Fintechs interested in partnering with banks would do well to have someone on the executive team or the board who has a banking background.
That’s the perspective of lawyers, consultants and bankers who work with fintechs at all stages of growth from nascent startup to public company.
With regulators signaling plans for heavier scrutiny of bank-fintech partnerships, prospective banking partners are bound to take some comfort when a fintech has someone aboard with experience working in the financial services sector, these industry insiders say.
Dan Allred of Silicon Valley Bank says he certainly does.
The result is often less friction in the relationship, as the fintech tends to get the perspective of the bankers on the other side of the table.
“Whenever we see someone with that type of expertise, it is helpful to us,” says Allred, a senior market manager for the $212 billion bank subsidiary of SVB Financial Group in Santa Clara, California, “because we feel like we are more likely to have a team that we’re aligned with in terms of the way that they look at the market and the way that they look at any regulatory requirements in their business.”
Alignment is a word that came up frequently as one of the potential benefits.
Sometimes misunderstandings are as simple as a matter of language, where one side could be using words that mean something different to the other side. This is less likely when there is, in effect, a bridge between the two mindsets in the form of banking expertise on the fintech side.
“I think it helps with the language that each company is speaking to each other, as well as with operational integration and just onboarding in general,” says Grant Butler, a partner at the law firm K&L Gates in Boston, who works with both financial institutions and fintechs.
“There’s a way bankers think about things, and if the founders or the leaders of the fintech companies are coming from a technology place, and just applying that to financial services, those are different perspectives a lot of times and it really helps to have someone who can bridge that gap.”
Factors to Consider
Butler says he would advise fintechs looking to work with a bank to highlight any people on their team who have experience in banking, regulation or compliance, whether that person is part of the staff or on the board. “It would be a positive,” he says.
Mary Dent of advisory and investment banking firm Klaros Group agrees that such expertise adds value for fintechs but cautions them to choose wisely when adding someone with a banking background. A cultural fit is crucial, she stresses.
“I think it is essential that both sides — bank and fintech — understand the reality that their partner lives in, in order to build a strong and effective partnership,’’ Dent says. “And for that reason, somebody from a bank could be a really great add to a fintech.”
But it has to be someone who is not overly attached to the way things have always been done and instead is able to help a fintech safely execute its novel ideas, whether that is in how it uses data, how it interacts with customers or how its product functions. “Part of this new world is doing things in new and different ways,” Dent says. “If somebody is too immersed in how they did it at the bank, I think they will struggle to be effective.”
Klaros works with both financial services companies and fintechs in areas such as growth strategies and regulatory issues, and Dent also spent several years as the chief executive officer of Green Dot Bank.
She says “step one” for fintechs that want to pursue a bank partnership is to understand the point of view of banks, banking regulators and consumer advocates.
“Call it ‘broaden their perspective,’ to understand at a fundamental level what they need to build into their product to make sure it goes well,” Dent says. “You can sometimes have consumer harm from a product that was designed to help consumers.”
Banker on Board?
Fintechs have different needs depending on their life stage, and early startups typically target investors and venture capitalists as board members. A mature fintech is more likely to add a banking expert.
But Dent and the others agree that banking expertise is helpful at any level of the organization — whether that is a chief financial officer or a product person. Having a board member who checks that box is a plus, but not a must.
“There are ways for a fintech to have deep experience in the outcomes a bank partner needs without having a bank board member,” Dent says. “They could have a team that comes from financial services or banking. They could have specialists in risk and compliance and operations that come from financial services.”
Even so, board composition matters to potential bank partners, in Allred’s view.
Allred leads the national fintech and payments strategy teams at SVB, which provides these businesses with commercial and investment banking services across all stages of maturity. He says many of those relationships start with a fintech board member — often a venture capitalist — reaching out to SVB to make an introduction.
The types of fintechs run the gamut — lending, insurance, payments, crypto, neobanks and others — and the financing his bank provides sometimes takes the form of direct investments through SVB Capital.
“Especially in some of these more heavily regulated businesses, payments, insurance, or gray areas like crypto, we love to see — beyond just the VCs, who we tend to know — board members at the table who understand that regulatory landscape and understand the unique business models and the drivers in those models,” Allred says. “Those people aren’t always bankers, but sometimes they are.”
Besides the regulatory considerations, fintechs often have complex capital needs to navigate. Depending on the model, a fintech may have venture capital for growth and, if it is a lender, likely debt capital for warehousing loans in a special purpose vehicle, Allred says. If it is in the insurance space, it has yet another set of issues with regulatory capital that’s needed.
“Having board members who not only understand those sorts of interdependencies but have also lived them at other companies and know how to navigate the market and have the network to help deliver partners that can meet those dependencies, that’s really, really helpful,” he says.
“So I’d say that’s a great way to think about board composition: What is going to make this company successful? And how do I make sure that each of those domains is represented?”