Michael Nuciforo is a Mobile Banking Consultant at Keatan. He previously worked at ANZ on a number of developments, including goMoney, and more recently managed the UK retail portfolio as Head of Mobile Banking at RBS. Follow him @TheBoldWar.
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There were 2,277 of them last year totaling $45 billion. And no, that’s not last year’s football salaries. It was the volume and value of tech startup acquisitions. Yet banks barely participated. Could acquisitions be the mechanism for banks to rapidly innovate? Is it time for banks to shop before their profits drop?
Mergers and acquisitions have been part and parcel of the technology sector for over three decades. The industry wouldn’t be what it is today without it. Google Ventures invests over $400 million annually in a wide variety of startups. Facebook has already acquired over 35 businesses, with Instagram being the most notable at nearly $800 million alone. It’s big business indeed.
Why do the biggest, most successful and talented tech businesses, feel the constant need to acquire? It feels counterintuitive, but it makes perfect sense. The industry is so competitive that one day you’re My Space and the next day…well, you’re My Space. If executed correctly, acquisitions have four core benefits:
- New Capabilities: Acquisitions are the quickest way to shift the dial or plug gaps in your offering
- New People: It is a great way to bring on fantastic talent
- More Protection: By buying the competition you can protect the status quo.
- New Revenues: Acquisitions of cash-flow-positive businesses can immediately improve the bottom line
But where are the banks? Why do they seem to ignore the opportunity to acquire or partner? Of the 2,277 acquisitions in 2012, only three were by banks. We believe banks must start protecting their position by using strategic acquisitions to implement the new products and services.
For inspiration, banks needn’t look far. Capital One, which has the sixth-largest deposit portfolio in the US, is already taking up the fight. Off the back of Capital Labs, its own start-up investment venture, the bank has established three offices in the United States. Startups can work there, obtain support and use Capital One API programs. Oh, and of those three bank start up purchases last year, Capital One completed two of them.
In May 2012, Capital One acquired BankOns, a small San Francisco start up that won Best of Show at FinovateSpring 2011 (demo video here). It also purchased Bundle in late December (demo video).
BankOns provides a sophisticated offers and coupons program and Bundle is a data analytics and PFM platform. Besides acquiring the technology and intellectual property, CapitalOne has also had to find room for a new corner office. BankOns founder Joshua Greenough was installed as Director of Innovation immediately after the acquisition. Finally, Capital One has already made at least one acquisition this year, picking up Verifone’s Sail mPOS unit, and renaming It Spark Pay.
The other big banking acquisition came from Chase which spent $40 million late last year on Bloomspot, an offers and coupons platform. Bloomspot comes with a 100-strong team instantly boosting the Chase Offers service. Chase had plans to hire substantially over 2013, and through the Bloomspot acquisition, they filled that gap instantly.
While these deals represent some progress by banks, it will be interesting to see if they pay off. There are numerous risks and considerations for banks looking to play in the tech M&A game:
- Talent retention: Banks may have challenges integrating and retaining new talent. Entrepreneurs and startup talent may not find hierarchical banks the most exciting long-term place of employment. Banks should therefore place a premium on acquiring smaller start-ups with management teams with previous banking experience. They are more likely to take the step back into the industry and stay.
- Risk aversion: Banks typically only like to work with recognized quantities, hence the fast follower mentality. Banks may struggle to commit to deals considered high-risk. Therefore, it may be better to invest in a small portfolio of smaller businesses rather than a single large deal.
- Proving return on investment: It’s not easy to measure the true cost and revenues from a new business endeavour, especially within a large hierarchy of overlapping services. But showing that the deal paid off is the first step towards doing a sequel.
Ultimately, it is important to ensure that the vision and aspirations of both businesses are aligned. While fintech startups may not initially aspire to be acquired by a bank, money and scale talks loudest. Many of the giant payment companies such as American Express, Visa, and MasterCard have made numerous acquisitions.
With FinovateFall just three months away (Sep. 10-11), there is still time for banks to think strategically. Don’t go to just look around and swap a few cards. Don’t just think,”Can we replicate that?” Instead, go with a different point of view and figure out what businesses you could acquire or exclusively partner with. Decide whether you are looking for a particular capability, skillset, or to simply protect your turf. Look out for your own BankOns, Bundle or Bloomspot. In the banking industry, sometimes all you need is one other bank to do it and everyone follows. Oh, that’s already happened…