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I sat down with Shamir Karkal, Co-Founder of Sila, a fintech company that’s raised over $20m to modernize payments. Shamir is also a true OG in fintech. He previously co-founded Simple, the first US neobank built for the smartphone era, and sold it to BBVA in 2014 for $117 million.
In this episode, we discuss:
Selling Simple to BBVA and three post-acquisition challenges of integrating to a big bank
“What you always imagine is that the bank has all these capabilities to support you. And once you're within the fold, they'll support you and everything will magically open up and be easy to do. And the answer is yes, they can. But the even if the spirit is willing, the flesh is very weak.”
Integration Challenges and Pace Discrepancy: The operational pace between a startup and a large financial institution like BBVA could not be any more different. Shamir points out that while startups operate with a sense of urgency, large banks often lack this, affecting the speed of implementing changes and innovations. This discrepancy significantly impacted Simple's ability to grow and evolve post-acquisition.
Struggle for Priority and Influence: Despite BBVA's major focus on innovation, Simple encountered difficulty in gaining attention and priority within a large organization. For large banks, small-scale innovations do not hold as much weight compared to their existing, more profitable core business. This reality made it challenging to assert its needs and goals within the BBVA structure.
Regulatory and Compliance Hurdles: Compliance departments in large banks hold significant power, often overriding decisions from the top management. This aspect created additional hurdles, slowing down their processes and limiting their agility.
Company building lessons and the importance of good timing
“The single biggest thing you need to have as an entrepreneur is just persistence.”
Persistence is the single most crucial trait for an entrepreneur. Naturally, persistence doesn't guarantee success, but its absence almost certainly leads to failure. Every startup faces moments where failure seems imminent, and it's the relentless drive to push through these challenges that often leads to breakthroughs. Reflecting on his own experience and that of his Simple co-founders, Karkal highlighted the immense mental and personal toll that entrepreneurship can take. The journey is not just about late nights and hard work, but also about the sacrifices made in personal life, including impacts on relationships and family.
The real reason why banks do not buy fintech companies too often
“Bank's ability to acquire tech startups is much more limited than people realize. For any bank outside the top 10, a $100 million acquisition is already very tough.”
Regulatory Capital Constraints: Banks are highly leveraged entities with stringent regulatory capital requirements. When a bank like JPMorgan Chase, with a market cap of $500 billion, considers an acquisition, it must account for the impact on its regulatory capital. The acquisition of a tech startup, which typically has a balance sheet heavy on intangible assets like intellectual property and light on tangible assets, can significantly affect a bank's regulatory capital. This is because the intangible assets acquired (accounted as goodwill) do not count towards regulatory capital.
Goodwill Accounting and Its Impact: The process of accounting for acquisitions in banking involves a line item called goodwill, which represents the intangible assets of the acquired company. However, for banks, goodwill does not contribute to regulatory capital. Therefore, when a bank acquires a tech startup, it essentially replaces a portion of its regulatory capital with non-contributory assets. This reduction in regulatory capital is a significant risk, as it can bring the bank closer to or below the minimum capitalization requirements set by regulators.
Limited Acquisition Capacity Relative to Market Cap: Despite their large market caps, banks like JPMorgan Chase have a surprisingly limited capacity for acquisitions, especially when it comes to tech startups. The largest acquisition a bank like Chase could realistically undertake would be under $10 billion, a fraction of what might be expected based on its market value. This limitation is even more pronounced for banks outside the top ten, where a $100 million acquisition could be challenging. The situation is very different when banks acquire other banks, as the acquired entity brings its own regulatory capital, mitigating the impact on the acquiring bank's capital ratio.
Why Shamir is bullish on consumer fintech making a comeback… and a lot more!
Untapped Market Potential in the US: Shamir believes that the consumer fintech market in the U.S. is significantly underinvested. Despite the rise of neobanks like Chime and Current, their penetration is still relatively low, with perhaps only ~15% of American adults as customers. This leaves a vast majority of the population — around 85% — without exposure to these new banking solutions. This is a massive opportunity for consumer fintech, especially given the advancements in AI and the infrastructure established by recent B2B investments. Shamir argues that the persistent issues faced by most Americans, such as living paycheck to paycheck and enduring poor banking experiences, are yet to be adequately addressed, presenting a ripe market for innovative consumer fintech solutions.
Emerging Markets Poised for Fintech Innovation: Shamir is also particularly optimistic about the potential for consumer fintech outside the U.S., especially in India, Latin America, and Africa. The rapid internet adoption in these regions, notably in India, where internet usage has skyrocketed, has recently brought hundreds of millions of new users online in a short span. This dramatic increase in digital connectivity, combined with the relatively low penetration of financial services, positions these markets at the forefront of fintech innovation. He predicts that in the next two decades, the epicenter of financial and fintech innovation will shift from the U.S. to India, driven by this massive, newly connected consumer base and their unmet financial needs.
Episode Chapters
02:18 Shamir Karkal's Background and Journey in Fintech
09:26 Challenges of Integrating into a Bank
13:16 Why Banks Do Not Buy Fintech Companies Often
19:32 The Accounting Challenges for Banks in Acquiring Tech Startups
25:16 The Future of Fintech and Banks
30:27 The Importance of Persistence and Timing for Entrepreneurs
34:13 The Success of Wise and the Importance of Timing and Focus
39:47 The Excitement for B2C Fintech and Emerging Markets
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Shamir Karkal, Co-Founder of Sila – Selling Your Company to a Large Bank, A Bullish Case for Consumer Fintech, The Hard Parts of Entrepreneurship