Why fintechs like TransferWise are partnering with the banks they used to bash
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Small business lender Kabbage announced a deal to offer finance to Santander's customers earlier this year, Barclays is working with Swedish bitcoin startup Safello, and online lender OnDeck is working with JPMorgan.
Even TransferWise, the international transfer business, has linked arms with Estonia's biggest bank and is pursuing bank partnership elsewhere. This is the same TransferWise that ran an advertising campaign with the tag line: "$CAMM€D: Your bank is secretly overcharging you you on international money transfers." Water under the bridge.
Dan Cobley, who leads the fintech practice at London-based venture builder Blenheim Chalcot, says its all to do with the cost of attracting customers.
He tells BI: "I think there's been a recognition that the cost of acquisition has been way too high for there to be a reasonable payback for most products and services.
"Where your margins are being compressed and your cost of acquisition is high, it's going to take you a long and expensive time to get to a profitable scale. You can get to that scale much more quickly by partnering with a big business."
Why spend huge amounts of money on advertising and offers to win new customers when you can work with a bank that will sell your product for you?
Cobley says: "There's a business in our group, Liberis, which is a small business lender - they did a partnership with [card processing giant] WorldPay late last year and that gave them access to small businesses which they could quickly reach and finance. That's enabled them to grow much, much faster than they could have done by just picking up customers one at a time through direct mail or online marketing."
He adds: "You look at the Kabbage deal with Santander - there are plenty of other examples. Fintechs are chasing those kind of partnerships because it gives them market access and reach to scale quickly. And banks, they're increasingly seeing that the kind of innovation they need to keep their customers happy is best delivered through partnerships with fintechs."
ClearScore hits 2 million users
Cobley, who was MD of Google UK before joining Blenheim Chalcot, credits the venture builder model with helping ClearScore become such a success so fast.
Blenheim Chalcot comes up with an idea for a business then pulls together a team of entrepreneurs and staff to turn the idea into reality. The company plans out the funding the startup will need then "drip feeds" that cash as it progresses.
Cobley says: "In the early stages of a business you spend about a third of your time worrying about funding. What the venture builder model does is it slims down the demands on your time [by securing funding] so you can spend 80-90% of your time building a great business."
Blenheim Chalcot's two other main fintech businesses - alternative finance comparison site Business Finance Compared and employee loans service Salary Finance - are both also progressing well, Cobley says.
'There might be a bit of downward pressure on valuations' post-Brexit
It is "fairly business as usual" for Blenheim Chalcot post-Brexit, Cobley says, adding: "The good thing about our model is there's funding within the group, it's a permanent capital model. You're not as exposed to funding markets."
But he adds: "We are very keen to maintain passporting rights and regulation that is consistent [with the EU], so if we're building something for the UK market we can take it overseas without multiple regulatory hurdles."
Cobley says he is also seeing Brexit hit the London fintech scene and the wider business market, saying: "There is definitely a sense that lots of people are choosing to do nothing until it all settles down. I've heard just anecdotally 'I'm having to pause my fundraising process until people are willing to re-engage' or 'the sale process to my biggest client is being delayed for a few weeks.'"
On investment, he says: "There might be a bit of downward pressure on valuations but if you're a UK company with a UK cost base and sales overseas, with the lower pound you've potentially got an advantage. And you've potentially got US dollars and euros looking to invest and UK assets might look comparatively cheap. It's kind of swings and roundabouts."
Cobley also doesn't think tech and fintech valuations taking a hit would be such a bad thing either.
He says: "Up until 6 months ago there was the slightly crazy situation where money was chasing fast-growth businesses that had no plans to get to profitability. They were just funding growth for the sake of growth. One of the things that we at Blenheim Chalcot have always focused on was lets build a business around sound economics and unit profitability.
"I think investors are starting to say 'We need to really focus on investing in businesses that are definitely building something where the customer is prepared to pay more than the cost of delivery.' To me, that's common sense.
"The key thing is not necessarily to make a profit at a company level but to make a profit at a customer level, so that if you choose to be profitable, you can be. The key thing is if the funding dries up, are you in a position to flip the switch and run your business successfully."