Simean Preston, previous Managing Director of BUPA (British United Provident Association Limited), a British multinational health insurance and healthcare company put it best: “The biggest part of our digital transformation is changing the way we think.”
Indeed, the banking industry is undergoing a radical shift driven by new competition from FinTechs changing business models mounting regulation and compliance pressures, and disruptive technologies over which they may have few dedicated resources to pursue.
None of these transformations are happening in a vacuum; they are driven by a new kind of client, especially SMBs who are ambitious, creative, and often used to a paperless, frictionless digital experience for all their business engagements - with both customers and service providers.
Those SMB customers are telling banks precisely what they need in a lender. They are saying: “Keep it simple. Be there all hours. Be where I am. Know me. Listen to me. Respond now. Help me when I need it, not weeks later.”
Unsurprisingly, large established banks often struggle to adapt and answer these customers with new products and services: These institutions are built on legacy systems, complex internal infrastructures, and allegiance to a tried-and-true conservative mindset. Even those forward-thinking institutions with an “innovation lab” can often generate exciting ideas but need a new level of experienced resources to actually build, maintain, and improve an elegant, fully operational, new technical solution.
Hiring a fintech startup is a common solution, but many banks are hesitant to take the leap; they want to leverage their own experience, their own resources, and their existing customer base, and don’t want to lose control of the final product of such a partnership.
The solution: Don’t hire, collaborate.
In cases like these, a hybrid model is ideal. Essentially, the bank and the startup create a new entity with joint ownership. Banks can retain more control than they would as a client and are assured that the fintech partner will have an extra-vested interest in their success.
Recently, we partnered with Israel Discount Bank on such a partnership to create a joint venture called Greenlend. It blends our experience creating embedded lending solutions with Discount’s reputation, distribution channels, capital, and well-respected regulation and governance history. As we developed the product, we learned much about the specific benefits banks can see with this model.
The top five benefits of the hybrid model:
Time to Market: As mentioned, large banks often find that laser-focused startups are ahead of them in building solutions for specific markets. These banks want quick access to technology that grants them early insights into emerging paradigms and new verticals. Partnering with a startup rather than trying to bootstrap in-house or simply retaining the services of a fintech can help banks innovate faster with less risk or distraction. By combining the resources and know-how of the larger bank with the agility and novel ideas of the startup, hybrid ventures can quickly accelerate the bank’s efforts in bringing new products and services to market.
Access to new technology: Startups are often at the forefront of technological innovation, developing bespoke, cutting-edge solutions to help banks meet customer expectations and needs. It’s in a startup’s DNA, while it’s rarely a large bank's core focus or skill. These innovations can include everything from artificial intelligence and machine learning to user-centric experiences and fully modular and instantly customizable onboarding journeys.
Access to top talent: Let’s just put this out there: the brightest and most ambitious young technologies are rarely lining up for banking jobs, unless they have a particular leaning toward finance as well. Startups scoop up most of the brightest minds in their fields, who are drawn to the challenge and excitement of working on something new and innovative — developing things that didn’t exist yesterday. By partnering fully in a joint venture with a startup, banks can tap into this deep pool of talent, bringing fresh ideas and perspectives into their organization, and maintaining an element of intellectual property.
One additional point – the CEO and top management of this new venture should come from the outside. As mentioned in this Harvard Business Review article: “Big companies almost always want their own people to run a new venture, but that can be a mistake. Although corporations have substantial assets and know-how that can help a start-up succeed, they don’t have the entrepreneurial ability to discover where the new value to be created lies.”
Transformation of work culture: Related to the previous point, large banks may be looking to transform how they work, to become more agile and responsive to changing market conditions. They quickly discover that it’s simply always easy, with proven methods and stable products always a higher priority than experimentation. Even the corporate structure doesn’t promote leapfrogging, and thus the “vibe” remains essentially the same. By partnering with a startup, banks can avoid dramatic and potentially confusing “work culture revolutions” and instead gradually learn from the startup’s unique mindset and abilities, and adopt a more agile mindset. This can include everything from changing unspoken communications behaviors to embracing a more collaborative and open approach to innovation.
Return on investment: We couldn’t end this list without a nod to driving revenue. By investing in a startup that they themselves use and control, banks can potentially reap the rewards of the new business’s success. Essentially, they guarantee the new company a substantial, ongoing customer. Benefits, then, include increased revenue and market share, as well as enhanced brand reputation and customer loyalty. Suppose the hybrid develops new services that are easily white-labeled or modified to share with others. In that case, the hybrid can turn into a full-blown industry leader while keeping the bank as its most important customer.
“Make no mistake,” explains Tomer Guriel, our CEO, “These benefits aren’t simply business issues or time-to-market prerogatives; the customer senses all these innovations — and expects them. The end result is a boost in reputation and loyalty. And with today’s ease of digital access wiping away allegiance to a brand, this is a big deal.”
In conclusion: The future of banking is here, and the winning strategy will often be a new hybrid joint venture.
By partnering more closely than usual with small startups, a prominent, established bank can create ventures that combine the best of both worlds. With the corporate know-how of banks and the entrepreneurial spirit of startups, these ventures can drive innovation at lightning speed, access cutting-edge technology, attract top talent, transform work culture, and deliver impressive returns on investment.
Don't get left behind in today's fast-paced business environment. In our recent webinar, we shared learnings from the experience of creating Greenlend, elaborating on the concept of a hybrid relationship in more detail.
Watch the webinar and get ready to embrace the exciting opportunity that hybrid ventures offer.