Who has the upper hand?

Finding a startup isn’t the problem. Startup ‘clusters’ can be found on almost any street corner in any major financial centre on any continent. But any bank that wishes to develop long-term partnerships with nimble, innovative, tech-savvy firms must, of course, be selective in its search criteria.

To find a durable startup, begin by looking at the challenges faced by the banking industry today. For a startup to survive, it must be a problem-solver, even if it invents its own compelling new problem to solve. It follows that a worthwhile fintech startup, by definition, will propose a solution, offering to perform some function or service more effectively, and at lower cost, than the banks are achieving now. “There are ways round the traditional methods of making payments, saving money and security,” says Christopher Sier, director, Financial Services Knowledge Transfer Network. And the innovators are finding them.

Top Startup in last year’s Innotribe Startup Challenge, for example, was KlickEx, which offers “payments without borders” – a regulated, scalable, community-based approach to currency exchange (with “no fees”). As any entrepreneur will tell you, success in filling a need creates its own problems. Where a fintech startup has succeeded to the point at which it outperforms the industry in a given function, it has already made itself into a potential target. To support such a startup might be to undermine the bank’s own “traditional methods” of delivering that function. You may think you’re mitigating risk by looking for startups that already have a track record, but that approach can be counter-productive.

Hungry for growth You could take a step back – support the incubators rather than the innovators themselves – or you could take the potentially more cost-effective approach of ‘going early’, even if not necessarily to the point of offering the first seed investment. Support one or more early-stage startups with good long-term potential, and not only will your initial outlay be smaller, but your long-term reward, against that initial risk, will also potentially be larger. You might also find that you have ‘future-proofed’ your organisation. “Banks risk having their key products and services nibbled away by entrepreneurs,” says Sier. Fintech innovators may not (yet) be eating your lunch, as the saying goes, but there are places being laid for them at the table. To back them is to buy forward-looking talent that is unfettered by legacy methodologies and infrastructure – and not to go hungry in future.

But how do you spot that long-term potential? Udayan Goyal, founder and managing partner of fintech advisor and investor Anthemis Group, says: “What makes a startup stick? First, a business model that works. Typically, it will be in a consumer-facing business with a customer proposition that works.” The first hurdle for the startup is to create an appealing product and generate demand. But that’s not enough, says Goyal. “You need a team that is capable of executing on the idea. That’s very important. Just because you have a good idea and a good product doesn’t mean that you have a team that can deliver,” he says. Idea without team: failure. Team without idea: ditto.

And the team has to be right rather than necessarily look and sound right. Jaspar Roos, chief inspiration officer at the innovation platform Future Ideas, says: “What’s the culture of the company? I’ve worked with many, many startups, and the ones I did not like are the ones who acted like Facebook. The ones I like best are the ones who don’t just want to become the next Facebook; they want to become themselves.” As Roos goes on to explain, an effective team is one that’s fired by the core idea, rather than just by the prospect of eventual wealth. Perhaps ironically, past failure can be a positive indicator here: an innovator worth backing will have a track record of coming up with ideas, plus the drive to keep on doing that. Pressed for an example of a startup worth supporting, Goyal cites Simple, the Anthemis-backed online-banking startup that was bought by BBVA, the Spanish bank, in February 2014. Simple’s customer proposition was – is – the provision of a “worry-free alternative to traditional banking”; indeed, the text on the sign-up button at the Simple website asks: “Ready to replace your bank?” Goyal says: “BBVA saw that Simple had a very attractive customer proposition that enabled them to acquire customers more cheaply.” Simple’s cost of acquisition works out at below USD50 per customer, says Goyal. They achieve this (to borrow one more phrase from the Simple website) by “re-imagining the banking basics” (and offering “no surprise fees”). BBVA paid USD117 million in cash.

A Simple solution? So what we have here is a startup built around the initial customer proposition that it would “replace” traditional banking with an online alternative. But the innovation is really in Simple’s approach to customer attraction and engagement. Behind the stylish website is the cold, hard fact that Simple has replaced the “traditional” customer-acquisition cost of – what would be a realistic guesstimate? – anything up to USD500, with that USD50. Although those numbers hadn’t been achieved when Simple first went looking for finance.

There’s one other characteristic that truly investable startups tend to have: they offer a relationship rather than just a one-way transmission of cash for the chance of a later return, and they’re open to sharing on a day-to-day basis. Roos says: “If I invest in a company, I want to get sales going. I like people who are not shy of giving away some of their success, who are willing to co-operate to make something happen. If a startup is just asking for money, you might want to know why they haven’t had the idea of leveraging your bank in other ways.”

But if you can work with good people to bring a good idea to market, on a co-operative basis, you have the potential to achieve something more than just a financial return. In a blog posted after the BBVA/Simple deal was announced, Goyal described one happy customer’s feedback to Simple (delivered via YouTube). Goyal said: “It was completely unsolicited; further proof that a good product creates raving customers.”

Which is what we all want, really, isn’t it?