By Bernard Lunn
We see three levels of maturity in the relationship between Fintech ventures and Banks:
- Level 1: Incomprehension. The other party just looks strange and it is hard to imagine a productive conversation.
- Level 2: Funding. Banks take minority equity stakes in Fintech ventures. This is the level that most relationships have reached. (Funding while still in incomprehension mode is clearly dangerous).
- Level 3: Strategic. This is where the relationship drives revenues and profits for both parties. This may or may not include an equity relationship; the strategic relationship comes first. Creating these win/win strategic relationships is one of our core skills at Daily Fintech Advisers because we understand enough about both parties to “know what makes them tick”.
Habit 5 in the classic 7 Habits book by Steven Covey is:
Seek First to Understand, Then to be Understood.
Two words of advice to Fintech ventures seeking to understand Financial Institutions:
- Partner means having skin in the game.
- Be relevant to their disruption challenge but don’t use the D word.
Partner means having skin in the game.
If you license technology or do labor for hire, you are a vendor not a partner.
The word “partner” belongs with “innovative” and “leading edge” as corporate-speak filler words that have become de-based from over-use.
Used by vendors, “partner” means, “pay enough to enable my high margins”. In short, “don’t commoditize me”.
Customers want to commoditize vendors. That is their job. By commoditizing vendors they reduce costs. Customers also like having partners, but when customers use that word they mean, “skin in the game”. You need to do offer three things to prove your skin in the game and earn your right to treated like a partner:
- Pricing based significantly on business outcome. If you are taking a risk in the transactional model, customers will respect your expectation to share in the upside. Licensing software by usage is not shared risk, because the vendor doesn’t care about the customer’s business outcome. This must be a negotiation between partners around shared risk and reward; the customer also has to put skin in the game (thus the word “significantly” which does not mean “totally”).
- Proactive innovation. This means investing ahead of the customer need. When the customer’s need catches up with your innovation, they will recognize your investment in that innovation as your skin in the game that entitles you to be seen as a partner. The incumbent vendors can just ask customers what they want. To break into that market, new ventures need to anticipate what customers will want in the future and invest in that innovation. This is not a one-time event; you need to be continuously figuring out what your customers will want in the future. (My book, Mindshare to Marketshare, teaches entrepreneurs how to use the sales team as “market sensors” to achieve this objective).
- Bring something else to the table. We are moving to the next phase of Cloud. In the first phase, Cloud was about reducing data center costs. In the next phase, Cloud based solutions need to bring something else to the table that they have created in the cloud. That something else could be consumers or data – basically anything that brings revenue or that adds to your customer’s delivery capability. This is how you build a moat around your innovation, so that a fast follower cannot simply copy your innovation.
Be relevant to their disruption challenge but don’t use the D word.
If your value proposition is not relevant to their disruption challenge, you will be like the waiter at the hotel asking the guest if she wants another cocktail just when the tsunami is hitting the beach. You must be relevant to what the CXO level guys are thinking.
For example, you do not want to be pitching systems to make bank tellers more productive to a Bank that is trying to decide how many branches to close and how to sell to the 70% of the world that is unbanked by using mobile money services.
It is not easy to figure out where the puck is moving to in your market, but if you don’t figure this out you will be flying blind in a hurricane.
Disruption makes it hard to have a genuine dialogue that leads to a partnership. The CXO level executives know very well that their world is changing and that they cannot simply keep doing what worked so well in the past. At the same time they have to keep the current numbers looking good, so they present a public face of “it’s business as usual”. That message is meant for investors, customers and partners.
The “it’s business as usual” message is also meant for their own middle management. The CXO level executives need middle managers to “keep their eye on the ball”, so that they keep making the quarterly numbers with the same products and services that worked in the past.
This is what creates the problem for your business development team. They will be working with middle management executives that are not empowered to deviate from the “it’s business as usual” message. This won’t lead to a productive dialogue.
To avoid this fate, you need to be able to talk at the CXO level in a way that connects to their priorities today while being cognizant of the coming disruption. Don’t hype the disruption – that will lose you credibility really fast. Bring evidence of what is happening today, not just what might happen tomorrow. For goodness sake don’t use the word disruption. Nobody wants to be disrupted. Talk about how to increase revenues and profits.
Three words of advice to Financial Institutions seeking to understand Fintech ventures:
- Look past the style differences.
- Understand how some startups get to $100m in revenue so quickly.
- Understand the powerful forces within your organization that are lined up to kill this innovation.
Look past the style differences.
This is superficial, but it is still important. Most banks already get this. I have been at meetings where the bankers turned up in casual clothes and the entrepreneurs turned up in suits. It did help – at least got a laugh and that is helpful to melt the ice. However too much focus on style enables Financial Institutions to “put a tick in the innovation box”. A lab/accelerator that looks like a Silicon Valley startup is useful. Making it look like a bank would not be good. The danger is mistaking style for substance.
Understand how some startups get to $100m in high quality revenue so quickly.
I am using revenue as the yardstick not valuation. If you have $100m in high quality revenue, you can be valued at a 10x multiple and get the unicorn status in a sustainable way.
$100m in high quality revenue is also a number that starts to “move the needle” for many Financial Institutions.
There is a well defined methodology that high velocity startups use to get to $100m within 5-10 years. It is now fairly well understood. The key thing for banks to understand is that it is totally different from the methodology used within large corporations. Which brings us to the next part.
Understand the powerful forces within your organization that are lined up to kill this innovation.
There are many good reasons to kill a bit of innovation. There are also many bad reasons. The bad reasons include:
- That’s not the way we do things around here (style differences).
- That huge market sits at the intersection of two markets that are served by large existing divisions who will fight about it while a startup takes the market away.
Daily Fintech Advisers (the commercial arm of this open source research site) does a lot of couples therapy where we find the win/win partnership between a bank/insurance company and a Fintech startup. Contact us to start a conversation.