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In July, in the GulfWeekly article “Engineering an ecosystem,” we discussed the wave of collaborations and partnerships that have become the buzz of the FinTech hive.
It was a macro level discussion about finding the right partner based on the presumption that start-up-bank partnerships and collaborations are inevitable and necessary.
However, recent research has suggested that this may not always be the case. To be clear, they are by far the norm, especially since, as Denise Leonhard, senior director of Global Corporate Strategy at PayPal, said: “Established firms offer FinTechs a level of scale they wouldn’t be able to access otherwise. (FinTechs) may have a great unique solution, but they can’t actually scale, and you need scale to drive forward.”
They may take several forms – mergers & acquisitions (M&A), investment funds, spin-offs, accelerators and incubators, events, support services, start-up programmes and offering co-working spaces–or a combination of several of these.
However, recent research being conducted by organisational behaviour professors at Stanford and Harvard points to a harsh truth about these partnerships, especially in FinTech. Ron Shevlin, director of Research at Cornerstone Advisors, has found that larger institutions may have the resources to identify, vet and enter into partnerships, but their size and organisational complexity makes operationalising and scaling partnerships difficult.
Smaller institutions typically don’t have the resources or skills needed to identify, vet and enter into any meaningful number of relationships. Operationalising partnerships often requires integration into core apps which can be a challenge for smaller institutions.
Thus on both ends of the see-saw, it is a lose-lose situation, coming down to an incompatibility between the start-up and corporate cultures. Start-up cultures tend to reward quick failures and pivots while corporate cultures, behemoths with large brand equities to maintain, often have multiple decision makers, each of whom are highly failure-averse.
As Philippe Gelis, CEO of Kantox said: “Inside banks, there is also no single decision maker. You need to convince multiple stakeholders that the partnership makes sense, that it will create significant extra value for both parties, and that the risk of cannibalisation is low. Once that’s done, you then need to convince their compliance department, IT team and legal.”
In the Middle-East, where there is a risk averse culture, this means that start-ups are often swallowed by the larger entity before they have a chance to establish themselves, unless they are backed by pockets just as deep as their partners. This creates its own form of inertia.
Now, to be fair, the Central Bank of Bahrain (CBB) and the UAE’s financial free zone Financial Services Regulatory Authority (FSRA) are trying to ensure the survival of the small, with programmes like the sandbox and incubator support to ensure products can be prototyped, tested and are deployment-ready when they hit the market.
However, sooner or later a David-Goliath partnership becomes a match, with Goliath the inevitable winner, since the smaller company ends up needing the financial support of the larger firm much more than the other way around. However, there are a few core types of start-ups that will thrive in this environment while having the highest chance of remaining independent.
* Platforms: Most big start-up success stories in this century have been or become platforms. Amazon, Facebook and Careem are all examples of platforms that simply connected two groups of people and provided a place where they could interact and trade goods, services and data. Megabank API toolkits, marketplace platforms, analytics platforms, business banking platforms; and core integration platforms provide a plug-and-play capability that enables participants to interact, transact and integrate without partnership or one-to-one contractual arrangements.
l Open Banking: While the CBB is currently unable to provide precise numbers as to how many of Bahrain’s banks are currently offering open banking, once this becomes available nation and region-wide, start-up firms can start building Banking-as-a-Service (BaaS) products. These leverage data provided with the customers’ permission to provide investment advice, micro-loans and more traditional banking services, without the labour capital needed to offer these in-branch. Here, start-ups have another chance to shine without needing to enter one-on-one partnerships with banks.
* National Accelerators and Incubators: Instead of one-on-one partnerships with banks, FinTechs forming alliances with one another in smaller non-corporate accelerator environments will find better culture fits and more likely to successfully collaborate. The Bahrain FinTech Bay is one such example, where start-ups like Rain and SprinkleXchange are more likely to find partners that are culture fits than in an established bank like HSBC or ICICI Bank.
In summary, the presumptions that FinTechs have to partner with banks as well as the idea that they have to be independent of each other are both dead. While the original concept of abandoning traditional banking to create FinTech start-ups was the thesis behind the space and the FinTech-bank partnership model became its antithesis, the future lies in the synthesis of the two, finding ways in which FinTechs can operate free of corporate sluggishness while building the brand equity of existing banking institutions.