Banks should stop fighting toe-to-toe with startups — and start buying them up instead


This week Atom Bank — the UK’s first bank built exclusively for mobile — raised around $100 million from a coterie of investors, including BBVA, the second largest bank in Spain.

While BBVA has thrown its lot in with the Fintech “disruptors”, many other established banks still haven’t fully committed themselves to a Fintech future. Instead of investing in tech startups, they are relying on in-house innovation.

Increasingly, that approach will need to change.

As time and technology advances, some of the best performing Fintech startups will potentially present serious direct competition to the banks.

However, traditional banks need to be aware of their current direct competition — i.e., other banks — that are already investing in and acquiring technology companies and Fintech startups, and tooling themselves up right now.

Established banks need to compete; many are falling behind

Technological advancement — and Amazon — have radically changed consumers’ expectations. In the past, customers wanted to bank with a household name and didn’t question too much the service they received. They tended to accept the service as is.

Many customers were content to go into their local branch to check their balance or transfer money. They were also happy to wait a few days for their transactions to go through.

This is no longer true. Now, consumers not only want to do things instantly, but they want to be able to do things on their own terms — wherever they are, whenever they want — and not just on their PC but increasingly on their mobile devices. In fact, today, more “banking” is done on a mobile device than anywhere else.

If the large established banks don’t stay fully abreast of these changes, they know they risk losing customers. It might only be the millennials at first, but inevitably, eventually, it will be everyone else.

A survey conducted by VC firm Blumberg Capital found that 75 per cent of people said that Fintech alternatives have given them more power over their finances, and 57 per cent said that traditional financial institutions will cease to exist in their current state in their lifetimes.

Many banks cannot compete on their own

The retail banking market is going through a period of turbulent change.

The last few years have seen the launch, in the UK alone, of several new tech-driven retail banking operations, including Monzo, Atom, and Starling.

In the UK, in 2010, Metro Bank was one of the first new retail banks for more than 150 years. Since then, countless other banks, with slightly different offerings, have launched.

Some of these will survive; some won’t. But it’s clear that established banks will need to move just as fast if they’re going to defend their market position and maintain the grip they have on their current customers.

Agility is not natural to the large banks. Of course, the larger your organisation is, the more difficult enacting change becomes, and the more layers of bureaucracy there are to slow you down.

Implementing new products, systems, architecture, customer services and customer acquisition channels can take years. And that’s just not fast enough today.

That is not to say that big banks cannot innovate, but that it is more difficult. For example, a number of the largest banks are launching and trialing new technology in AI and machine learning, such as JP Morgan, which has launched a new piece of software — COIN — which can automatically parse financial deals, saving it 360,000 hours of lawyers’ time.

But, faced with rapid change, many banks — their CEOs, Boards, and wider management team executives — need to admit that they cannot compete on their own.

Buy or build?

This speed of change provides banks with a dilemma. They could hire the best tech talent, set up development labs and start creating the technology that will support growth in-house.

But the market is moving too rapidly to make that a feasible option on its own.

It is also difficult for many banks to hire in top talent. It is not only expensive, but it’s hard to attract these people away from smaller dynamic companies they’re already running themselves, and into a corporate setting. It is not their natural home, which makes it a real challenge.

In addition, why try to do it yourself when there are so many outstanding Fintech startups much further down the development line, doing a great job on their own?

The best option is often for banks to acquire at least one of these new disruptors as well as consider other technology company bolt-on additions. It’s a sensible move for the banks because it enables them to get their hands on new technology, know-how, and an effective team, all in one go — and it’s a turbo-charged way to beat the disruptors at their own game.

Investment and acquisition could be the solution

BBVA is an example of a bank that recognises this challenge. Since the start of the month it has made two interesting moves.

It acquired Holvi, an online-only bank for entrepreneurs and small businesses, and it invested to the tune of £29.4 million in mobile-only UK-based startup Atom Bank.

Anthony Thomson, Atom Bank’s Founder and Chairman

And BBVA is not alone. Citigroup has invested in BlueVine, Betterment, and FastPay amongst others. Banco Santander has invested in Ripple, iZettle, and Kabbage. And Goldman Sachs has invested in Plaid Technologies, Oscar Health, and Better Mortgage.

Clearly, the right acquisition depends on each bank’s institutional DNA, its weaknesses, and strengths — and its own vision of what the future might look like.

But in this competitive climate, many of the large banks desperately need an injection of innovation, because above all, what they really need most now is speed.

If they don’t invest, their competitors will, and they’ll increasingly find themselves unable to retain their market position as consumers demand new products and services, faster.


Paul Cuatrecasas is CEO of Aquaa Partners, a London-based investment banking firm providing M&A advice to growth-focused companies interested in the TMT sectors.