With technology start-ups swiftly becoming multi-million and billion dollar businesses, banks that start a relationship early with the nascent businesses have the opportunity to foster a long term profitable client relationship, a recent report from BearingPoint finds. Care may need to be taken however, as the start-up landscape does not necessarily work well with ‘standardised’ products, and may require specialised teams that work with the unique needs of start-ups.
Traditional banks are facing considerable profitability challenges from changes within the regulatory landscape, low interest rates and increased competition. Looking for new revenue streams is thereby one way in which banks may be able to differentiate themselves from their competitors.
In a recent report, titled ‘Start-up revolution: a brave new world of bank business’, BearingPoint considers the place that technology, software, e-commerce, data management and digital platforms start-ups may have within the wider business landscape. The historically marginalised ‘start-up’ by traditional banking, may now, with the rapid proliferation and scalability of new entrants, be a segment worth courting early for banks.
Being part of success
Successful start-ups can create significant value from relatively simple and low cost ideas that scale massively on digital platforms. One such example is Uber, which grew to a $40 billion dollar business within a relatively short timeframe. While not every start-up is successful (success ranging between 10-20%), the consulting firm notes that if banks are involved in the wider eco system of start-ups, they may be able to identify potentially high-value ideas early and thereby hunt for long term banking partnerships early in the start-ups’ development process.
If banks are on board early, and successfully deliver simple value adding services, they will be in a good position to remain and become a trusted partner for considerably more complex banking solutions as the start-up scales up.
Banking on start-ups
Besides supporting start-ups as clients, banks may also move toward creating partnerships with start-ups that are themselves aiming to disrupt the traditional banking environment. Supporting such initiatives has different levels according to the consultancy.
First level engagement sees banks develop workshops and other open collaboration ventures that allows for the development of ideas that could progress into valuable start-ups. Level two involvement consists of wider partnership deals, with the banks’ experience coupled with ideas from start-ups. Level three involves a deeper financial relationship, with banks pumping money into the start-ups that meet the strategic innovation agenda. The final level of involvement would be the development of start-up incubators that seek to develop ecosystem changing business models that are in the hands of the banks involved.
The consultancy highlights however that banks need to be careful about their relationships with start-ups. The development of start-ups does not necessarily follow the same trajectory as that of small businesses or medium/large corporates. The standardised ‘off the shelf’ banking solutions offered by banks to its customers may not be well suited to businesses that rapidly scale through different product levels while often needing unique or sophisticated solutions throughout the development process.
To accommodate start-ups, a clear recognition of the kinds of needs that they have in the different stages of development needs to be considers. According to BearingPoint, this would involve developing specialised teams that engage with the start-ups during their development and cater to their specific development needs. Care must be taken however, as the start-up community is well networked, that the reputation of banks in delivering promised services is key to their long term involvement with start-ups, as well as other start-ups being willing – on recommendation – to get into bed with a particular banking service.