Banks and startups need to partner for growth
Banks and startups need to partner for growth but who can solve the risks involved?
Five Nigerian banks have joined as pioneer members of a new initiative aimed at increasing corporate-startup collaboration in emerging markets.
The initiative is called the Circle of Corporate Investors and is being organized by Catalyst Fund, an African, Asian, and Latin American accelerator.
The goal is to assist startups and corporations in "better discovering technical and commercial synergies while also sharing learnings and insights with the broader industry," according to Maelis Carraro, managing director of Catalyst Fund.
Access, Sterling, Ecobank, and Fidelity are the banks that have joined the partnership. VFD Group, an investment firm that owns the digital bank VBank, has also joined.
The startup-corporates face-off
Digital advancements have reduced the barrier to service delivery in sectors such as financial services. As mobile phones have supplanted office buildings as access points, competition between slow-moving established corporations and agile start-ups has increased.
Paystack and Flutterwave have seized control of online payments in Nigeria's fintech space, prompting respected institutions such as Guaranty Trust Bank to establish new structures to counter the threat.
However, emerging market narratives of disruption that pit startups and incumbents against one another gloss over numerous opportunities for collaboration that are currently dormant.
While the current state of technological advancement is impressive, the reality is that traditional corporates retain a stronger hold on offline markets and operate across a broader geographic footprint than startups.
Access bank is one such example. It was founded in 1988 and has grown to become Nigeria's largest bank through managerial changes and corporate acquisitions.
Access serves 36 million customers in 600 locations across 12 countries and three continents. There is a goldmine of market resources hidden somewhere within that will prove invaluable to startups that enter into strategic partnerships with the bank. Acquiring such a partner can serve as a signal to competitors and customers of a startup's ambition.
Carrro stated that corporations could benefit from startups' agility, innovation, and flexibility in order to increase customer value and accelerate digital innovation.
While traditional banks' history and coverage are impressive, they were slow to push Nigeria beyond the 3% credit penetration mark until digital lenders entered the market with avant-garde instant loans.
But partnerships are risky, yes?
Leveraging my market and network while leveraging your technology and agility should result in a win-win situation for both parties. However, such business collaborations are not without complications.
According to a 2019 Harvard Business Review article, “differences in size, structure, and power” can make it challenging for startups to connect with the appropriate nodes within a large corporation. These discrepancies create dangers for both parties.
A startup may spend too much time developing a custom solution for a single large corporate partner, missing the opportunity to think of itself as a universally scalable platform. Additionally, if the corporate partner is preoccupied with other matters, he or she may be unable to devote the necessary high-level manpower to making the most of this partnership.
Corporates face similar risks. Startups are experiments, and they may expose corporates to reputational risk if they fail or splinter into some sort of scandal. As this World Economic Forum whitepaper notes, "because many start-ups fail, corporate investment risk is elevated in comparison to their typical investment projects."
As a result of the foregoing, it is clear that in order for startup-corporate partnerships to succeed, some work must be done to mitigate the risks. It is possible for startups and corporations to establish the necessary structures and interfaces on their own to mitigate such risks.
However, what if a middleman handles the transaction?
De-risking partnerships
Catalyst Fund hopes to be a partnership accelerator through its Circle of Corporate Investors by providing an ecosystem of tools that de-risk partnerships.
In its optimal form, such an accelerator should help corporations source, evaluate, and implement new innovations for their customers with greater precision. Though the initiative's initial members are banks, it intends to expand to include telcos, fast moving consumer goods companies, and logistics providers.
Corporate members receive access to Catalyst Fund's portfolio of 40+ active startups across three regions. Chipper Cash, Cowrywise, Sokowatch, and 27 other startups are included in that portfolio in Africa.
Additionally, Catalyst Fund promises ‘custom toolkits' that will bolster and streamline partnership processes. It intends to host “knowledge sharing roundtables” with leading corporate innovators worldwide.
Until now, Catalyst Fund's primary objective has been to assist startups with venture building activities such as product design, marketing strategy, and more.
It remains to be seen how successful this experiment is. They cite assisting Unilever in reaching millions of new consumers via Sokowatch as an example of what they can accomplish.
In either case, the Nigerian banks that have signed on believe the venture will be worthwhile.
Ecobank's Chief Digital Officer, Nvalaye Kourouma, describes the initiative as "a significant step toward establishing a framework for productive engagement with startups and other key stakeholders to ensure success."
According to Gbenga Omolokun, the company's Executive Director for Group Risk, Compliance, and Technology, it provides an opportunity to accelerate their vision of reaching the last mile with practical and empowering solutions.
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