Financial technology startups have typically been portrayed as a band of T-shirt-clad geeks poised to snatch food off the dinner plates of the button-collared bankers. So it may have come as a surprise to some when, rather than going head-to-head with the Bay Street behemoths, so-called fintech companies started partnering with the very incumbents they had set out to upheave.
Over the past year, chief executives at some of Canada’s biggest banks have acknowledged the competitive threat posed by tech-savvy entrants.
At Royal Bank’s annual meeting last spring, CEO Dave McKay noted the importance of collaborating with early-stage companies—”even the ones trying to disrupt us.” Since then, CIBC has waded into online lending through its partnership with Montreal-based upstart Thinking Capital, while Scotiabank has invested in Kabbage, a U.S.-based lender that serves small- to medium-sized businesses.
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The year ahead is likely to see a slew of similar partnerships, say industry insiders. “I respect that scrappy, David versus Goliath attitude amongst the startups, but I also think it leads to a lot of wasted resources and efforts,” says Kevin Sandhu, founder and CEO of Grow, an online lending company that uses hundreds of pieces of data to provide loans much more quickly than a traditional bank. “There’s an opportunity to take the best of us and the best of them.”
Banks have a number of advantages over their more nimble competitors, including access to cheap capital, a large customer base and a trusted brand.
For Thinking Capital, partnering with CIBC—an institution that has been around for roughly 150 years—boosts the online lender’s credibility. “The value that they add to the relationship is really in the form of an endorsement,” says Jeff Mitelman, Thinking Capital’s co-founder and CEO. “They’re endorsing to the small business community that our system operates as described.”
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Meanwhile, the banks are able to offer their customers a more high-tech, convenient banking experience in a fraction of the time it would take to develop the service themselves, says David Williamson, CIBC’s head of retail and business banking.
“Quite often the fintechs have the ability to deliver something more quickly than through our legacy banking systems,” says Williamson. “So why not partner and get that to market faster than it would take to build it ourselves?”
Online investment manager—or “robo-adviser”—WealthSimple is among the fintech startups being courted by the financial services industry. “We’re actively involved in discussions right now with several large financial institutions about working together,” says Michael Katchen, the company’s founder and CEO, adding that he expects to announce a deal in the first quarter of the year.
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“Our clients, 80 per cent of them are under 45,” says Katchen. “In the industry it’s the exact opposite. So we’re actually complementing each other, and not competing for the exact same clients.”
Several of the banks have hinted that the year ahead will see them announce new partnerships with startups. “We have a lot of things in the hopper,” said Linda Mantia, executive vice-president of digital, payments and cards at RBC.
Scotiabank has a number of employees dedicated full-time to looking outside the organization for innovation opportunities, said Mike Henry, executive vice-president of retail payments, deposits and unsecured lending. “One of the challenges that we’re facing right now is actually not a shortage of ideas,” said Henry. “It’s frankly that there are too many ideas.”
While the banks haven’t ruled out the possibility of outright acquiring some of the upstarts, Rizwan Khalfan, the chief digital officer at TD Bank, says the partnership model has some unique advantages.
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“We want these startups to continue innovating in their own way, rather than bringing them within the banking environment,” he says.
“We like this approach where we partner with them for a period of time, incorporate their innovation and capabilities. ¦ The world is moving so fast that tomorrow there is a new company with a new idea, and you want the option to be able to take advantage of what’s new and what’s evolving in the marketplace.”
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