What are some of the biggest challenges facing incumbent financial services institutions in addressing the rise of fintech?
Herb Kozlov: There is a great deal of divergence but there seems to be difficulty in integrating technologies into operations. A lot of acquisitions are wasted because companies buy a start-up and don’t really understand the full implications of the implementation. It's not as easy as simply taking a system and replacing it out, especially with some of the more novel technologies acquired by older institutions. Utilizing those technologies can be more costly than first anticipated.
How should companies approach integration in order to make it a success?
HK: There are three common traits to successful integration. First, it does not start the day the deal closes but when you’re exploring and getting ready to complete the transaction. If you wait until the deal closes, it’s already too late. So it’s important to be thinking about the integration early on, both strategically and how to achieve it in practical terms.
The second element is human capital — making sure that in an M&A transaction everyone is enthused, incentivized and their interests are aligned post-closing. If that team doesn’t have the right incentives, or if they don’t stick around, that's a serious problem. Thirdly, not every M&A focused on acquiring a product or service succeeds. The most sophisticated acquirers know that and they look at more than just the return on investment (RoI). They might acquire five technologies knowing that one or two of them will fail, but the only way to find out is to buy it and kick the tires as the owner, not as a consumer or customer. It’s essentially an expensive test drive.
What can fintechs looking for a sale do to make that integration easier and make themselves more attractive to potential buyers?
HK: Number one is having regulatory and compliance expertise and, from the beginning, making sure that this is central to product and service development. That also needs to be touted. Buyers really don’t want to take on anything that could be a liability, and will take comfort in their regulatory requirements being kept in mind from the beginning. That can be a struggle for tech companies, because they are experts at the tech and can underestimate the extent to which regulation can direct the technology itself.
If you're a fintech company and your strategy is to secure financing or an M&A exit, you have to know what problems you’re solving. If you don’t understand the industry you’re trying to serve, the operators' pain points or what their barriers are to owning you or investing in you, you have no chance of succeeding. Otherwise you may build something that’s a pretty toy, but it doesn’t meet regulatory requirements or it creates more pain points for the bank rather than solving them. You’ve got 10 minutes to explain why they need your product, and if you can’t do that it means you don’t know the answer yourself.