, Karl Abbott of Scotiabank, and Luis Valdich, managing director at Citi Ventures.

Shergill sounded a cautionary note for early-stage startups.

“If you’re an early-stage consumer fintech company, don’t even go close to a bank,” he said. “It’s going to weigh you down, it’s gonna slow you down.”

He pointed to the massive compliance burden involved in any such partnership, and how incompatible it is with the way early startups work.

So how should a startup looking to partner approach the big banks?

The panelists gave some historical context. They cited the recession of 2008, the effects of which included a talent drain from the big banks and the death of a number of niche lenders (which created a vacuum filled by startups). They also pointed out that the big banks themselves were so caught up in their recoveries that they didn’t pay much attention to fintech startups until now.

Valdich of Citi advised new companies to start small and attack a narrow problem: “Take a bite of something that is chewable …. You need to be very measured, very specific.”

Once a scaled-down initiative proves successful, then startups can think about expanding the initiative or how their products might apply to other areas.

Shergill’s advice to business-to-business startups was to start conversations with banks early, while not letting any individual bank dictate your strategic direction.

“Start engaging with the bank to get that advice very early on, but also ensure that you aren’t developing a solution just catered to one customer,” he said. “You’ve got to have that discipline to ensure that it’s a scalable solution across several different organizations.”

At the end of the day, it’s all about solving problems and understanding your customer, said Valdich. Banks are huge, sprawling, complicated entities, but startups aren’t pitching companies, they’re pitching people.

Getting to know stakeholders and acquiring what Valdich called “sherpas” within target organizations are two vital steps.

Persistence is needed to build real rapport and for getting a sense for when an opportunity is real, so startups can avoid endlessly spinning their wheels with a bank that was never going to team up with them in the first place.

“Remember that banks are basically technology companies that move money,” said Gotsch, of the Partnership for New York City. “They have an insatiable demand for technology. Some of it is built in­-house, but a lot of it is not. And the trick is finding the fit between what you have and what they need.”

partnering-panel-imagei

For more details and to read the transcript, please visit the relevant CB Insights page through the link below:

Banks Partnering With Startups? A Minefield For Both Sides

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