The New York Times put out an interesting article on May 6th titled Jamie Dimon Wants to Protect You From Innovative Start-Ups. The article focuses on a section of JP Morgan’s shareholder letter in which CEO Jamie Dimon talks about the perils of banks collaborating with startups. I won’t go into the merits of Mr Dimon’s assertions (the article does a good job of dissecting this) but I did think it was worth digging into another angle – specifically the philosophy that is implied by JPMC’s stance: it does not view itself as a platform when it comes to working with startups.
I recently had the opportunity to spend several weeks in London and used that time to dig into the flourishing Fintech community. For those of you that haven’t been paying attention, the startup scene there has been growing tremendously and many would argue that it wears the crown as the global Fintech capital. I spent my time there meeting with banks, insurance companies and other institutions big and small. What I saw was an eagerness on the part of Fintech startups and incumbents to work together that was very different than what was implied by Mr. Dimon’s letter. Examples of this collaboration include Barclay’s partnership with Techstars, RBS’ public and proactive outreach to the Fintech community, and the launch of Innovate Finance, a non-profit set up as a collaboration between the government, financial incumbents and the Fintech community to nurture the growing Fintech market.
Underlying this approach is the concept of Startup Driven Innovation – the idea that companies can no longer rely solely on linear thinking, the evolution of existing products, and internally-developed innovations. The exponential pace of technologies and business models combined with the increasing number of competitive threats means that companies need to diversify their thinking and increase their rate of execution. One way to do this is through revamping existing R&D approaches and the other is by working with the startup community to leverage their innovations and their approaches to creating innovations.
An incumbent institutions’ willingness to collaborate is fundamentally a hedge that acknowledges that the next killer app or product likely won’t come from inside their walls. This isn’t to say that there is no place for the incumbent or that it will require a loss of revenues. The incumbent needs to have a frank assessment of its strengths and weaknesses and determine how to best position itself in the evolving market. In the case of the European financial incumbents, their list of assets is substantial: robust regulatory and compliance ops, a base of existing and engaged financial customers and access to capital are three of the biggest. If these institutions can figure out a way to establish themselves as a platform that extrapolates these assets and allows Fintech companies to offer their services without building the expensive overhead of supporting compliance, regulation and access to capital, the rewards will be substantial. The task of creating this platform is no mean feat, but platforms are ultimately some of best and most lucrative business models (just ask Visa and Mastercard).
The collaborative approach by the startups and incumbents has yielded another benefit – success in bringing to heal regulatory impediments. The introduction of PSD2 (helpful in encouraging new products and cross selling opportunities) and the FCA’s sandbox and no enforcement policies (allows for experimentation) are both significant wins for anyone who is looking to expand the pie of financial services revenues to be divided up.
So why hasn’t JPMC adopted this approach? Mr. Dimon is an incredibly savvy businessman and I am sure there have been a number of high priced strategic consulting firms that weighed in on this question. My guess would be that JPMC believes that between their internal resources (literally tens of thousands of software engineers), a more selective set of partnerships (work with companies like OnDeck) and given the relatively slow pace of evolution in the financial services space, JPMC can stay ahead of the pack. It will be interesting to watch how this unfolds.
Synapse Partners is reinventing corporate innovation by connecting Fortune 500 companies with the technologies, practices and startups that are shaping the future. Our advisory business helps corporations invest like VCs and execute like startups. Our venture capital business, Synapse Capital Partners, leverages the insights and relationships of our advisory business to invest in companies addressing transformative opportunities.