A very large bank–I think it was a Well Funded bank–announced that it was launching a startup accelerator to provide up to $500,000 in capital, and offer a six-month boot camp for startups to develop tools for the financial industry, especially in the transactions, security and consumer information areas. According to the head of the bank’s wholesale services group (why he was quoted, I don’t know):
“It’s designed to to spur ourselves to move faster. We need to expand our access to new ideas at the edge of our industry.”
My take: In no way do I mean to imply that this executive (who I met a number of years ago) is lying, but I’m not so sure about that statement.
Imagine you invented a special device which significantly (and quantitatively) improved the intelligence of kids. Would you keep it for your own children, or would you make it available to everyone and reap the billions of dollars it would probably earn you?
You would probably go the second route, and then have enough money to leave to your kids, so it wouldn’t matter how big of a bunch of dumbshits they turned out to be.
So why would Well Funded be any different?
If one of their investments turns out to produce the next $100 billion startup, why would they give up that payday for the uncertain return of incorporating the innovation into their core business?
This is the bank fintech fund dilemma: Invest for internal or external commercialization?
I’m quite sure that if I asked the folks involved in these bank fintech funds (there are others besides Well Funded’s), they would tell me that they will take it on a “case by case” basis. Again, I’m not calling anybody a liar, but you know that’s not how it’s going to play out.
I can’t help but conclude (cynically or not) that few of these funds’ investments will be kept internally for core business improvement.
From time to time, I think “if I were the CEO or CMO of this bank or that credit union, I’d do this or I’d to that.” Those thoughts don’t last too long, as I quickly remind myself that having a real job SUCKS.
But…if I were the CEO/CMO of a credit union competing with a bank with one of these fintech investment funds, I would be really tempted to try to use it against them.
Credit unions love to tell people that they’re member-owned, not investor-owned. Personally, I don’t think this sways too many people. Apple is investor-owned. Nobody seems to mind that. In fact, a lot of companies that consumers do business with–and love–are investor-owned. Being investor-owned does not mean that the company can’t do what’s right for customers, and develop products and services to benefit customers.
But the world of banking is a bit different. It’s bad enough people think banks charge them to hold their money. We’ve probably come to grips with the realization that banks take our money and make money off it by lending it to other people.
But in the case of the fintech funds, the narrative could be different. It’s more akin to the “obscene” profits that Wall Street hedge funds make, which consumers really deplore. A credit union competing with Well Funded could say “they’re using your money to make hedge fund-like returns–which will you’ll never see.”
I may be overstating the potential reputation risk here of these bank fintech investment funds, but the dilemma still remains.