It may be the dark underbelly of big banks’ “open” innovation projects.
While large banks and fintechs are ostensibly working more closely together than ever, in private conversations and even publicly at a few conferences, fintech leaders have expressed increased frustration about working with bank partners.
Though they won’t name names, they claim tier-one U.S. banks string them along, fail to communicate, don’t pay anything and, worst of all, out-and-out steal intellectual property.
Following is a guide to what fintechs are complaining about:
Long lead times
Most large companies suffer from bureaucratic bottlenecks, so the fact that big banks are slow at making tech purchasing decisions is neither surprising nor new.
But the degree to which this happens appears to be more severe in the risk-averse banking industry. For small fintechs with limited amounts of capital, foot-dragging on the part of a large bank partner can be deadly.
“There seems to be a correlation: the larger the institution, the longer the lead time will be,” said Yvan DeMunck, U.S. head of business development at online lending software provider James. “For a startup, even if you have a very interesting product, it’s a huge obstacle to overcome within large institutions to get a seat at the table to even have a conversation. So that takes a lot of time, which takes a lot of money and quite a few companies disappear or fold because they focus on these larger institutions and didn’t have enough funding to make it through the time to get to something.”
The problem is a combination of the size of the banks and the fact that top executives may only be in their post for a couple of years, and therefore have little incentive to go out on a limb for a startup. If something goes wrong, that could affect them internally. And if the partnership turns out well, they may never get credit for it.
“You’re in such a vast, amorphous structure that it’s not going to move the needle anyway,” DeMunck said. “So there’s very little commitment. It’s very difficult in these large institutions to get the buy-in necessary from the leadership that really matters to make things happen… These organizations are just too big and it’s difficult to deal with them in a proactive, modern way.”
Small startups just can’t afford to deal with large institutions, he said.
“As a startup, I have to think in terms of days, weeks and months if I’m thinking about progress,” DeMunck said. “If you talk to a large bank, they’re thinking in terms of months, quarters and road maps. ... So there’s a major difference in perspective of time and urgency.”
Wells Fargo, Bank of America, JPMorgan Chase, and Citigroup all declined the opportunity to comment for this story.
Failure to pay
More seriously, fintechs claim large banks are bad at paying for new technology and services.
“A lot of people will tell you, forget about the big banks, don’t even talk to them because they’re going to talk you to death and not pay for it anyway,” DeMunck said. “It’s totally useless and a waste of your time. High-profile VC investors would much rather see you go after some other sectors where you know there might be some chance to get more rapid traction for what you’re doing. You also might get paid.”
Parker Crockford, commercial director for the U.S. at identity verification software startup Onfido, said at the RegTech conference in early October that when he’s engaging with large financial institutions, “we get pulled into a lot of innovation conversations where they just want to pick our brains and look cool. I don’t have time for that any more. I’ll say, ‘I’m happy to give you a white paper or a 20-minute chat over the phone.’”
But he also looks for some intent to actually use his company’s service going forward.
“From our perspective, it’s pay us for our service and don’t just pull us in because you want to write a fancy report and be the person who’s in the know inside the institution,” Crockford said. “We have too much stuff going on.”
Questions around intellectual property
Then there is what is arguably the most serious charge: that large banks have “borrowed” ideas given to them by fintechs.
One tier-one bank’s innovation group sought out Kyield, a company that has artificial intelligence software for preventing human-caused catastrophes. The bank wanted to prevent crises, internal fraud and abuse.
“To their credit, they have one of the best mutual nondisclosure agreements I’ve come across,” Mark Montgomery, founder and CEO of Kyield, said in an interview. “It is outstanding. They insisted both parties execute a mutual NDA, which protects both parties.”
Kyield signed the agreement and engaged in several phone calls and meetings with different people and groups within the bank.
“It didn’t appear communications were working at all between the different groups, which is not unusual in these huge companies,” Montgomery said. “I told both groups I was talking to the other. And then we hit a wall and it went no further. This is not abnormal in our experience, but working across an organization, including senior-most executives and the board of directors, is often necessary.”
Eighteen months later, Montgomery claims, he saw a press release announcement about a new innovation program that was almost word for word the same as a paragraph he had sent them earlier.
“While we had not communicated directly with this manager previously, we did provide detail to other members of the same team and executives they reported to,” Montgomery said.
He has no plans to sue, partly because a lawsuit could cost millions in legal fees and ruin his company.
“Even now, if I were to prosecute a large bank in court, I would probably lose control of my company to do it. That’s how expensive it is. Ten million [dollars] can get to $30 million pretty fast.”
What makes matters worse, in Montgomery’s view, is that in some cases, large banks outsource to companies that offer to reverse engineer services in other countries that don’t have strong IP laws or don’t enforce IP law at all. So an outsourcer can borrow IP in a way that’s very difficult to prosecute.
Sense of entitlement
Finally, many fintechs also report an arrogant attitude among big banks, where they don’t seem to feel a need to cooperate in a professional way with small companies.
“Entitlement is a major problem in the culture of some these giant companies,” Montgomery said. “We find entitlement cultures most often when they’re highly regulated, they own and dominate the markets they’re in. So a few startups with IP get run over in the process, that’s okay because we have a more important job to do, we’re a tier-one bank.”
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