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Why Banks Fear Startups
Banks and financial institutions often approach relationships with startups with a degree of caution. This hesitation comes from several characteristics typically associated with new businesses.
Let's see the most common ones:
1. Activity
Startups are known for their rapid changes in business strategy and operations, which can be risky for banks which prefer stability and predictability in their clients. The dynamic nature of startups, while a strength in the business world, introduces uncertainty that banks generally prefer to avoid.
Perhaps one startup's original idea is to sell bread and act as a bakery, but if that does not catch on, management might decide to shift gears and also earn revenue by providing online baking lessons. A bakery is a different risk category than education, and this seemingly innocent change of activity might pose a significant risk to the bank's overall portfolio.
2. Volumes
Banks usually charge fees based on the volume of transactions or generate income on the funds that are kept with them, and therefore prefer larger volume clients.
Many startups however struggle to reach operational phases where substantial transactions become regular, directly impacting the bank’s potential revenue from transaction fees. Often, startups fail to scale up and start operations, which means the bank spent time and effort to onboard them but they never earn profit on the clients who will not use their account.
3. Legal
Startups often operate on tight budgets and may underinvest in crucial areas like legal compliance. This poses another risk for banks, as unintentional legal violations by a client could implicate the bank as well. Supporting an entity engaged in illegal activities, even unknowingly, can lead to significant repercussions for a financial institution.
Read more
Banks and financial institutions often approach relationships with startups with a degree of caution. This hesitation comes from several characteristics typically associated with new businesses.
Let's see the most common ones:
1. Activity
Startups are known for their rapid changes in business strategy and operations, which can be risky for banks which prefer stability and predictability in their clients. The dynamic nature of startups, while a strength in the business world, introduces uncertainty that banks generally prefer to avoid.
Perhaps one startup's original idea is to sell bread and act as a bakery, but if that does not catch on, management might decide to shift gears and also earn revenue by providing online baking lessons. A bakery is a different risk category than education, and this seemingly innocent change of activity might pose a significant risk to the bank's overall portfolio.
2. Volumes
Banks usually charge fees based on the volume of transactions or generate income on the funds that are kept with them, and therefore prefer larger volume clients.
Many startups however struggle to reach operational phases where substantial transactions become regular, directly impacting the bank’s potential revenue from transaction fees. Often, startups fail to scale up and start operations, which means the bank spent time and effort to onboard them but they never earn profit on the clients who will not use their account.
3. Legal
Startups often operate on tight budgets and may underinvest in crucial areas like legal compliance. This poses another risk for banks, as unintentional legal violations by a client could implicate the bank as well. Supporting an entity engaged in illegal activities, even unknowingly, can lead to significant repercussions for a financial institution.
Read more
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If in doubt, ask a professional. It doesn't cost a lot to set up a banking and payment plan at the beginning, but it can cost a lot not to have one, and fail.
Understanding these challenges is crucial for startups that wish to foster strong banking relationships. As an advisor specializing in banking and payments, I assist startups in navigating these hurdles, ensuring that they can establish and maintain effective partnerships with banks while steering clear of potential pitfalls.