Banking and fintech have been a bit like the protagonists in a romantic comedy over the last few years.
They started out as polar opposites. Fintech viewed banks as boring and banks saw fintechs as starry-eyed. With time, they've grown to appreciate each other's complementary advantages. Today, banks recognize that outsiders might know something about serving customers better, while fintechs acknowledge that unseating the incumbent isn't as easy as they may have thought.
So, will they live happily ever after? It depends on how you define happy.
Perhaps the natural conclusion is that all the partnerships that have formed in the last year are just a precursor to something more. Perhaps they will give way to banks buying and investing in fintech startups, rather than just buddying up. But tying such knots won't be easy.
"Banks usually prefer to do everything on their own. Partnering is not natural for them; it is not a muscle they've exercised much," said Dan Latimore, senior vice president of the banking practice for Celent. "And when it comes to acquisitions, acquiring a company is a skill unto itself."
More Cooperation
Although banks and fintechs are getting along better, they are still very much in a phase of feeling each other out, said Jose DaPonte, head of global business development and new ventures for BBVA Digital, a division of BBVA Compass.
"There's much more cooperation going on," DaPonte said. "There's much more willingness to reach out from the fintech side and much more willingness to engage from the banks."
BBVA has been one of the few banks that has acquired fintechs, along with partnering with them. Perhaps most notably, in 2014 the bank acquired the digital startup bank Simple. In March it announced its latest acquisition, the online business banking service provider Holvi. The Helsinki firm, which was founded in 2011, provides entrepreneurs and small and midsize businesses with traditional banking and a range of business services through its online platform.
"You have to think long and hard about what the rationale is before going into an acquisition," DaPonte said. "For one, the company has to have capabilities that we want to internalize, and we also have to believe it is a company whose value would be enhanced by being inside BBVA."
The good news is that banks and fintechs have largely moved on from the phase where they saw each other as threats. Banks are now implementing innovative technology and startups have access to a wider range of customers.
"Fintechs bring some great assets to the table, but so do the banks," Latimore said. "They have current customers, data on customers and an existing brand. I think both have come to the mature realization the other has something they need."
Fintech Champion
BBVA has been successful in connecting with fintech firms because it has an entire unit — the unit led by DaPonte — dedicated to seeking them out. The unit is tasked not only with finding innovative companies for BBVA to acquire or invest in, but also with acting as a "buffer" and independent entity between the bank and the acquired companies as they integrate into the larger BBVA structure.
While DaPonte's division might be a rarity now, he expects more to come.
"I think you will see more banks have dedicated internal organizations that act as a conduit between the bank and the fintechs," he said.
Although whole acquisitions remain rare, banks are definitely investing in fintech more through dedicated venture capital arms. A recent study by KPMG and CB Insights found that a third of investments in fintech firms in the second quarter of 2015 came from corporate-backed venture capital firms. That compared with less than a quarter in the three prior quarters.
Diwakar Choubey, chief executive of MoneyLion, a New York-based online lending firm, agrees that banks need people focused on bridging the divide between fintech and wary bankers.
"It's an educational process for banks," he said. "They need that internal champion that will promote a partnership and take it through the committee process, get the board and CEO approval, and also do the due diligence to find the best players in the space you're looking to partner in."
Making the Numbers Work
Although partnerships may make the cultural difficulties of bank-fintech acquisitions easier, there is a high hurdle: What will it mean to the bank's bottom line?
"We look at: Will the company bring value to our clients? Can we bring value to the company? And will we learn something disruptive in a core area where Santander is active?" said Mariano Belinky, who heads Santander InnoVentures, the bank's global venture capital fund.
For instance, Santander does a lot of small-to-midsize business lending, which is why it was interested in investing in the online lending platform Kabbage, he said.
Still, Belinky said it can be a tough sell for banks given their capital restraints and need to generate returns.
"Ninety-nine percent of startups today are not making money," Belinky said. Bankers tend to have a mentality of "If I have to choose between buying a startup outright versus buying a traditional existing business that can immediately give me revenue back, I'll usually choose the latter," he said.
Perhaps one caveat to that is fintech companies that provide innovation in a niche where the current products from traditional vendors are lacking, said Bradley Leimer, head of fintech strategy at Santander U.S."A lot of the [fintech] space really has evolved out of necessity due to vendor choice," he said. "You've had startups focusing on [bank technology] components that haven't evolved in 10 years."
Willing Partners
One of the main concerns for both bankers and fintechs is what will happen to the startup culture should it be acquired.
"We also absolutely look at the team they have in place, and whether they will be a cultural fit," DaPonte added.
Observers say the best-case scenario is where the fintech retains some autonomy but lets the wider bank culture to be included.
"In cases of successful acquisitions, the acquiring financial institutions essentially leave the startup intact, and allow them to leverage the core operational, regulatory and capital infrastructure of the bank," said Sean Park, founder and chief investment officer at the venture capital firm Anthemis. "BBVA's approach so far with Simple is a good example of this."
Anthemis was an early investor in Simple, as well as the German startup Fidor Bank, which was acquired by the French bank Groupe BPCE in July.
Creating hybrid cultures is a tremendous feat, however.
"Show me the acquired company where the team is completely intact from when it was acquired," Leimer said.
"It doesn't happen very often."
What also needs to be considered is whether all fintech companies even want to be acquired by banks. For many, it is not the most appealing exit strategy, Latimore said.
"Selling to a bank is not high on list for many of them," he said. "Some want to continue to scale and get a large number of bank partners and then go through an IPO. Another option is to sell to a bigger incumbent fintech player and get access to a bigger distribution channel."
Indeed, Park said that although fintechs are happy to partner with banks, many have no interest in having their companies owned by them.
"I can't speak for all financial services startups, but for those that we invest in, being acquired by a bank is rarely the aspirational endgame or goal," he said. "Rather, it is an opportunistic and pragmatic possible outcome along the way to building a better customer value proposition."
Also, as the fintech industry evolves, more M&A deals might actually happen within the group itself, Park said.
"You will increasingly see new leaders emerging that are beyond the checkbooks of incumbent banks," Park said. "Going forward, these are much more interesting acquirers, the future Googles and Facebooks of the fintech space."
Perhaps that could push banks to become prolific buyers of tech startups. If fintech becomes profitable as an industry and others start snapping up companies, banks may be compelled to act.
"As these startups mature and make money, you'll see more acquisitions coming, not only from banks but less-constrained financial institutions," Belinky said.
"Ninety-nine percent of startups today are not making money," Belinky said. Bankers tend to have a mentality of "If I have to choose between buying a startup outright versus buying a traditional existing business that can immediately give me revenue back, I'll usually choose the latter," he said.
