Welcome to Breaking Banks, the number one global fintech radio show and podcast. I’m Brett King. And I’m Jason Henricks.

Every week since 2013, we explore the personalities, startups, innovators, and industry players driving disruption in financial services. From incumbents to unicorns and from cutting edge technology to the people using it to help create a more innovative, inclusive, and healthy financial future. I’m J.P. Nichols, and this is Breaking Banks.

Soft landings are a topic of hot conversation these days. The go-go days where you can always raise another round are gone. The ecosystem is littered with companies with little product market fit, less revenue, and even less runway.

Many of these are looking for a soft spot to land. Unfortunately, M&A is hard in the best of times, and many fintechs are now looking to banks as the potential exit into the promised land. In the first half of today’s show, Jason Zahler, partner at Oliver Wyman, and I discuss their new report on bank fintech M&A.

In the second half, Robert Antonietes, general partner at Information Venture Partners, and I talk about three decades of venture cycles and M&A more broadly, including strategies for big banks, community banks, fintechs, and even VCs. So, Frank Rotman wrote an amazing piece called Landing the Plane, which is we are in an environment where there are a lot of startups that were massively overfunded, many with maybe higher valuations and not business models that they could fully support, that are now looking to how do I land the plane? A lot of this comes up with fintechs as, hey, banks should actually be acquiring these companies. And so, Jason, I want to start with, right off the bat, I’m pretty skeptical around that you guys have the recent report around bank fintech M&A, but I’m pretty skeptical.

Why aren’t we seeing more bank fintech M&A? Well, Jason, I think it’s the right place to start because when you look at the top 50 US banks and the top 15 international banks in our report, and you turn the dial back 10 years, in that period, while there were thousands of M&A transactions, while there were hundreds of valuable bank acquisitions of other forms of businesses to grow or expand their franchise, there were only 94 examples of bank fintech M&A. And as a potential outcome, there’s absolutely a limit to how many fintechs can navigate themselves into the position where an acquisition from a bank is on the table. And more importantly, and without reducing focus, to actually pull it off.

There are many conversations at the top of that funnel, and very few deals get closed. There are a contributing number of reasons to this, and you mentioned our recent report that we put out where we spoke with industry experts from VCs, operators, bank corporate development, Wall Street analysts, et cetera, and the top limiting factors to bank fintech M&A, don’t just revolve around culture, people, and value creation. They don’t just revolve around the capabilities needed to integrate and go to market.

They revolve a lot around the idea of what’s in it for the bank to bring this fintech in the door. Now, that question is underpinned by value, and the valuation of a fintech by the market from the folks on the cap table and investors at a multiple of forward earnings is one number, and the way that banks would see the value to be created by this acquisition and fold it into its ongoing operations is a completely different underwriting and value process where the synergies are often misaligned. Well, and I want to call that out because two of the examples that you called out, I would say from memory is Green Sky and Ameritrade as acquisitions.

I don’t so much think of those as fintech acquisitions. They may be fintechs and tech-driven, but those were big businesses that you can actually, to your point of ascribing value, you can actually look at the value that they had and say, oh, this is going to be accretive to us because of what it contributes, because they are tech-driven, have greater profitability, it is going to do X, Y, or Z for us, either increasing distribution, increasing net profits, et cetera. You make a good point about the size of the company, and that’s one of the surprising findings in this report.

The earlier stage you get, the least likely you are to be considered for acquisition by a financial institution, especially in top 50 in the US or top 15 internationally. I think that when you’re unpacking some of the more noteworthy names, you get into deals that we didn’t call out, as well as those that you mentioned. Some of the key themes across those deals revolve around, I’d say, five dimensions for banks considering their acquisition, and then those dimensions are underlined by the data.

Let me tell you what I mean. First, if a bank is looking at acquiring a fintech, our research showed that there’s a sizable percentage of deals where there was a publicly announced partnership between the bank and that target prior to the deal being executed, which means that they’re aligned on perhaps their tech and innovation discipline. Secondarily, is digital capabilities.

If there’s not a digital capability synergy, are you acquihiring a team? Are you buying a legacy piece, excuse me, a new piece of tech to underpin and replace a legacy piece of tech, or is there some other digital capability the bank might want? There’s distribution and scale, and I’ll give examples with names on that one in a minute. There’s value preservation, which we hit on a moment ago, and then lastly, and most importantly, from everyone we talked to, is the culture. There are just not many fintech operators who aspire to be long-term bank executives, and there are not many bank executives that can pivot into the role of taking over an acquired fintech business, bringing it into the culture of the organization and carrying it forward.

When you look at those factors together, what you are left with is roughly the 94 deals I mentioned, but only about 10 to 15% of them reaching various materiality thresholds. I know you mentioned some pieces that have been written recently. I saw one piece that said 250 million is a materially impactful bank fintech deal.

We cut the number around 300 million, and only 13% of our deals hit that threshold, which means that these deals are being focused on areas where they can be easily tucked in. They may be point solutions. The integration is not across business lines.

They’re probably not going to be dilutive. And most importantly, many of these deals are not going to be impactful to the bank’s overall financial performance and subsequent market performance from investors. There might be questions asked, but they’re not going to be pushing the needle, which creates the safety needed for bank executives to feel comfortable to do the deals.

Interesting, because part of this is why do something if it’s not going to be material, but your point is, hey, if it’s immaterial, that actually makes it safer to do some of these things. It’s about stacking Legos, not about big building blocks that you’re looking to pull together. I think Legos is one.

I think you could also say Tetris. It’s about saying, if you look at a bank like US Bank, which has made acquisitions in your backyard in Minneapolis, but also in the fintech space we both have been a part of for so long, where they’re acquiring companies that serve growth segments for key priority business lines. So if you’re going to want to serve veterinarians, you want to serve doctors, you want to serve lawyers and law practices in the small business banking space, perhaps you acquire someone in that space as they have.

Or you want to provide better functionality for small business card. You don’t want to build the controls yourself. You acquire a company that has those controls baked in.

There are Tetris pieces that can be pivoted around an existing proposition. Where we’re seeing fewer bank fintech M&A deals is the creation of a net new category. It can be to push further into a market.

It can be to expand the perimeter, maybe to defend some of the perimeter, but it’s probably not to build a net new strategy with a net new segment and a net new product in most cases. Well, what’s interesting, if you go to the flip side, who’s made big moves? I’d say the one that’s most interesting to me is if you look at SoFi, in terms of big moves acquiring, what is it? First Galileo, then Technisis, then acquiring a bank. Those were big moves.

Each independent was a big play. Sure. Golden Pacific, maybe not as large financially, say as Technisis or Galileo, but it gave them the charter, like a new license.

Do you think we’re going to see the trend continue where it’s a game of Tetris or a much bigger game a la SoFi? Because we’re entering a new era. Well, yes. What you just shared is actually a great point that should be highlighted.

While the paper looks at what you or I would traditionally call bank fintech M&A, and specifically the top 50 banks with charters, there’s a huge category with a lot of exit potential for fintechs to sell to other enterprise technology companies, to other fintechs, and to non-bank financial institutions or players who wish to aspire to offer financial products. So to your question, yes, there’s massive opportunity to unlock the bundling of, say, a new platform with a net new banking license that may have been acquired with the right regulatory oversight and bolting on products that are point solutions as standalones that can be brought together and layered under a really dynamic customer experience to serve a clientele. That’s 100% probably a simpler case for a fintech to be acquired by an entity that has or pursues a bank license.

Where it’s harder is when you look at the bigger deals that we’ve covered in our report, you look at my former colleagues at JP Morgan, where the big four acquisitions over the last 10 years with public valuations that are fintech acquisitions are Repay, Instamed, Nutmeg, and GlobalShares. They were the league table leader in the number of deals of that size. You drop down and you’ve got Morgan Stanley buying Solium and E-Trade.

Obviously, building out its position in that space. When you go further down the list, there are deals that have not been as well received by the market that have been held up as good at the time, but maybe not in the long run, whether those are companies that have been floated for spinoff or that have been written down by their acquirers. That gives folks pause when you’re running a business unit that’s growing at 3% to 5% a year, your headcount’s growing, and you’re a senior level manager.

There isn’t always an incentive to say, how do I push the needle of my business forward? There’s a good enough case, which is how much credit do I get for doing better versus how much do I get penalized if 4% becomes 3% because of a drag on earnings? That’s 100% right. That’s 100% right. The integrations, as you know, have a very long tail.

That’s why we’ve seen such a high level of partnership tie up before acquisition. There’s an interesting stat that we cited in our report from some recent research that people should know about, which is that for the first time, there was also a percentage outcome given to successful IPO of companies in the fintech space that partner with financial institutions pre-IPO. The success rate was much higher.

What that also gives you is insight to the fact that partnership between bank and fintech is not only a precursor to acquisition, it should be a mandatory state of being for every bank to be exploring. I know you’re passionate about that space as am I. When the partnership can be quantified to say your chances of an acquisition or an IPO in an environment with valuations down and a lot of me too and a lot of froth and a lot of challenge on what the future landscape will look like, man, you’ve got to go for that. And building those relationships between the bank and your fintech or between your bank and the fintech communities if you’re the banker is really paramount right now as the market evolves.

Were there any lessons for the partnerships that became acquisitions that were well-received? What made those work the best and what are the red flags that say this is not going to be well-received? Yeah, it’s a great question. And I think I’ve lived it on both sides now as a bank fintech partnerships and corp dev exec and now advising clients on the same and wanting to see more and more of this. There’s three steps in the playbook that make it easier to succeed than not.

And there are a few other pieces that make it much more difficult. Let’s start with what’s easy. What’s easy is having the right process up front to define what your first move will look like as a partner.

All the ugly nuts and bolts from getting on boarded, passing a security check for cyber, having the diligence done on your platform, assessing who’s cloud to play in. All of those pieces which people gloss over, that’s really the first step to make sure that you’re going to be able to actually test the product or service that you could offer in partnership with the bank successfully. The second step is when there’s a potential for the bank to have a story or a piece of skin in the game that’s tied through your outcome.

And what I mean is many banks do strategic investments in some of the partners they work with. If you’re an early to mid-stage company, it’s not just about value creation through partnership in a rev share model. It should be about, wow, there’s a flagship Fortune 100 company that could be helping steer my product development roadmap, that could be offering me an incredible sandbox of dummy data and eventually customer data to test my solutions.

They will have an outcome tied to my own if we can create synergy together. So that’s the second piece. Well, and it’s one of the reasons we created the Alloy Labs Alchemist Fund, right, where our LPs are all our bank members.

And it’s different than other banks’ LP funds in that it is much more of a multi-tenant corporate venture capital fund for the reasons you described, right? Like we invest last, right? We look at partner and growth and how do we win together, and the investment is the last thing we do. And for many of the G-SIB banks, especially, it’s a similar approach where being in the room with the product team and with the founding team as they think through where to take their business is much more important than having a tiny position on the cap table. And if you can tie it to a future outcome where if we deploy you at scale inside our bank and your company grows in valuation because your success as a company is intertwined with our success, we’re both going to win.

That’s a model that’s really healthy. And the last piece there, which gets into how to make it successful on the partner side, is clear expectations of what would happen in a tie-up scenario. Is the culture one where the founders want to engage the bank post-acquisition if they were to be pursued for an acquisition? Or is it one where the founders are going to come in, make a smooth handoff, earn their cliff and walk away? That’s a question that gets a lot of potential acquisition talks tied up because there’s a perception from the banks that thus and such founder won’t ever conform to my banking culture and norms.

And there’s a perception from founders that I don’t want to conform to those norms. And if that conversation, we heard this from multiple founders and execs, if they can have that up front, and it’s a win-win around a financial outcome for the product and the team, you can actually table a lot of the things that get folks distracted as they head down from the signing of the deal into the post-merger phase. So let’s pull on that thread.

What makes the most successful once you’ve decided to consummate? What do both sides need to focus on that is going to make them be successful as opposed to have a land war in Asia sort of integration or the mythical unicorn synergies that never materialize? Yeah, definitely. I think the first lens is a practical lens. Right now, there are many fintech products that are masquerading as companies.

And right now, there are many bank partnership and corp dev teams that are really looking for specific use cases to help one or multiple parts of the business. So if you take that together, what you’ve got is a buyer and a seller that needs specific capabilities to move forward a business goal, not so much two separate warring factions or corporate cultures or iconoclasts versus the state bureaucracy. It’s really two complementary atoms coming together, if done right.

And there’s four key components there. First, I hit on a moment ago, what is the integration strategy? If we tie up, what does the future state look like? While we’re negotiating and deploying, who’s going to govern this? And typically, that has to be partially the existing company, tech, business, and product teams and partially some folks from the company that’s being acquired who really know it well and are incited to do a good job through their comp and exit plans to get you fully across the line. The last is who’s the integration team going to be? Now, this one’s important because I’ve seen integration teams in my career in industry that were set up for success.

And I’ve seen integration teams that felt like a consolation prize for the executives chosen to run them. That matters. That really matters.

And then the last piece is once you’ve got the strategy, the governance, and the team, what does the roadmap actually look like? At what point do you expect, for example, the founder or execs of the startup if they want to depart to do so, if they need to take a step back to do so? How do you communicate that? And how do you try to maintain a way that you keep some of the core team that wants to be in the new firm for a variety of reasons? They could be financial. They could be work-life balance. They could be passion for the product and also recognize that many people will leave.

And that’s OK. So for a startup looking to get on this path, what would you recommend in terms of aligning to these values you just described? Like it feels like that is work that needs to be done on the startup side before somewhere between thinking about a partnership to an acquisition, but certainly not, hey, we’ve consummated this. Now let’s figure out how it works.

Yeah. So I think there’s a couple of key levers that you should be monitoring. And it’s going to be through different mechanisms.

Some teams do it through their C-suite or the founder. Some teams do it through their growth team, or some have strategic partnerships and alliances, folks. My guidance is it helps to have an advisor on your board or someone in your executive suite that has worked with large FIs, and in this case, I’ll use banks specifically, in the past and knows how they work.

It can really reduce the errors. First, investing in the right capabilities. So are you building a solution that’s actually a unique value prop on unique tech, or is it on someone else’s rails and could be easily duplicated? You can’t have the conversation if it’s the latter.

The second one is if you have a narrow go-to-market as a startup or a fintech, you might box yourself out from some of the acquirers that you would want to talk to. However, point solutions, as we just hit on, are a huge piece of why these deals happen. So identifying the market sizing and opportunity for one of many of your products or to narrow your focus down to one or two key go-to-market approaches is huge.

Instead of trying to be too many things to too many potential customers. And it feels like too often that too many things to too many customers feels like a shotgun, I’m going to hit something if I do this, but it actually works against you. I think that for all of the Twitter and LinkedIn thought pieces on focus, many, I’m sure myself and yourself included, still struggle from time to time to narrow the aperture and keep ourselves locked in.

But when you’re building a product that could be acquired, that is the ballgame. You get the target selection. Maybe you shouldn’t waste your time trying to sell into the top four banks in this country because the process is too cumbersome.

They already have similar capabilities. But you look at the regionals and the super regionals and the credit unions and the community banks, and there’s a way to go to market there. And then the other pieces that are sort of important that we haven’t touched on.

We talked about the process to a deal. We talked about integration. But being aware of the regulatory landscape, I don’t have to tell you, Jason, every other podcast, every other thought piece is a new development on emerging regulation or companies that are tripping regulation that maybe should exist.

And so being aware of the environment and how you’re building and building in a bank safe or bank compliant way can really knock down some of the obstacles to a deal. Yeah. So if you’re a bank beginning to think through this, the flip side here, where do you think a bank really needs to get their house in order to make an acquisition make sense? Is there prioritizing your Tetris game? Yeah.

So I will speak for a bank that has, let’s call it one line of business. Let’s say it’s a retail bank. And you can extrapolate this out to any bank to any type.

But in many institutions, there are different teams in each line of business that are looking at acquisition. Let’s just pretend we’re a retail only bank. There’s a team that’s something like partnerships and corporate development.

The three enabling factors to make that team sing are the following. Number one, working hand in hand with the triumvirate of business product and technology to understand the problems that cannot be solved through internal build that help defend your place in the market or expand your moat or competitive advantage. That’s number one.

So it’s not the shiny object that no one needs. It’s an acute problem that you’re trying to solve. And then when you understand what those problems are, covering the startups in that space, just like you would an internal stakeholder, meeting the founders, understanding the competencies, exploring how it would fit into your environment.

That’s first. Second is when you’ve engaged the stakeholders internally and have decided that between build, partner and acquire, you’re going to explore the acquire route. You want to be looking at companies that have not only been exposed to you in the past that you may be familiar with, but also to have a challenger perspective on board that has not seen those companies that might not have those biases to tear into some of the assumptions you make as a practitioner in the space.

That’s really important to have a challenger or a bar raiser on the thinking behind engaging for a deal. And then the last piece, and it might be the most important, is to recognize that if you start three to five acquisition conversations, you’re not going to close them all. And not closing the acquisition is an okay outcome.

If you’re a bank executive and you think you need a capability and you kick the tires on three similar vendors or startups in that capability and nothing meets either the price you’re willing to pay, the value or synergy you could create, or some other obstacle comes up, do not execute the deal because of FOMO. Don’t execute the deal because of any other pressures other than this is the right thing for our group and for our company. And you and I can both point to places where that advice has and has not been followed.

More often not, not to be a pessimist, but, you know. Your word’s not mine. Oh, man.

So what is your forecast for upcoming, we know a lot of these fintechs are looking for soft landings, air quotes on soft landings, right? We’re hearing it all the time. And please, if you’re a startup out there that does AI underwriting for unsecured consumer, in underserved markets, please do not send me your deal. We’re not interested.

Not the soft landing we’re looking for, right? The question I have, though, is the outlook for M&A. Do you think we’re going to see more bigger deals? Are we going to see a flurry of activity around the Tetris? Or is it going to be like Tetris played on Game Boy, not NAS, right? So there are different directions this scenario can go. When you look purely at the banks, the biggest issue, and we haven’t said it explicitly in this call, we’ve hinted at it in this podcast, is that there’s a bid-ask spread in the market right now.

Yes. Where banks are not valuing potential targets anywhere close to the ballpark, those targets, and more importantly, their investors are valuing themselves. So until there is a break in that logjam, I equate it to being at a wedding and the music has started and there’s no one on the dance floor.

There are deals on the sidelines that are not being transacted on because the parties are too far apart. I can’t predict who will blink first, but I do think that banks have a lot more dry powder and a lot more time in market and a lot more of a sustainable competitive advantage to wait it out. Well, let’s also just call it out.

They have profitability. Yes, they have profitability. In most cases, the target does not.

Well, there’s profitability, there’s scale, there’s nice to have versus need to have, and there’s also some skepticism. When we released the report, we heard from a lot of friends in fintech that said, this is great, no one’s looked back 10 years and actually put the pieces together, but this confirms there haven’t been that many bank fintech deals. Our friends in banking said, this confirms the reason there haven’t been many deals is because the companies are overpriced, the technology is not as mature as they say, and their bad integration fits.

Our job is not to say there should be X more deals or X fewer deals, it’s to say, we have considerations that both sides should think about in order to have successful dialogue about how they could tie up. If that can be followed, we think there’s opportunity out there. The alternative for banks, for the big players is to do nothing and keep doing what they’re doing.

For the small players, it’s to risk being subsumed by the bigger players. For the communities and regionals, it’s the need to work with folks like Alloy to find paths to access technology that keeps their customers who are focused on that in-person relationship-based banking around in a more digital world. I love that.

All right, final hot take. If you were advising, pick your size of bank, what is the craziest acquisition idea that you would give them that you think would give outsized returns but does not fit into their normal risk tolerance? Well, I think you’ve seen a couple that wouldn’t be traditional bank acquisition deals in the last few years. You’ve had big banks buying travel platforms, and you’ve had smaller players trying to buy shopping platforms.

I would suggest that the acquisition play is along the following lines. It’s to figure out, similar to what Chase is doing with connected commerce, or what’s happening in Asia with everyone being a super app, if you accept that you can’t build a true super app because you don’t own the phone or the communication platform if you’re a How do you build the right bundle to serve someone’s daily needs in their personal or business life? How do you use APIs and embedded finance to make it easier for Jason to run his business? How do you make it easier for Jason to take his family on vacation, to do the shopping, to budget and forecast, and most importantly, to go to bed with a clear conscience? I think that’s still a ballgame that cannot be built organically. Many are trying, and inorganic growth that helps solve that value prop for consumers, small businesses, and even getting into the middle market sector of commercial banking has a lot of wood to chop, and there’s a lot of meat there.

Well, I think you nailed an important point. Well, two important points, right? I think you’ve heard me describe what we call our investment strategy is the edge of money. Banks are used to being the center of money, right? Deposits flowing in, loans flowing out, hopefully repayments flowing back in, transfer of payments, but that actually is solving a minute problem for consumers and businesses.

They’re trying to solve something bigger. One of the things you said that I think is really important to underscore is you’re not going to get to the edge of money doing it organically, because banks are too risk averse, and you’re going to get there too slowly. You need a risk transference that someone outside of you needs to go do those things, whether it’s connected commerce or getting into travel, right? You want to see they’ve succeeded and then pull those things in, not try and grow it from seed.

I think that’s a key, and the last thing that I’d say that I hope that listeners will take away is that there will be, in my mind, I think in your mind, and many of the other market watchers’ minds, a consolidation in this market. It’s coming, and the options are going to be, in a few edge cases, very successful public exits, in more cases, acquisitions from sponsors and private capital, in other cases, M&A, and there’s a giant bulk of these startups that we’re fans of who might not make it through. Well, I was going to say the biggest consolidation to me is going to be the did not succeed.

That’s right. Hard landing. That’s right, and look, there’s going to be a hard landing, and that’s what the market would demand, but if you’re in a company where the tech is actually differentiated and going it alone hasn’t worked, it’s also a really good moment to pivot and lean into some of these conversations we just talked about.

Yeah, absolutely. I think that’s a great place to end. If people want to get a copy of the study or reach out to you, where can they find that? Definitely.

So the Bank Fintech M&A report is on oliverweinman.com. You can find me on LinkedIn, Twitter, or at my very public firm email address, which you can also find on the Oliver Weinman website. Thanks for having me today. This show is brought to you by Alloy Labs.

As much as we love talking on the show, we believe that action is more valuable than talk. Alloy Labs is the industry leader in helping fearless bankers drive exponential growth through collaboration, exclusive partnerships, and powerful network effects that give them an unfair advantage. Learn more at AlloyLabs.com. Alloy Labs.

Banking Unbound. Rob, excited to have your perspective here, not just as a longtime investor through multiple cycles, but you’ve not only worked at a bank, you’ve worked at three different banks. So who better to talk about the topic of bank and fintech M&A than someone who has had a foot in either pond? Now, I’m curious when we start, and as you and I were brainstorming this, and we raised questions, should banks be looking to acquire fintechs? And you posed the question, do you mean now or in the broader context? I’m curious, do you have a different answer about if this moment in time that I think we can characterize as there’s a lot of overfunded fintechs looking for soft landings, should banks take advantage of that? And if so, why? Or broadly, should they be looking at acquiring fintechs? Yeah, and I think those are two different questions.

And I think you’re right that there are far too many fintechs around today. There’s too many have been funded, not enough have gotten traction, and very few are critical mass. So if you are a bottom feeder, if you’re valuation-driven, this is the right time to buy.

But I don’t believe that that’s the right strategy for banks. For PE shops that are using some of their portfolio companies as consolidation platforms, buying on the cheap, it makes a lot of sense. And that’s a business model you can pursue.

But for banks, I think it’s different. I think banks have to be driven by strategy. Banks have to be driven by effectively return on capital, return on equity for their shareholders.

And so while the cheap valuations part of that actually makes sense, I don’t think the strategic element makes a lot of sense. What should banks buy? Well, from my perspective, banks operate on costs. The lowest cost bank in the long run will win.

Frankly, banks will beat fintechs in the long run because they have lower cost base. And that’s why you see some fintechs actually acquiring banks, because they can access deposits and get lower cost of capital. But so if you go back to the premise, what drives lower costs? It’s critical mass.

And so if you have a payments business in a bank and you see an opportunity to do a small tuck-in that gives you more critical mass, that makes a lot of sense. If you are a bank that wants to be in the payment business but isn’t, then you have to go out and do a major acquisition and create that new line of business within the bank. And to me, those are not value plays.

That is not a value play. If you are not in a business that you want to be in, that’s a strategic acquisition. You have to go and look at the entire landscape, understand who the best fit is.

In fact, you might be working with them already. You might have come to the conclusion that you need to be in this business because you’ve partnered with somebody, and it’s working extremely well. Those transactions— Can I pause you right there for a second, though? Part of what you’ve described, though, that is the acquisition really of a business, right, like a real business, a sustainable business that you should be able to value based on multiples.

Is it accretive, like you’re doing it for finance, or you’re doing it strategically, as you said, but you’re really buying a real business? Is that a correct interpretation? You are buying a business that you intend to build into a real business, but it could already be a real business, correct? Okay, continue, sorry. Yeah, no, I don’t think you dip your toe in the small—using the same example, payments business, you want something that has critical mass if you’re going to get into the business. Anyways, if it’s strategic, those considerations are very different than what we’re seeing as per the soft landing comment that you make.

Soft landing is trying to find a home for an underutilized asset, and as VCs, we have probably invested in too many of them. So I think about the discipline that’s required by banks, and that’s probably why we don’t see banks buying a lot of fintechs, because they have to be driven by strategy, which is dictated by the board and the senior management team. It is driven by the current environment.

As an example, I think the world is different pre and post-SVB. What’s a priority for a financial institution? A bank probably is different. How they think about their business has changed.

Things like COVID have changed the business. I think about the acceleration of digital payments through COVID, and I think of the lesser importance of branches. Banks, unfortunately, unlike fintechs, have to be omnichannel.

They have to serve a customer, whether it’s the 88-year-old retiree or the 18-year-old high school graduate, and so their strategic considerations are different than a single product fintech that faces a certain segment of the consumer market. So again, you’ve got to go back to the strategy of the bank, what’s driving it, how important is it, and can we do something there, and that’s what drives the M&A activity. What do you make of some of the argument is you’re doing it for an aqua hire or a piece of technology that hasn’t necessarily proven it has product market fit because it hasn’t been able to scale? If it is core to your strategy, I like those acquisitions.

We know that aqua hires in general are difficult because of the retention challenges, and an aqua hire of a small technology company into a large bank is very difficult because of the cultural differences between them. I like those types of acquisitions, but I don’t consider those to be strategic. They’re more tactical in the sense that you’re filling a small product gap that you might have as an organization, and I think that’s great, but when I think of M&A and I think of JP Morgan and I think about Citi and large banks around the world, that’s in the noise.

Those transactions don’t really have an impact to the bottom line of the organization. Now, what about at this point in time, too? Not only are we, I think, at an inflection point for fintechs, but an inflection point is you alluded to for banks, where the very nature of banking has changed. I think we’ll never go back to a zero interest rate environment.

SPB taught a lot of lessons. COVID taught a lot of lessons because even that 80-year-old has figured out she can deposit a check without going to the branch during COVID. Are we at an inflection point that even smaller banks should be thinking about aqua hires to say, I need to remake the nature of the bank and the people I employ here, and doing it one by one may actually be difficult because from a cultural point of view that you had just described, you bring in ones and twos, and the antibodies come out, and you have rejection, and the individual is pushed out, but if I bring a team in mass, can I insulate them in a way? Yeah, I think smaller banks need to specialize in something.

They need to differentiate themselves among the thousands of banks out there, and so that’s probably going to be by geographic or industry limits, and I think those are great, but when you look at the greater picture, banks are consolidated. We are seeing larger banks buy smaller banks. We are seeing smaller banks combine for synergies, back office synergies, and other synergies, and I think this is going back to the comment of lower operating costs.

Banks probably spend more time looking at competitors to acquire than technologies. Smaller financial institutions, like you said, have to do something, aqua hires or other, but it’s really about what market are you serving, and how are you differentiating, and does technology make a difference there, and if it does, what should we go and buy to help us? That also makes them more attractive as a business to the larger banks, because when we go back to the comment that a larger bank may want to get into a new business, well, if you are the best in car finance or construction loans, well, wait a minute, there’s an opportunity for you to end up being acquired by a larger bank that wants to be in that business. That is such an important point that historically in bank M&A, you were buying a lot of times geography.

I wanted your geographic footprint to round out my giant map of risk, like the old risk game is I need to get enough armies in enough countries, but they largely are adjacent to each other. Now that the branch is less important, you actually need to acquire for strategic value. That is not that geography, which probably means I’m not acquiring you for your people, not acquiring you for your branch, certainly not acquiring you for your core contract.

You have to have some other strategic value. I’d love to hear you riff some more on that idea of these things of value that smaller banks could go build. Yeah, it comes back to, I think, differentiation, I don’t say, I wouldn’t dismiss geography.

I just wouldn’t. I think that’s still an important element. But I think the product specialization is really, really, really important.

I think about how to build a financial institution. It’s looking at the capital base that you have and how it’s best deployed. You have to pick a lane for a small institution.

I think payments is an example of a wonderful lane, critical mass dependent, but it can be regional, but it can be national, it can be international. You could specialize in particular verticals. That, to me, feels like it’s an interesting business model.

You have the opportunity to go and acquire Payfax, you have the opportunity to go acquire vertical things, companies to consolidate. There are things that you can do as an example. This is an example, but that’s the type of thinking that I would wish that these smaller banks would embark on.

Look at where you are, how you need to be different to survive. At the end of the day, everybody has to have an exit plan. What are you building that is desirable by somebody else? If you’re looking at the bulge bracket banks, the large banks, they’re fighting on 100 fronts.

They’ve got hundreds of products. For them, it’s a different decision. For a smaller financial institution, you cannot compete on all 100 fronts.

You will never have enough FX volume to be a player in that business, never. You might as well use third parties, use technology, see that to the aggregators and just do something that is different that you can excel at. When I worked for Michael Porter, he made a big point within strategy that it’s not about what you choose to do.

It’s what you choose not to do. That becomes important. I think that’s one element you’re really highlighting is you need to go do something different, and you need to quit doing a bunch of these other things that you’re going to be doing subscale and less well.

How do you get boards that have traditionally thought themselves as miniature versions of these larger players through something like that? Always bring in talent that challenges the norm. It’s all about board composition, from my perspective. A regional bank, a community bank needs not to establish these boards of people only from the community because you get that narrow-mindedness.

That sounds worse than I really mean it to be. You need to have external challengers on the board. It’s the role that independents play.

We got to challenge ourselves, and strategic thinking is part of that. This is an interesting angle. Should bank boards be considering adding fintech players to their boards of directors, bringing some of that technological and product expertise? I think bank boards should think about having technology leaders on their boards.

Those can be from fintech. Absolutely. I think that’s one way of doing it.

There’s a broader – banks aren’t bricks and mortar anymore. They’re bytes. They’re ones and zeros.

We have to have technology expertise. Part of that is on the product front from fintechs, but part of that is cybersecurity. Part of that is privacy.

Part of that is infrastructure. I think banks need to develop that expertise. No different than we have comp committees and audit committees.

We should have technology committees and security committees. Best practices would suggest that you have expertise in all those areas. Now, a small financial institution cannot do all of that, so it has to pick and choose.

But my point is don’t staff your entire board with people who are representative of the community that you operate in, because that’s the kind of thinking you’ll get. You need to bring in outsiders who have a different perspective, and it might be a functional area of difference, bringing in technology or strategy people, or it could be just a different experience set within financial services. Because they’re all competing.

Speaking of picking and choosing, I want to transition a little bit to the investment and the fintech side. You’d previously mentioned, hey, we’ve all as an industry overfunded a bunch of these startups. So now we have portfolios that many probably raised too much money at too high of a price that may or may not find a soft landing, but there’s a tension, which is we still need to keep investing.

How are you guys working through that? So it’s true. We have to keep investing. That’s what we’re paid to do, and I think there’s two forms.

One is to take a look at the existing portfolios and identify the ones that have the best prospects and continue to support those, understanding that it always takes longer and costs more money to build startups, whether fintech or in other areas. And the second is to look for new and interesting ideas that support the investment thesis that you have as a fund. But I don’t think, and we’ve never practiced this, there’s a rush to invest.

Our funds, we do 10, 12 deals per fund. It’s very anti-typical VC. I mean, it’s not 40, 50, spray and pray.

It’s 10 concentrated bets, high conviction bets. So for us, it’s never been about volume, but for the industry, many times it has been about volume, and now they need to call. For the startups in the portfolio, the existing portfolio, what advice do you give them in the current market? So if you’re selling into banks and financial institutions, the most important advice I can give you is that long sales cycles have become longer.

There is no urgency to make decisions in this environment. The banks are a bit of an advantage here. The fintech community had a lot of momentum.

Things have changed. Things have slowed down. And so the banks can take their time, but they also need to reestablish what their North Star is.

And so we need to understand what their priorities are. If you do not believe that the customers you are selling to prioritize your product, service, or solution, we need to pivot. But if this is a priority, then you need to understand over what time frame, who owns the budget, why they’re making this decision, and make sure that you have enough runway to go and prove that you can get to the next milestone.

But going back to my opening statement, it’s taking a lot longer to sell into banks than it has. And look, I’m not blaming banks. If you look at the mass layoffs that have happened, if you look at the reorgs that these financial institutions have gone through, everybody’s trying to figure out who’s doing what.

That is a natural break in the sales process. The champion that you had today or yesterday may not be the champion you have today. You have to reeducate that new champion.

It takes a lot longer. So one of the partnerships we’re doing between Alloy Labs and a major fintech, we are on our 11th executive sponsor. Oh, 11.

Taking it to new levels, Rob, new levels. Our members, one of them told me, it’s like, I can’t decide if, Jason, you’re too stupid to quit or that determined. And I, day in and day out, don’t know which of those I am.

But it does also- So you’ve lived it. You’ve lived it. You understand exactly what I’m saying.

It’s frustrating. It’s incredibly frustrating for the entrepreneurs and the teams. And it’s equally frustrating for us.

But we have to deal with it. There’s no way around it. So I feel like this advice really applies to your new investments and the existing portfolio.

And I can’t help but think there’s an underpinning lesson in this, which is you can’t overscale your business. Just as we talked about, efficiency is important for the banks. Efficiency is your new investment not having the pressure to spend, as well as, hey, if you’ve overspent, you really do need to figure out how do you keep trimming down.

Do you have advice for startups that are getting going or recently funded? How do you think about that pace of scaling up and the right metrics that tell you it’s time to scale up? First of all, new startups, especially with first-time entrepreneurs, don’t believe it. They don’t believe that this is an issue. They think they can just walk in and sell.

And so that’s the first thing I would say is listen. But once you’re in business, it’s really about understanding the metrics of selling. And by that, I mean understanding your sales cycles, duration of sales cycles, duration in each segment of the sales cycle.

What’s your min, your mean, your max? Understand when you’re offside. And because what you’re trying to do is, and you know this as well as anyone else, Jason, repeatable sales cycles, repeatability. And this is data-driven.

If you have a big enough funnel, this becomes a statistical exercise. With your first customer, there isn’t enough data, and you’re learning. But still measure everything you possibly can from the very first day and from your very first sales opportunity.

Because that’s the data that’s going to inform you when you’ve achieved the maturity in the sales process that you need to scale. And so I caution people not to scale ahead of time. Spending without understanding is certainly not advised and not prudent.

You know, with, I hesitate to say this, 25 years in the investment and entrepreneurship business now, I don’t know that I’ve ever heard an entrepreneur say, boy, I wish we scaled staffing expenses more quickly versus the number of times you hear, boy, I wish we had that money back or we hadn’t scaled that fast. You’ve been at it longer than I have. Would you say that’s true? I think that’s true in at least 99.9% of the cases.

Yeah, that is absolutely true. There’s always an exception to the rule, but no, you’re absolutely right. And by the way, that’s true of us as well.

We also as VCs make that same mistake. We don’t change out people. We don’t make decisions on the business fast enough, even though we know.

And part of it is because it’s a negotiation with the entrepreneur. We need to see it the same way at the same time. So if we see something and they don’t see it, it doesn’t help.

We can dictate things, but that doesn’t feel right, at least the way we approach things. We want these to be decisions that everybody agrees to and that they understand why they’re doing it. All right.

Last question, a bit of a hot button as we think about the current market. AI, overhyped, already a bubble? Overhyped, already a bubble, but a real business opportunity. So within the universe of AI companies, we have too many, but there’s going to be some real winners.

AI will inform and change the way organizations, including banks, do business. And in banks, it may start internally first before it’s customer facing, specifically Gen AI. But if you think about all the processes that banks have, AI models can be built to simplify those, to automate those.

It’s about workflow. It’s about document management. All those things can be improved with the use of AI.

So I love it. It’s here to stay. It doesn’t mean we haven’t invested as an industry, invested in too many of these companies, but so be it.

That’s just the way venture works. Love it. Rob, thanks for sharing your insight, both as a banker and as an investor.

Very sage advice for the big banks, the small banks, and the fintechs out there. Thanks, Jason. Anytime.

Appreciate it. That’s it for another week of the world’s number one fintech podcast and radio show, Breaking Banks. This episode was produced by our US-based production team, including producer Elizabeth Severance, audio engineer Kevin Hirsham, with social media support from Carlo Navarro and Sylvie Johnson.

If you liked this episode, don’t forget to tweet it out or post it on your favorite social media. Or leave us a five-star review on iTunes, Google Podcasts, Facebook, or wherever it is that you listen to our show. Those actions help other people find our podcast.

In return, that helps us build an audience that can be supported by sponsorship so we can continue to provide you with our award-winning content every week. Thanks again for joining us. We’ll see you on Breaking Banks next week.