July 28, 2016
In the past few decades, the relationships between the startup community and corporate sector have evolved from subtle confrontation to joint ventures and collaborative innovation. This shift could be attributed to the financial service industry’s changing climate. For example,~40% of revenues and up to 60% of the profits in retail banking businesses – consumer finance, mortgages, small-business lending, retail payments and wealth management – are believed to be at risk from various factors such as dwindling margins and FinTech startup competition (which target customer-facing origination and sales).
The financial services industry is not alone in capitalizing on the startup transformation crusade. Technological advancements spurred by the global startup ecosystem influence several industries including retail, commerce, supply chain management and logistics.
In 2016, competition has been replaced with collaboration through advanced technological initiatives. Katherine Manuel, SVP of Innovation at Thomson Reuters, emphasizes the importance of unification and a collaborative approach to growth and development in the financial services industry. The speed of financial technological innovation means that big companies and banks have to collaborate with entrepreneurs and academics to keep up with the pace of change, she says. At the same time, startups and academics need the business input to scale, fund and provide relevance in highly regulated markets.
Plus, collaboration benefits both parties. Innovation labs allow corporations to source ideas, the latest technological advancements and new talent. Startups, in turn, gain an opportunity for priceless feedback from industry professionals. An isolated development path denies these businesses potential mentor/investor exposure as well as an opportunity to improve market solutions.
Chris Owen, a Capital One UK Program Leader, helped launch Capital One Growth Labs in the UK for this very reason. The accelerator program for early-stage startups and high-growth companies aims to foster collaboration. One of the key aims of the program is to discover and partner with some of the most promising new technology startups and unlock the truly leading-edge and innovative ideas of tomorrow, he says. Having early access to startups, and the products they build, will enable Capital One to continue expanding its technological capabilities, as well as maintain a strong view on the customer needs of tomorrow while at the same time turbo-boosting those businesses by giving them unrivaled support.
Banking industry giants are following Capital One’s suit in seeing advantages of joint ventures. Bank of America Merrill Lynch, Citi, Barclays, HSBC, JPMorgan, Credit Suisse and Goldman Sachs are among those involved in FinTech Innovation Lab (implemented to encourage relationships between startups and banks).
Collaboration is not limited to location. Rather, global reach is affecting change in larger markets such as Russia, which is building its own startup relationship framework. In fact, Russia’s Sberbank teamed up with the Internet Initiatives Development Fund (IIDF), a government-backed fund for Internet startups, to launch an accelerator for FinTech projects. FRII will select projects while Sberbank provides startups with expertise and funding for pilot projects. Sberbank and its 2012 venture arm, SBT Venture Capital, will fund the endeavor.
McKinsey experts believe financial institutions willing to adapt can capture unmeasured benefits.
FinTech innovations can help them in many aspects of their operations, from improved costs and better capital allocation to greater revenue generation. And while the threat to their business models remains real, the core strategic challenge is to choose the right FinTech partners, professionals suggest.
Of course, choosing the right partner is a complex task given the scale of the startup community. A sophisticated approach is required for selection based on the sheer number of promising solutions and talented entrepreneurs. Technological compatibility and mindset are key qualities on the line. Successful ventures now depend not only on openness, but also the best fit option to be taken onboard as a merger, acquisition, partnership, etc.