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- Nigel Morris, a cofounder of Capital One who spent 10 years as its president and chief operating officer, told Business Insider now is the right time for deals between fintechs and banks.
- Morris, who is currently a managing partner at venture-capital firm QED Investors, said investors will take a sharper look at fintechs’ strategies and push them to focus more on reaching profitability.
- Small to mid-size banks, meanwhile, will need to consider how to better establish digital channels in the wake of the pandemic, he added.
- As a result, the two sides would mutually benefit from working together.
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Nigel Morris is no stranger to getting deals done at banks, having cofounded and served as the president and chief operating officer at Capital One.
During the decade Morris spent at Capital One, he helped grow it into a public company valued at more than $20 billion with $1.5 billion in earnings in 2004. Now a venture investor at QED Investors, a firm he cofounded and serves as a managing partner at, Morris has made bets on several unicorns including Credit Karma, NuBank, and SoFi.
And while Morris is focused on a different type of dealmaking in his current role, he still recognizes an opportunity in his old field when he sees one.
That’s why Morris has advice for his former peers in banking in the wake of a pandemic that has rocked both public and private markets.
“I’ve been saying to my friends in the C-suite of the banks: There’s never been a better time to think about acquisition,” Morris told Business Insider. “You’ve got to have a plan. You’ve got to figure out how to integrate things that you want to and manage a very different ecosystem. It’s challenging, but there’s a lot of talent out there in the fintechs that is available in a way that it wasn’t six months ago, and this is a time to lean in.”
See also:Why Goldman Sachs, which has a $509 billion wealth business geared towards ultra-rich clients, is buying a small Virginia fintech for financial advisers and retail investors
Banks and fintechs need each other post-pandemic
The reasoning behind why a deal between fintechs and banks makes so much sense right now stems from both sides needing help as a result of the current situation, said Morris.
For fintechs, the market downturn brought on by the coronavirus will force investors to take a harder look at the startups than they have previously, Morris said. For years, large checks were cut with relative ease on the basis that a startup focused on personal finance would push to grow its customer base as fast as possible, focusing on profitability at a later date.
The days of startups getting “stratospheric valuations” based on that storyline are long gone, Morris said, as investors will have much “sharper pencils” when looking at startups.
“If you can’t see line of sight to unit economics that are plausible by doing what you’re currently doing or what is in the pipeline very quickly, you’re not going to have permission to be able to try and figure it out down the road,” Morris said. “I think what we’re seeing is that COVID will accelerate a more discerning evaluation of these underlying business models, which didn’t exist a couple of years ago.”
See also:11 fintech investors share advice they are giving startups to help them get through a market downturn and funding drought
Banks, to be sure, have needs as well. The coronavirus has demonstrated the need for many of them to establish better digital strategies. Building business around branches, long the play of many traditional banks, is no longer a feasible option.
And while larger banks have recognized the need to adopt digital channels — albeit with varying degrees of success — small and mid-sized banks remain behind the curve, Morris said.
Couple that with the fact personal finance has become a crowded, competitive field with seemingly everyone offering a one-stop shop for consumers, and consolidation makes sense, he added.
The two sides are symbiotic, with banks bringing deep pockets, experience in compliance, and a large customer base while fintechs offer a more customer-centric focus with the energy and ability to create new products and technology quickly.
“I’ve always argued that the fintechs need the banks and the banks need the fintechs,” Morris said. “They cover each others’ skill sets and capabilities.”
See also:$85 billion e-commerce giant Shopify is trying to make banks irrelevant for small businesses. Its chief product officer lays out why.
Partnerships won’t necessarily be easy
However, bridging the gap won’t be easy, Morris said. Referring to a famous quote used to describe US-British relations, Morris said fintechs and banks are, “separated by a common language.”
For fintechs, banks have long represented slow-moving, conservative organizations with too much red tape to foster real innovation.
Banks, meanwhile, need to balance weathering the economic storm while also figuring out ways to allocate resources towards partnering or acquiring a fintech.
Still, the allure of working together is too great to ignore and something that is now “irrevocable and undeniable,” Morris said.
“There’s not going to be one C-suite of a bank or board of a bank that’s not saying, ‘Now what are we doing on digital? How are we gearing up?'” he added. “[The fintechs] are now saying, ‘Gosh, we need what the banks have. And candidly, we may be going through a rough period ourselves. How can we partner with the banks in a constructive way?’ I think you are going to see much more activity.”
Read more:Here’s how 9 execs at Wall Street giants like Goldman Sachs, BlackRock, and JPMorgan are thinking about the future of fintech