Some Friendly Advice for Fintechs, From Banks

One of the savviest dealmakers in modern banking is a guy by the name of Al Lerner, who was more widely known as the former owner of the Cleveland Browns football team until his death in 2002.

Lerner was someone who seized opportunity.

In the midst of an acute real estate crisis in the late 1980s, he invested in MNC Financial, a bank holding company that owned the former Maryland National Bank, which at one point was the biggest bank in the state. MNC soon ran into trouble, leading Lerner to step in as its chairman and CEO.

Lerner was already wealthy by this point, but his decision to spin off MNC’s credit card unit in 1991 into a separate publicly traded company sent his net worth into the stratosphere.

The name of that company was MBNA Corp. It became the world’s second-largest issuer of credit cards, after only Citibank. In 2005, MBNA was acquired by Bank of America Corp. for $34 billion. It’s still the seventh biggest bank acquisition in U.S. history.

Lerner was once asked about his approach to doing deals. “Almost everybody else starts with, ‘What do I want and how do I get it?’” he responded. “I am totally the opposite. My approach is, ‘What does the other guy want and how do I give it to him?’”

This is sage advice. And it applies as much today to the dynamic between banks and financial technology companies as it did 15 years ago, when Lerner completed the biggest deal of his career.

If you want to sell something to a bank — be it a technology product or an entire technology company — it helps to understand what matters to them, as well as to the bankers that run them. It also helps to approach that interaction with an appropriate dose of humility.

A popular narrative in the financial technology space is that banks are bad at innovation. That they’re stuck in their old ways and aren’t able to change. There are certainly instances in which this is true, but the overarching narrative doesn’t match up with reality.

Look at the Bank of New York. It was established in 1784 by founding fathers Alexander Hamilton and Aaron Burr (when they were on friendlier terms). That was the year the Confederation Congress ratified the Treaty of Paris with Great Britain to end the American Revolution.

A lot has changed since then. The telegraph. Penicillin. Cars. The internet. But the Bank of New York, now called the Bank of New York Mellon Corp., is bigger and stronger than ever.

The story of Union Bank & Trust provides another telling anecdote. In 1928, it introduced a revolutionary way for business customers to bank from the comfort of their own homes by allowing them to submit deposits through the U.S. Postal Service. By 1954, half of Union Bank’s deposits were completed remotely.

That must have rung the death knell for bank branching, right? Actually, no. There were 6,346 bank branches in the United States in 1954. By 2018, there were 78,014.

The majority of banks today have survived countless revolutionary technological changes and lived to talk about it. They’ll survive the changes going on right now by adapting with the help of financial technology partners.

The challenge for banks is that they don’t have the same flexibility to move fast and break things. Banks are highly leveraged institutions. A typical company on the Dow Jones Industrial Average is leveraged by a factor of three to one — meaning they borrow $3 for every $1 in equity. A bank is leveraged by a factor of 10 to one, or more.

This makes banks incredibly fragile. If the assets on a bank’s balance sheet lose as little as 5% of their combined value, that bank would be on the verge of being seized by regulators and sold to a better capitalized institution. And declines like that happen all the time. Home prices in Seattle fell roughly 30% in the financial crisis, commercial real estate prices have dropped more than 20% twice since the late 1980s, and stocks frequently experience corrections of 10% or more.

It’s for this reason, combined with the irregular but not-infrequent cycles that afflict the banking industry, that more than 17,000 banks have failed since the modern American banking industry was birthed to help finance the Civil War.

This makes banks and bankers risk averse by nature, which spills over into technology. This doesn’t mean they aren’t willing to take the initiative to change, though it does mean that they’re focused on taking rational initiatives — ones with reasonable odds of success.

That’s where financial technology companies come in. They don’t have the same constraints. They can innovate faster and take more risk. That’s why the future is so bright for these companies. Banks need them as partners to help move the industry forward. But the financial technology companies that will do best will be the ones that can empathize with the inherent constraints of banking and appreciate the perspective of bankers.