The acquisition of FinTech companies is not an alternative to innovation for banks

When I recently spoke with an innovation executive of a major bank (who is not participating in our consortium) he said to my astonishment: “We are not interested in innovating because usually startups trying to compete with us are just peanuts, and if they become bigger we’ll simply buy them.” Last time I checked he’s no longer working at this bank, but it is endemic of the attitude shared by many people in one of the most challenged industries of our times.

Acquisition is often not the way to deal with industry disruptors

PayPal has become the biggest payment operator in Europe, and European banks have let this happen by standing by and watching. For a very long time traditional banks in Europe dismissed PayPal as a small startup from far-away San Francisco and felt confident in believing that if it became an important threat, they could simply buy them, or thinking they could easily create a similar service themselves if it took off. Today, more than 15 years later, there is no PayPal alternative in the EU market that has taken any significant share of the online payments market.

Every single function of a financial service will eventually be disrupted

Banks were invented centuries ago in a context that was very different from today’s digital world. Banks were set up to hold deposits on behalf of those with money, to lend it to those who needed money, and also to facilitate payments. Today, a lot of these intermediary functions can be carried out through digital technology, by organisations much lighter than traditional banks and their legacy systems. If we think about it, there is no single function that a bank performs that couldn’t be performed in a smarter way or with a different business model (for example, peer-to-peer) by a new, agile disruptor.

Banks don’t see the bigger picture

Established financial services companies often don’t have the position of strength needed to assess the disruption that is just around the corner. Furthermore, it’s difficult for them to locate startup partners with solutions that are scalable in their organisation. In addition, banks require a thorough understanding of customer behaviours and needs to project how a startup service would be integrated into their current offer, and this capability isn’t a strength of the big players in the industry either.

Startups in financial services might be in need of funding, but they’re often not interested in being acquired by the major banks

The focus of start-ups who are disrupting the banks is on changing established behaviours and delivering the best value they can in a new way. They raise investment so they can scale up and grow. However, for banks this isn’t an open invitation for them to lay down their money and buy their place at the table, as start-ups aren’t looking to be acquired immediately by banks. They need the freedom to grow and develop in their own way. For a bank to innovate, it needs a smart strategy. One that can’t just be ‘buy the innovator’, because often they are not for sale.

There are many potential acquirers but only a few acquisition targets

For a bank to succeed in the acquisition game, they need to have a broad understanding of the landscape to make the right strategic decision for them. Simple chose to be acquired by BBVA in 2014, but most other neo-banks are not for sale.

Investing in a startup can form part of the bank’s innovation strategy, but it can’t be its only strategy. Banks should select the area in which they want or need to lead the disruption, and then go and find or build the disruptors.

 

This article by Aldo de Jong was originally posted in the Claro Partners’ Disruptive Shifts blog, here.

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