FinTech are from Venus, Banks are from Mars

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While arguably part of the same universe, the differences between fintechs and banks can sometimes seem vast.

Collaboration can be difficult when two parties come from exotic ecosystems

FinTechs evolve rapidly, measuring time in days and weeks. If a fintech says it is imminently launching a product, that could mean next month or next week.

Banks move more slowly, measuring time in quarters and years. If a bank says “soon”, it could mean within three quarters or maybe the next year.

In contrast, banks are stable. As I like to say, if the CEO of a big bank didn’t show up for work for a year, 90% of the company, if not more, would probably still be there when they returned.

FinTechs are volatile. Income can increase 10 or even 100 times in a short period of time, but if the founder of a fintech does not show up for work for a year, 90% of his business, if not more, may disappear upon his return.

The differences certainly continue, but it is also helpful to place these differences in the context of the commonalities between the two camps.

For starters, banks and fintechs are there to serve their clients in the broader arena of financial services. This means that they all operate under the broad remit of storing, moving, lending, investing, or creating money. They all have products, almost always practice some form of marketing, and seek to increase their market share by solving their customers’ problems.

So beyond existing under the laws of the same universe, we can actually say that fintechs and banks actually exist in the same solar system, revolving around the same sun, but are very different planets.

And just as Mars may once have been a lush, green planet, many banks were once agile start-ups themselves. The planets are changing. And by extension of the same logic, the fastest fintechs of today could very well become the stable and slow giants of tomorrow.

Therefore, given that banks and fintechs approach the same customers and the same issues within financial services, albeit from very different starting points and perspectives, it stands to reason that there should be a lot to gain collaboration between the two.

The catch, of course, is that collaboration becomes very difficult when two parties come from alien ecosystems and don’t necessarily speak the same language.

This is where VCs can step in to play a vital role as translator, facilitator and, in some cases, matchmaker.

A VC who is able to speak both “banking” and “fintech” simultaneously can engage with banks to help organize the fintech landscape, explaining what can be transferred to the banking world.

Mobile app-based neobanks have a lot of built-in learnings on how to move to a branchless world. Lending to small and medium-sized businesses (SMBs) isn’t easy, but now there are new fintechs that unlock new sources of data and information that can take a seemingly risky client and turn them into a very low-cost loan proposition. low loss. in what we call the “21st century loan”.

Such a VC could also help explain to banks what strategies might not work. Acquiring a fintech is indeed very difficult. A bank considering such a strategy should think very seriously about how to avoid adverse selection (the best fintechs may not want to sell to a bank, or they may always appear to be overvalued from the bank’s point of view), how how not to extinguish the creative spark within fintech once an acquisition is made, or how to get the most creative employees to continue their contracts under the aegis of the bank.

More importantly, an acquisition is not always the most appropriate tool. Sometimes it is better for a bank to partner with a fintech. Such partnerships can lead to win-win situations for both parties, but only if they are properly implemented. In some cases exclusivity may be necessary, while in some cases it is better for a fintech to partner with many banks. This question refers to the academic framework of the optimal way to draw the boundaries of a company.

To take an example from the world of credit, provided a bank fully understands the policies and procedures of a fintech, it may be preferable for the fintech to remain independent with the bank providing the balance sheet. In such an initiator model, the bank would get a predictable set of assets on its balance sheet for a predetermined amount, while the fintech would retain its independence and incentive structure.

To continue with the same example, a VC that includes both parties at the table would be able to explain to the fintech that funding provided by the bank may be more preferable to other sources of funding such as a specialized debt fund. . The right course of action is of course highly dependent on the situation.

In conclusion, the differences between banks and fintechs may seem vast, if not downright insurmountable, but the right kind of venture capital can serve as a bridge between these two worlds, creating collaborations that capitalize on the differences while building on the common points.