Don't sell workplace culture short in buying a startup

With the growth of digital technologies, financial services organizations are facing a widening gap between the skills they have in their workforce and the ones they need. Systems and applications that are relevant one day are increasingly irrelevant the next, as new innovations influence digital trends and behaviors in unpredictable ways.

Yet banks find themselves in tight competition with technology giants and startups for talent with expertise in software development, data science, cybersecurity, user experience design and other digital competencies. Nearly 75% of financial services chief executives see the limited availability of skills they need in their workforce as a threat to their business. Retail banks, in particular, are struggling with this skills gap — 62% of banking organizations report that the gap between the skills they need and the ones they have has grown in recent years, a larger share than any other industry.

In an increasingly digital industry, banks will have to make up this shortage in digital skills, or face losing customers to competitors with deeper expertise in them. These skills include software development and operation, known as “devops,” along with machine-learning engineering, product management, user experience design and agile development. Collectively, having these skills translates to better customer experience and insights — the exact factors that banks will compete on in a digital environment.

But there’s an emerging strategy that banks can use to address the tech talent shortage: acquir-hires, or acquiring startups for the purpose of gaining their workforce talent.

Banks have recently been increasing their acquisitions of fintech startups. Large banks made more startup acquisitions last year than in any year since 2013. That trend seems to have continued into this year with TD Bank’s January acquisition of AI startup Layer 6, and Goldman Sachs’ acquisitions of credit card startup Final and personal financial management startup Clarity Money. Several of these recent acquisitions have reportedly been driven at least in part by banks’ interest in the talent they gained from acquired companies.

Acqui-hires give banks an easy path to obtaining skills in technologies or businesses they are largely unfamiliar with. As emerging technologies like AI and blockchain take on larger roles in the industry, purchasing a team of experts that has worked with these technologies can rapidly add critical skills to a bank’s workforce.

However, acqui-hires don’t always achieve the desired outcome of boosting innovation within the acquiring organization — and there are many pitfalls banks should consider as they are integrating startups into their business.

Merging a team of technology experts from a startup with a bank’s compliance-oriented culture is never easy to pull off. The larger organization’s risk aversion can smother the innovation capabilities that the startup’s team was acquired for in the first place. That risk seems to have contributed to some of the issues that recently bedeviled BBVA’s tumultuous acquisition of Simple. After Simple had to close some of its customers’ accounts because of problems integrating the two organizations’ technology platforms, Simple CEO Joshua Riech said that the neobank needed to return to its cultural roots. “We’ve been acting like a bank instead of a technology company,” he wrote in a blog post.

Banks need to be careful not to crush the culture of more nimble teams that may not have much experience working under bank regulations. Integrating the two organizations needs to be done slowly and carefully, with the intent of learning from each other’s strengths and improving their weaknesses. For example, the acquiring bank may keep the startup’s organization separate for a while, and arrange workshops, trainings and small projects where members of each organization work together in small teams to learn how the other operates. Banks can also help familiarize their own business and technology teams with how startups operate by finding opportunities to leverage agile development methods.

If banks take care to identify these cultural pitfalls early on though, they will be much more likely to avoid them. Learning about the acquisition target’s employees and culture should be considered a critical part of the due diligence process — every bit as critical as the financial details and business objectives behind the acquisition.

Banks also need to be honest with themselves about their own ability to integrate a startup into their culture. More and more, financial institutions are investing in and collaborating with startups in the fintech sphere. The success and experience of those collaborations can indicate whether a bank is ready to bring a startup fully under its own umbrella.

As emerging technologies in artificial intelligence, blockchain and cybersecurity grow more important to banks’ business and operations, many more financial institutions will likely look to the exploding number of startups working in these areas as an answer to the increasing shortage of workers with expertise in them. Many of these acqui-hires will succeed, and many others will fall victim to cultural issues. The difference between success and failure will be in taking a careful and studied approach in assessing the cultural fit and tying together the two organizations post-acquisition.