A Whirlwind Fintech Romance Heads for Divorce

(Bloomberg Opinion) -- 200-year-old French bank seeks hip German digital-savvy startup for fast growth and good times.

BPCE's purchase of mobile bank Fidor in 2016 seemed like a 21st-century fintech love story. Two years later, the relationship is on the rocks. It's a cautionary tale for banks looking to tap startups' digital expertise and a warning for other fintech firms hoping to achieve stellar valuations. The risk of culture clash when banks assimilate tech startups is all too easily overlooked.

Reports in the French and German press suggest the differences between France's second-largest bank and Fidor have become irreconcilable. BPCE's new CEO Laurent Mignon told Les Echos in September that Fidor hadn't been integrated well enough and that it won't be rolled out in France. Separately, Fidor founder Matthias Kroener told FAZ of a cultural conflict that could lead to an eventual sale.

In these kinds of deals, the cultural angle is far more relevant than the financial: the outlay involved in buying a fintech firm is a rounding error for most big European banks. BPCE made almost 24 billion euros ($27 billion) in revenue last year, yet only spent about 150 million euros acquiring Fidor and its 100,000 customers.

The buyer knew the startup was losing money and would need investment. Fidor’s business model was clear at the time of the acquisition: A consumer bank on one side and a technology services provider for outside firms on the other. Yet today, BPCE seems unconvinced by the strategy. So what happened?

No doubt the bureaucracy and risk aversion of branch banking had something to do with the culture clash. BPCE is a slow-moving behemoth, a mash-up of two historic cooperative banks, as well as investment bank Natixis SA, created in the financial crisis. Its managers tend to be former civil servants, not venture capitalists willing to burn cash on a big bet. Allocating more resources to Fidor as it kept racking up losses no doubt resulted in internal squabbles.

But there should be humility on both sides. Presumably those fuddy-duddy bankers wary of their new hipster colleagues found some ammunition when they dug into Fidor's 540 million-euro balance sheet. BPCE's 2017 accounts mention a 52 million-euro writedown at Fidor, which also raised an extra 89 million euros in capital from its parent that year.

The sums may be relatively tiny, but they highlight one of the problems faced by trendy digital banks: to compensate for their higher cost of funding, they have to place deposits in riskier, higher yielding instruments.

The lesson is that banks need to devise a clearer strategy for their fintech acquisitions, instead of holding them at arm's length and occasionally dipping into their technology brains trust for ideas as BPCE expected to do.

It would be a shame if lenders kept frittering money on overhauls of their own creaky IT systems that went nowhere rather than betting on startups because there is clearly some value in these other areas.

But BPCE's woes suggest other banks will become even more selective in future about which piece of the fintech pie they are willing to buy. If risk aversion means they buy minority stakes in startups or a few staff members rather than an entire company, then the valuations of those firms will take a hit.

The honeymoon period between big banks and small challengers was never going to last, but both sides stand to lose from a messy divorce.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering finance and markets. He previously worked at Reuters and Forbes.

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