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A Look at Canadian Bank-Startup Relationships
The Big 5 Canadian banks have a testy relationship with startups despite their activity in supporting AI research, partnering with accelerators, and lending to tech companies. As major institutions, they should be playing a supportive role in supercharging innovation by investing in, buying services from, and striking partnerships with startups. But overall, the opposite has been happening. The Banks are mostly internalizing their innovation efforts, while shutting out young companies.
The table below lists publicly announced partnerships between the Big 5 Canadian banks and Canadian startups (I omitted startups located in the US and other countries):
It’s quite striking to see all the relationships listed in one table:
On average, each bank partnered with or invested in just 4 or 5 startups in so many years. Granted, there are deals that aren’t public, but I will take a chance and say that those are also few in number. Conversely, Crédit Agricole has been on an aggressive and open innovation drive. The European bank adopted an open API policy that allowed developers to create more than 50 complementary apps. It has also incubated some 400 startups through its Village business accelerator.
Most of the partnerships have the hallmarks of a vendor-client relationship. Given the complex vendor management and selection processes at the big banks, this does not bode well for young startups. They rely on exceptions (like winning a competition) or hard-to-acquire relationships to stand out as a vendor of choice.
Most of the partnerships focus on the “last mile” of banking, client facing services. This is a natural result of banks keeping startups out of their sandboxes. Startups cannot improve or transform back or middle-office processes if they have no access to them in the first place.
It’s in the culture
The Canadian banking culture remains insular and risk-averse (here we go again). But the more I dig into it the more I’m surprised about how difficult it is for startups to work with banks.
An innovation manager from one of the big banks bluntly told me that they avoid working with small startups since they can’t be sure of their survival, and therefore are concerned about the customer experience. The same manager derided the VC model as too risky and declared that banks shouldn’t bother with venture investments.
I also heard of instances where some banks were trying to get freebies from early-stage startups. This points out to flaws in intaking smaller companies as they don’t fit in a typical vendor model, it seems that banks are just not equipped to deal with small and agile teams. It could also mean that banks are uncomfortable with experimentation and iteration, they prefer a sure thing. In that context, a free product would be easier to sell to business unit leaders. But startups can’t survive by giving away free work.
It’s an open secret within the startup community that the big Canadian banks are unwelcoming. There are anecdotes on how some startups are struggling with their existing banking partnerships even having a better experience with US institutions.
Why does this matter?
One might argue that banks should internalize innovations to protect their business successes, customer data, and in the long term deter competition. But the reality is that most innovation is being generated outside the banks. Two examples illustrate this point:
Nervous about Wealthsimple’s success, BMO launched its own robo advisor product (Smartfolio) by hiring a dev shop in Toronto and instructing them, verbatim, to “Go copy Wealthsimple”.
Instead of trying to cultivate its own AI capabilities, TD acquired Layer 6. This was a sensible and well-timed talent grab that came out of the playbooks of tech giants, like Google, who continuously acquire talent, ideas, and products.
Startups are lean, agile, innovative, and come with a disruptive mindset. Partnering with them in a meaningful and productive way can only benefit the incumbents.
What can banks do?
A specialized and ongoing startup intake process would be a good start. And I don’t mean full on “open banking”. This process could be controlled with criteria and gating. But it should still allow for co-creation of products, experimentation, proofs of concept, and if all the gates are passed, eventually a commercial agreement. This process should be agile yet controlled in a way to provide the bank with the comfort that its data is protected. At the same time, startups should be treated fairly. They need to be paid and their time should not be wasted.
Recent developments offer some signs of hope. Scotiabank announced plans to share APIs with developers and RBC launched RBC Reach, an accelerator that paves the way for startups to partner with the bank. Let’s hope this spurs a new Canadian model for bank-startup relationships. But without a deliberate cultural shift, these initiatives might end up being pipe dreams.