The influence of trust on the realization of partnership formations : a study on ‘FinTech’ start-ups and big firms in the financial services industry

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The influence of trust

on the realization of partnership formations

A study on ‘FinTech’ start-ups and big firms in the financial services industry

Titia Westra van Holthe - 10868674

MSc. Business Administration – Entrepreneurship & Innovation Dhr. Dr. W. van der Aa

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STATEMENT OF ORIGINALITY

This document is written by Titia Westra van Holthe (10868674) who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in the document is original and that no sources other than those mentioned in the text and its references have used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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ABSTRACT

This study focusses on the influence of trust on the realization of partnership formations between ‘FinTech’ start-ups and firms in the financial services industry. This research shows that trust is perceived as the most important factor that can influence the realization of a partnership formation between a ‘FinTech’ start-up and a big firm in the financial services industry and confirms earlier findings that state that trust has to be studied at two levels of analysis. Besides that, this research builds on previous findings that show that the two levels of analysis influence each other, and trust in both levels of analysis have to present in order to realize a partnership formation.

Thereby, this research builds on previous findings by showing that both levels consist out of the following three interrelated components of trust: capability, goodwill and self-reference, and emphasizes the fact that start-ups and big firms experience the demonstrations of these components differently. However, limitations should be taken into account and further research is recommended.

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INTRODUCTION

1.1 Dynamic environments

Blurring international boundaries, the convergence and de-regulation, the development and integration of new technologies, all of which contribute to the continuously changing competitive environments firms operate in today. Traditional organizational and managerial theories are becoming less relevant since they mainly focus on traditional vertically integrated models instead of open innovation models (Powell 1998). Over the years organizations have become a lot more flexible, decentralized and become part of organizational knowledge-sharing networks. The shift in the focus of corporate innovation activities resulted in the fact that the competitive advantage now relies on the firm’s ability and capacity to generate, process, and apply information and knowledge. More and more organizations are able to interconnect via different knowledge sharing networks, partnerships and alliances, which increases the flow of information and enables players in the market to use expertise from different domains and to disrupt the market with new business models (Powell 1998; West, Salter, Vanhaverbeke and Chesbrough 2014).

Powell (1998) points out that especially technologically advanced industries experience this new logic of organizing and states that ‘competition has become a learning race’ (p. 228). In order to keep up with this learning race, he states that complementary collaboration is required since complementary collaboration enables firms to benefit from joined forces. Most studies on collaboration and firm performance acknowledge Powell’s statement (1998) and point out that complementary collaboration enables firms to reach a wider scale, develop

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7 more competitive technological skills and leverage the value of technological knowledge (Baum, Calabrese and Silverman 2000; Parida, Westerberg and Frishammer 2012). However, in order to set up and maintain a successful partnership, firms require a certain set of skills that enables them to realize a partnership formation and to transfer and implement the information and new knowledge during the realization process and once the partnership formations have been established (Powell 1998).

Remarkably, the majority of the studies focus on collaborations between big established organizations. Start-ups, small and medium sized organizations have in most cases not been taken into account (Parida, Westerberg, Frishammar 2012; Brunetto and Farr-Wharton 2007). And that while, according to GFT’s report (Barri et al. 2014) on open innovation in the Financial Services sector, more and more technological start-ups are disrupting the financial market with new technology systems and possess certain skills that big firms do not possess or to a lesser degree.

Even though the majority of the disruptive start-ups does not survive due to the ‘liability of smallness’: the limited amount of financial resources, the lack of multidisciplinary knowledge and not the right approach towards innovation (Brunetto and Farr-Wharton 2007), the minority of start-ups left, manage to overcome the ‘liability of smallness’ by creating a big network of investors and experts around them and gaining market share rapidly (Barri et al. 2014; Parida, Westerberg, Frishammar 2012; Vangen and Huxam 2003; Powell 1998; West, Salter, Vanhaverbeke and Chesbrough 2014).

Compared to big firms, successful start-ups are willing to take more risks, are able to utilize their own flexibility and specialized knowledge, which in turn enables the start-up to respond faster to market demands than big firms. Therefore, big firms often perceive successful start-ups as a serious potential threat. On the other hand start-start-ups see big firms as a big threat as

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8 well since big firms benefit from knowledge generated through previous experience, the rich possession of R&D resources, structured innovation processes and high levels of in-house knowledge (Parida, Westerberg and Frishammar 2012). Linking back to Powell (1998) and the findings of previous studies, complementary collaboration between these two parties would be more beneficial for both parties rather than trying to compete each other out of the market (Baum, Calabrese and Silverman 2000; Parida, Westerberg and Frishammer 2012).

1.2 Research focus

One of the markets that was massively affected by the changing environment is the financial services industry through the emergence of the FinTech. FinTech is a contraction of the words ‘financial’ and ‘technology’ that includes any form of technology that can be applied to financial services (Blomqvist 2002). More than ever traditional financial and technology oriented firms struggle with the high pace of innovation and the increase of emerging ‘FinTech’ start-ups that gain more and more market share (Blomqvist 2002; Markides 2013). On the other hand, small disruptive ‘FinTech’ start-ups struggle with the lack of experience, resources and other capabilities. The fact that these two parties can establish beneficial complementary partnerships, has contributed to the increase of attention for partnership formation between start-ups and big firms within the FinTech (Blomqvist 2002; DeYoung, Hunter and Udell 2004).

However, Kelly, Schaan and Joncas (2002) found that 94% of the technology executives believe that collaboration between the two is the key to success and should be implemented in their corporate strategy, Hurmelinna et al. (2005) present multiple studies that found that between 50-80 percent of the partnership formation attempts fail. According Hurmelina et al. (2005) the high failure rate is due to the incompatibility of both parties. They state that most managers are not able to overcome the asymmetric implications, such as cultural differences,

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9 when trying to establish a partnership. Olkkonen, Tikkanen and Alajoutsijärvi (2000) show in their research that communication between two or more parties plays an important role. They state that the more inter-personal communication between two firms takes place, the more likely they are to establish an economic relationship. Others state that it is trust that plays a dominant role during partnership formations. It has even been proposed that some cooperative threshold of inter-firm trust is required to even enter the partnership formation process (Gambetta 2000). Nonetheless, the role of trust remains unclear and therefore many researchers point out that further research on the influence of trust on the realization of partnership formation is required (Vangen and Huxham 2003; Brunetto and Farr-Wharton 2007; Blomqvist and Ståhle 2004).

1.3 Research question

Taking all this into account, this research focusses on the influence of trust on the realization of partnership formations between ‘FinTech’ start-ups and big firms and the following research question is focused on:

“To what extent does trust influence the realization of a partnership formation between a ‘FinTech’ start-up and a big firm in the financial services industry?’

1.4 Theoretical relevance

Since this research aims to create a better understanding of the influence of trust on the realization of partnership formations between ‘FinTech’ start-ups and big firms, this research contributes to the existing literature in three ways. Firstly, this research contributes to the existing literature by looking at the influence of trust on the realization of partnership formations instead of the influence of trust on established partnership formations (Blomqvist 2002). Secondly, this research creates more insight on the ambiguous influence of trust on the realization of partnership formations; if this research shows that trust has a dominant

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10 influence on the realization of partnership formations, the high failure rate of attempts of partnership formation could be explained by the dominant influence of trust during the realization of the partnership formation (Gambetta 2000; Vangen and Huxham 2003; Brunetto and Farr-Wharton 2007; Blomqvist and Ståhle 2004). Thirdly, as mentioned before, most research on collaboration focusses on collaboration between big firms and do not take start-ups, small and medium enterprises into account even though research indicates that both parties could establish beneficial complementary partnerships (DeYoung, Hunter and Udell 2004; Blomqvist 2002; Parida, Westerberg, Frishammar 2012; Brunetto and Farr-Wharton 2007). Therefore, this research contributes to the existing knowledge by focusing on the realization of partnership formations between start-ups and big firms.

1.5 Practical relevance

Even though previous research shows that start-ups and big firms could both benefit from complementary partnership formations, it remains unclear why the failure rate of partnership attempts is so high. If this research shows that trust has a dominant influence on the realization of partnership formations, founders of start-ups and managers of big established firms should take the influence of trust into account when trying to realize a partnership formation.

1.6 Structure of the thesis

In order to answer this research question, the next chapter provides more information on the research context, followed by an explanation on the difference between ‘FinTech’ start-ups and big firms and why the realization of partnership formation can be beneficial for both parties. The third chapter focusses on trust and shows that trust is a broad and multidimensional concept. A definition of trust is presented, the two levels of analysis explained, three components of trust at the two levels of analysis are described.

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11 Based upon the generated insights of the literature, chapter four presents a conceptual model that incorporates the main concepts of this study and the main findings of the literature review. The fifth chapter provides more insight on how the research has been conducted as well as more information on the chosen research set-up, the recruitment of participants, the data gathering and analysing process and the role of the researcher. Thereafter, chapter six presents the main findings of the conducted research. In chapter seven the main findings of this research in relation to the conceptual model are discussed and critical remarks outlined. Based upon the critical remarks, recommendations for further research are proposed. Lastly, chapter eight presents the conclusions drawn and outlines the theoretical and managerial implications of this research.

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PARTNERSHIP FORMATIONS BETWEEN ‘FINTECH’ START-UPS

AND BIG FIRMS – Insights from the Literature

This research focusses on the influence of trust on the realization of partnership formations between ‘FinTech’ start-ups and big firms in the financial services industry. Even though ‘FinTech’ has been described briefly in the introduction, this chapter provides more information on what ‘FinTech’ incorporates, explains the difference between start-ups and big firms and the beneficial side of partnership formation, and briefly mentions the ambidexterity of partnership formations in general.

2.1 ‘FinTech’

As already explained in the introduction ‘FinTech’ is a contraction of the words ‘financial’ and ‘technology’. Day and Schoemaker (2000) define technology as ‘a set of discipline-based skills that are applied to a particular product or market’ (p. 2). Financial technology can be therefore described as a set of technological discipline-based skills that are applied to the financial market. This definition is in line with Blomqvist (2002); he states that FinTech includes any form of technology that can be applied to financial services.

Since more and more traditional financial and technology oriented firms struggle with the high pace of innovation, collaboration between ‘FinTech’ start-ups and big firms has increased in popularity. In 2014 the Deutsche Bank even presented a report, ‘FinTech – The digital (r)evolution in the financial sector’, that describes the impact of the digital structural change on the financial market. The writers of this report, Dapp, Slomka and Hoffman (2014), describe ‘FinTech’ as the digitization of the financial sector. According to them this term describes all ‘modern technologies for enabling or providing financial services, such as internet-based technologies in the e-commerce field, mobile payments or early-stage crowd-based financing of start-ups (crowd funding, crowd investing)’ (p.5).

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13 2.2 ‘FinTech’ start-ups and big firms

Before presenting several studies that indicate that partnership formations between start-ups and big firms can be beneficial for both parties, a distinction between a ‘FinTech’ start-up and a big firm has first to be made. According to Blank (2013) this is because many people use the wrong definition for both start-up and established firms: ‘Start-ups are not smaller versions of large companies… the ones that ultimately succeed go quickly from failure to failure, all the while adapting, iterating on, and improving their initial ideas as they continually learn from customers’ (p. 64). Therefore, a start-up can be defined as ‘a temporary organization, designed to search for a repeatable and scalable business model’ (Blank 2013; p. 63). So the ultimate goal of a start-up is to find a repeatable and scalable business model. Once they have managed to reach their goal, start-ups can no longer be defined as a start-up and becomes a firm that executes instead of looks for a business model (Blanks 2013). Based upon the fact that this research focusses on ‘FinTech’ start-ups, a ‘FinTech’ start-up can be defined as a firm that looks for a business model that is related to a set of technological discipline-based skills that are applied to the financial market.

Building on Blank’s findings (2011; 2013) an established firm executes a repeatable and scalable business model. Even though the firm can adjust its business model over the years, the business model itself will be related to its original model (Blank 2013). In practice a distinction between micro, small, medium and big firms can be made (see appendix 9.1). Since this study focusses on big firms, a big firm is defined as a big firm that owns and/or controls value creating activities in one or more different countries with more than 250 employees and an annual turnover exceeding more than 50 million euros or an annual balance sheet of more than 43 million euros (Blank 2013; Aharoni 1971; MKB Servicedesk 2015).

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14 2.3 Partnership formations between ‘FinTech’ start-ups and big firms

Within the report of the Deutsche Bank (Dapp, Slomka and Hoffman 2014) mentioned earlier on, the writers stress the fact that ‘FinTech’ is a broad concept and that due to the increasing technological possibilities the concept is only about to get bigger and provides other players in the market the opportunity to become more powerful if traditional firms do not take action. According to them traditional firms have enough opportunities and expertise in order to boost competition and should consider the possibility to partner up with start-ups in order to keep the market share (Dapp, Slomka and Hoffman 2014). As mentioned in the introduction, Powell (1998) stresses the same fact by pointing out that complementary collaboration is required in order to keep up with the learning race (Powell 1998).

Baum, Calabrese and Silverman (2000) showed that partnership formations are beneficial for ups. In their research they focused on the Canadian biotechnology and found that start-ups were able to increase their initial performance by establishing alliances with other parties in the field. They found that if a start-up managed to form alliances with other smaller and bigger parties in the field, the start-up gained more access to diverse information and capabilities per alliance, which then significantly contributed to the increase of not only the innovation performance of a start-up, but also the overall performance. At the end of their article they stress that especially vertical alliances, which means setting up an alliance with a bigger firm, can help start-ups to overcome the liability of being small.

The findings of Parida, Westerberg and Frishammar (2012) are in line with the findings of Baum, Calabrese and Silverman (2000). Hence, it should be noted that Parida, Westerberg and Frishammar (2012) did not look at start-ups, but looked at small and medium sized enterprises (sme’s). They state that sme’s significantly benefit from open innovation activities. In their research they found that technology scouting with another firm was

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15 relatively easy to implement and reaped significant benefits for both parties. Thus, technology scouting with another firm not only reduces costs, but it also serves as a good starting point for other more open innovation activities such as setting up a joint venture. Also Parida, Westerberg and Frishammar (2012) advise sme’s to partner up with strong customer firms in the value chain when sme’s seek for radical innovation, since strong customer firms have more R&D resources, have structured innovation processes and benefit from the high levels of in-house expertise. On the other hand they point out that established firms benefit from collaborating with sme’s as well, since sme’s are willing to take more risks, are able to utilize on their own flexibility and specialized knowledge and so sme’s are able to respond faster to market demands than bigger firms (Parida, Westerberg and Frishammar 2012).

2.4 The ambidexterity of business model innovation of big firms

The literature describes multiple strategies for established firms to overcome the decrease in market share. One of those strategies is the adoption of new business models. Integrating new business models enables established firms to respond to changes in the market faster and helps to keep or to increase the market share of an established firm in the same competing market (Markides 2013). However, managing dual business models with different ways of competing in the same market is easier said than done. This is because ‘a new business model requires different and often incompatible value-chain activities from the ones the company already has in place for its traditional business model’ (Markides 2013, p. 313). Thereby a new business model could cannibalize the existing market share of the established firm, confuse customers or alienate stakeholders of the established firm (Markides 2013).

Based upon Markides research (2013) it could be stated that the ambidexterity of business model innovation that established firms struggle with, could explain why big firms show an increased interest in partnership formations with ups. Partnership formations with

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start-16 ups enables established firms to benefit from connecting their businesses to external new business models in the market without setting up their own new business model and to deal with the ambidexterity of business model innovation that comes along with setting up new business models (Markides 2013).

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TRUST – Insights from the Literature

In the previous chapter more information on ‘FinTech’ was provided, the difference between start-ups and big firms explained and several studies that indicate the beneficial side of partnership formations were presented. However, managing multiple business models is not as easy as it seems. Markides’ research (2013) shows that managing two or more different business models simultaneously can be difficult. Therefore start-ups and firms should take Markides’ recommendations into account when facing an ambidextrous challenge like this (2013).

Since this research aims to create more insight on the influence of trust on the realization of partnership formations, this chapter focusses on trust. Building on the multiple definitions presented in this literature review, a suitable definition for this research is presented. Based upon previous findings in the literature, the importance of studying trust on two levels of analysis, inter-organizational and inter-personal level, is explained and a distinction between three components of trust on both levels of analysis is made.

3.1 The definition of trust

Over the years many researchers have studied trust in organizational studies. In 2007 Seppänen, Blomqvist and Sundqvist (2007) presented a critical review on multiple empirical studies that measured inter-organizational trust. Their review shows that trust is a complex and multi-dimensional concept that requires more attention (Seppänen, Blomqvist and Sundqvist 2007). Only by looking at the multiple definitions of trust makes you realise how broad and dynamic concept trust is.

Brunetto and Farr-Wharton (2007) for example define trust between firms as ‘a state in which both parties are confident about the other parties’ motives and conduct in situations involving risk’ (p. 364). Mayer, Davis and Schoorman (1995) do not agree with this

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18 definition since they point out that trust and risk cannot be treated as synonyms even though many researchers do so. From their point of view trust is all about the willingness to take and accept risk and not necessarily taking the risk itself. This means that that even though empirical research indicates that a high level of trust leads to cooperative behavior, a high level of trust cannot be perceived as a necessary condition for collaboration since not every collaboration puts the other party at risk. Based upon these findings Mayer, Davis and Schoorman (1995) define trust as ‘the willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor or control that other party’ (p. 712). By vulnerable they mean that there is a chance that something of importance could be lost (Mayer, Davis and Schoorman 1995).

Gambetta’s findings (2000) are not in line with the statement of Mayer, Davis and Schoorman (1995). Even though he acknowledges the fact that a high level of trust between different players increases the likelihood that players under risk will cooperate, he also points out that a certain level of trust is required for cooperative behavior and that trust that serves as a cooperative threshold. Unfortunately the research is not able to give more insight on what level of trust is required for cooperative behavior or how certain levels of trust can be reached (Gambetta 2000).

Within the context of this study Blomqvist’s definition of trust cannot be ignored. In 2002 Blomqvist (2002) presented a study on trust in asymmetric technology partnership formations and presented the following definition of trust: ‘Trust can be defined as the actor’s expectations on the capability, goodwill and self-reference visible in mutually beneficial behavior enabling cooperation under risk’ (p. 175). Two years after publication of the article containing this definition, Blomqvist and Ståhle (2004) presented a similar, but less static definition of trust which makes a distinction between the expectations of both parties and the

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19 demonstration of these expectations in their behavior. They conclude that within the context of partnership formations ‘trust is an actor’s expectation of the other party’s capability, goodwill and self-reference, which needs to be confirmed by experience. Thus trust is increased by – and decreased by the lack of – evidence of these components in parties’ actual behavior and communication’ (Blomqvist and Ståhle 2004, p. 180). This means that trust is a dynamic phenomenon that emerges from ongoing feelings and actions and that trust can be perceived as a bridge between past experiences and anticipated future experiences (Blomqvist and Ståhle 2004).

Seppänen (2008) found that trust is not only generated at personal level, but also at firm level and points out that both levels of analysis should be considered when defining trust. Therefore, he redefines Blomqvist’s definition of trust as the ‘actor’s expectations on the capability, goodwill and self-reference of both the counterpart person and the counterpart firm’ (Seppänen 2008, p. 76).

For this study the latter two definitions of trust are combined and therefore trust is defined as the actor’s expectations of the other party’s capability, goodwill and self-reference of both counterpart person and counterpart firm, which needs to be confirmed by the experience in order to enable cooperation. Thus, the level of trust depends on the evidence of these components in the counterparties’ actual behavior and communication on personal and organizational level (Blomqvist 2002; Blomqvist and Ståhle 2004; Seppänen 2008).

3.2 Generation of trust

Many researchers state that trust is generated through the interaction between two or multiple parties (Blomqvist 2002; Hovland, Janis and Kelley 1953; Seppänen 2008; Mayer, Davis, Schoorman 1995). Hereby a distinction between the so-called ‘trustor’ and ‘trustee’ can be made (see figure 1). The trustor within this study is the firm or the person representing the

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20 firm that is about to trust the trustee which is the counter firm or the person representing the counter firm. Blomqvist (2002) explains that the trustor’s propensity increases when the trustor’s expectations are in line with the demonstration of the trustee’s behavior and the trustee behaves in a consistent and trustworthy manner.

But even though the propensity and trustworthiness influence each other, trust is not always mutual. This means that firm AB can trust firm CD and perceive firm CD as trustworthy, however firm CD does not necessarily trust AB and does not perceive firm AB as trustworthy. Therefore, Blomqvist (2002) stresses the fact that for trust to exist, mutual trust is needed.

3.3 Level of Analysis

Due to the huge amount of critique on the framework that was designed in order to measure trust on multiple levels of analysis by Schoorman, Mayer and Davis in 1995 and the recent new findings in the field Schoorman, Mayer and Davis decided in 2007 to review their own framework. They acknowledge the fact that the framework presented in 1995 might have been too broad and that measuring trust at multiple levels in one framework was difficult. However, they state that the framework has served as a springboard for other studies on the multi-level analysis of trust in the years after. Based upon recent findings in the literature, Figure 1. The interaction between the trustor and trustee generates trust. Adapted from ‘Partnering in the dynamic environment: The role of trust in asymmetric technology partnership formation,’ by Blomqvist, 2002, p. 172. Copyright 2002 of Lappeenranta University of Technology.

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21 they propose that more research on the relation between personal and inter-organizational trust is required (Schoorman, Mayer and Davis 2007).

In 2012 Fulmer and Gelfand presented a review that illustrates that trust can be studied at multiple levels of analysis. Within their research they made a distinction between three organizational levels of analysis: the individual level, the team level and the organizational level. Based upon their findings they state that it is time that when studying trust, multiple levels should be taken into account (Fulmer and Gelfand 2012).

But not everyone agrees on the fact that multiple levels of analysis should be taken into account when studying trust. Marsh and Dibben (2003) present multiple studies that state that studying trust at different levels of analysis is not possible since the locus of trust resides not in a team or organization, but in a person within the organization and that therefore only individual trust should be studied when looking at trust in organizational contexts. Teams and organizations are perceived as objects that cannot trust or be trusted. Individuals on the other hand are perceived as objects that can trust and be trusted.

However, they found when studying the role of trust in an information science and technology context, trust does reside in multiple levels of the organizations. For example, they found that in a particular case the locus of trust clearly lay in the contract and not in the agents involved. It was the contract that created trust amongst the two parties and enabled them both to take legal formal action when the other party failed to carry out its respective role in the relationship. Marsh and Dibben (2003) point out that in order to create a better understanding of the role of trust, researchers will have to move away from the idea that trust only lies in a person. They state that not only the literature will benefit from this shift, but that if firms start recognizing the multiple dimensional role of trust within the organizational context, firms will benefit from it as well (Marsh and Dibben 2003).

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22 Zaheer, McEvily and Perrone (1998) conducted research on organizational and inter-personal trust between buyers and suppliers. Within their research inter-organizational trust describes the level of trust at organizational level between two or more firms, whereby the level of trust in the counter firm is based on aggregated level of trust among all members of one organization. Inter-personal trust on the other hand refers to the level of trust in the person that is representing the counterparty. Zaheer, McEvily and Perrone (1998) refer to the inter-personal level of trust as ‘the extent of a boundary-spanning agent’s trust in her counterpart in the partner organization’ (p. 142) (see figure 2). They found that inter-organizational trust and inter-personal trust were strongly related, and therefore they state that only studying inter-personal trust increases the chance of missing ‘the important institutionalized effects of inter-organizational trust’ (p.154).

The findings of Seppänen’s research on inter-organizational and inter-personal trust (2008) are in line with the findings of Marsh and Dibben (2003) and Zaheer, McEvily and Perrone (1998). Firstly, his findings support the fact that trust is a multi-dimensional concept and that the inter-organizational and the inter-personal trust are significantly related. Therefore both levels of analysis should be taken into account when studying trust. Apart from that, Seppänen contributes to the existing literature by showing that both levels are not only related, but also influence each other. He found that an experience on firm level did not only influence the idea of the trustworthiness of an organization, but also the trustworthiness of an individual working for the company. This also works the other way around, but Seppänen (2008) points out that the effect of the trustworthiness of an individual is not as strong as the effect of the trustworthiness of the organization. He states that the trustworthiness of an individual is linked to experience and increases its influence on the trustworthiness of the organization over a longer period of time (Seppänen 2008).

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23 Figure 2. Inter-organizational and inter-personal trust.

Adapted from ‘Does trust matter? Exploring the effects of interorganizational and interpersonal trust on performance,’ by Zaheer, McEvily and Perrone, 1998, Organization science, 9(2), p. 142. Copyright 1998 by the Institute for Operations Research and the Management Sciences.

3.4 Components of trust

Up until now there are many different views on which components generate trust. Hovland, Janis and Kelley (1953) for example were one of the first ones to show that trustworthiness and expertise affected the trustworthiness of the trustee and therefore the perceived level of trust. Even though the framework proposed by Mayer, Davis and Schoorman in 1995 received a lot of critique, they showed that ability, benevolence and integrity of members of an organization influenced both trust levels.

Based upon the definition of trust provided in 3.1this research concentrates on the three components capability, goodwill and self-reference proposed by Blomqvist and Ståhle (2004). Like mentioned before they build on the findings of Blomqvist (2002) and presented a more dynamic model with three components of trust. Taken the interrelation between the two levels of analysis into account the three components are studied on both the inter-organizational level and inter-personal level (Blomqvist and Ståhle 2004; Seppänen 2008).

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24 The next two headings provided more a clear overview of the three components at the two different levels of analysis.

3.4.1 Capability, goodwill and self-reference at the inter-organizational level

Based upon the importance of the multiple levels of analysis of trust and the three components presented by Blomqvist and Ståhle (2004), this subheading provides a better insight into the three components at the inter-organizational level of trust.

The first component mentioned is capability. Capability covers all technological and business capabilities that a potential collaboration partner possesses. Technological and business capabilities include all skills, competences and characteristics that enable the firm to do what it is supposed to be doing at the moment of judging. Capability also includes the judgement of the meta-capability. The meta-capability describes up to what extent the potential collaboration partner possesses the right skills needed for cooperation and/or to what extent the counter firm has gained experience through closing partnership with other parties (Seppänen 2008; Blomqvist and Ståhle 2004).

Goodwill describes up to what level the potential collaboration partner is willing to accept a potentially vulnerable position. Goodwill becomes noticeable when the potential collaboration partner shows its genuine interest, takes responsibility, is not afraid to express concerns and shows a great level of understanding and respect towards the other potential partner firm (Seppänen 2008; Blomqvist and Ståhle 2004; Mayer, Davis and Schoorman 1995). Seppänen (2008) points out that without the feeling of shared moral responsibility and positive intentions, firms are less likely to take risks and partner up with another firm. Thereby he explains that goodwill can be realized through positive behavior or in withdrawal from negative behavior (Seppänen 2008).

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25 The third component, inter-organizational self-reference, refers to Blomqvist’s findings in 2002. During his research on technology partnerships, he found that firms evaluate the potential collaboration partner based upon the potential collaboration partner’s awareness of the strengths and weaknesses, and the identity and capabilities of their own firm. This is because when a firm is aware of its own strengths and weaknesses, it has a better understanding of ‘what the system is and what is not…’ and what ‘the firms identity and capabilities in relation to others’ are (Blomqvist 2002, p. 179). It is said that firms with a high level of self-reference are better in dealing with uncertainty and changing environments and therefore more attractive than firms with a low level of self-reference. Blomqvist (2002) states that ‘an organization with a strong self-reference is able to recognize, maintain and develop the heterogeneous strength in its identity, yet connect and cooperate at equal level with diverse and complementary actors’ ( p.181).

3.4.2 Capability, goodwill and self-reference at the inter-personal level

Building on top of the findings in the previous subheading, this subheading provides a better insight on the three components at the inter-personal level of trust. When looking at the three components of trust at inter-personal level, instead of inter-organizational level, the focus of the three components of trust changes from trust at the organizational level to the individual level.

This means that the capabilities focus is no longer on the capabilities of a firm as a whole, but refers to the technological and business capabilities of the person that is representing the counterparty. Hereby a person is judged on specific knowledge and skills, the overall understanding of environment he/she works in, business know-how and other competences and characteristics that are required to do the right job. The meta-capability refers to the experience the person has in closing other partnerships in the past and the possession of great

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26 understanding and skills that which required for closing partnerships (Seppänen 2008; Blomqvist and Ståhle 2004).

Goodwill on this level describes up to what level the counterpart’s agent is willing to accept a potentially vulnerable position without being afraid to be nailed down or to take advantage of the vulnerable position of the trustor. Goodwill becomes noticeable by an individual when the agent of the counter firm shows its interest, takes responsibility, is not afraid to express concerns and shows a great level of understanding and respect towards the agent of the potential partner firm (Seppänen 2008; Blomqvist and Ståhle 2004; Mayer, Davis and Schoorman 1995). Also goodwill on the individual level can be realized through positive behavior or in withdrawal from negative behavior (Seppänen 2008).

Lastly, the third component, inter-personal self-reference, refers to what extent the counter agent is aware of its own identity and capabilities in relation to others. This includes the ability of a person to define its own values, goals and principals and to understand what is important, what needs to be prioritized and what is meaningful, and compares him/herself to others for self-reflection (Seppänen 2008).

3.4.3 The interrelation between each of the three components at each level of analysis

Blomqvist (2002) explains in his research that the three components of trust are interrelated to eacch other. By doing so he makes distinction between active and passive components of trust, whereby goodwill is perceived as an active component and capability and self-reference as passive components. According to him active components ‘indicate the actors’ intention and enables asymmetric partnership formation’, whereas passive components are ‘necessary pre-requisites or enables for mutually beneficial cooperation’ (Blomqvist 2002, p. 183). Blomqvist and Ståhle (2004) support this finding by pointing out that all components have to

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27 present in order to realize a partnership formation. They state that if there is a lack of one of the components, cooperative behavior cannot flourish (Blomqvist and Ståhle 2004).

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28

CONCEPTUAL MODEL

In order to create a better insight into trust and the realization of partnership formations between ‘FinTech’ start-ups and big firms, a literature study has been conducted and the previous chapters have presented a broad overview of the main insights of the literature on the main concepts of this study. Based upon the main insights presented in the literature review this chapter presents a conceptual model that is developed in order to answer the research question of this research (see figure 3). This conceptual model illustrates how the main concepts of this research are related by incorporating the main insights presented in the literature review.

4.1 The explanation of the conceptual model

Like mentioned before, figure three presents a conceptual model that is developed to answer the research question and is based on the main concepts of this research in relation to the main insights provided by the literature overview. Within this model the concept trust is redefined as the perceived level of trust since trust is generated through the interaction between two or more parties and the level of trust of the trustor in the trustee is based on the trustor’s expectations of the trustee’s capability, goodwill and self-reference, confirmed by the trustor’s experience of these three components of the trustee (Blomqvist 2002; Blomqvist and Ståhle 2004; Blomqvist Seppänen 2008; Hovland, Janis and Kelley 1953; Mayer, Davis, Schoorman 1995).

The perceived level of trust is in the conceptual model divided into two levels of analysis: inter-organizational trust and inter-personal trust. This is distinction is made based upon the findings of researches on level of analysis presented in chapter three. In this chapter Mayer, Davis and Schoorman (2007), and Marsh and Dibben (2003) recommend that future research on trust should take a multiple level approach into account and Zaheer, McEvily and

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29 Perrone’s (1998) and Seppänen’s (2008) findings show that the two levels of trust are strongly related and that therefore studying one level of trust is not sufficient. Based upon this latter finding the arrow between inter-organizational trust and inter-personal trust represents the significant relation between the two levels of analysis and the mutual influence of the two levels found by Zaheer, McEvily and Perrone (1998) and Seppänen (2008).

Each level of analysis exists out of three components of trust. These components are based upon Blomqvist and Ståhle’s findings (2004). Their research builds on top of Blomqvist’s findings (2002), but takese a more dynamic approach. The three components of trust at the inter-organizational level focus on the capability, goodwill and self-reference of the potential collaboration partner firm and the three components of trust at the inter-personal level focus on the capability, goodwill and self-reference of the person representing the potential collaboration partner firm (Blomqvist and Ståhle 2004; Seppänen 2008; Blomqvist 2002; Mayer, Davis and Schoorman 1995). The arrows between the three components at each level indicate the interrelationship between the components of trust (Blomqvist 2002; Blomqvist and Ståhle 2004).

Since this research focusses on the influence of trust on the realization of partnership formations between ‘FinTech’ start-ups and big firms within this model a distinction between attempts that managed to realize a partnership formation with a contractual agreement as outcome and attempts that failed to realize a partnership formation and no contractual agreement is made.

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30 Figure 3. An illustration of the influence of trust on the realization of partnership

formations between ‘FinTech’ start-ups and big firms based upon findings in the literature.

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31

FROM IDEA GENERATION TO RESEARCH DESIGN, DATA

COLLECTION AND DATA ANALYSIS

The previous chapters provided a literature review on the main concepts used in this study. Based upon these generated insights chapter four presents a conceptual model that incorporates the main concepts of this study and the main insights of the literature review.

Since the conceptual model presented in chapter five served as a basis for this research and therefore the research set-up, this chapter gives more insight on how the idea for this research was generated, the research design has been developed, the data is collected and the data is analyzed. Besides that, the role and the influence of the researcher on the data collection and data analysis are discussed.

5.1 Idea generation

The idea for this research stems from two assignments of the ‘Innovation Management’ course lectured by Dr. W. Van der Aa. The first assignment consisted a case on the integration of the lean-start-up methodology for one of the biggest Dutch banks and the second assignment consisted a business report on the current trends in the financial market. The two assignments showed that big firms struggled with the high pace of innovation and the emergence of disruptive start-ups and that even though they tried to set up partnership formations, the majority of the attempts failed.

In order to create a better understanding of why start-ups and big firms failed to realize a partnership formation, the researcher of this study decided to do more field research and started, after multiple meetings with experts in the field, visiting ‘FinTech’ meet-ups organized by Holland FinTech. The meet-ups organized by Holland FinTech were interesting since the aim of these meet-ups is to create a mutual understanding between start-ups and big established players in the financial services industry, by bringing them together. Visiting

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32 these meet-ups on a regular basis enabled the researcher to get in touch with multiple ‘FinTech’ start-ups and big firms active in the financial services industry. During these meet-ups the concept trust was mentioned many times and thereby the idea for this research was born.

5.2 Research design

Once the idea for this research was born it became clear that literature on the influence of trust on the realization of partnership seemed ambiguous and that more research on this matter was required. Within the literature a distinction between an inductive and deductive approach is made. An inductive approach describes an approach whereby data is collected and theory is developed based upon the findings. A deductive approach is an approach whereby the research strategy is designed in such a way that theoretical propositions can be tested (Babbi 2007; Saunders, Lewis and Thornhill 2009). Even though the conceptual model of this research is based upon the main insights of the literature, it can be said that this research has an inductive approach since it aims to create a better understanding of the influence of trust on the realization of partnership formations between ‘FinTech’ start-ups and big firms in the financial services industry.

5.3 Data collection

Since this research has an inductive approach, qualitative research has been conducted. In order to make sure that the main concepts and insights from the literature were covered during the interviews, semi-structured interviews were conducted. The predetermined questions can be found in appendix 9.2. The order of the predetermined questions asked depended on the flow of the conversation and differed per participant. The semi-structured interviews enabled the researcher to go in-depth by eliminating, altering or asking additional

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33 questions when answers given by the participant were unclear (Saunders, Lewis and Thornhill 2009; Babbi 2007).

All participants were recruited via either the ‘FinTech’ meet-ups, the visit of the ‘FinTech 50 Awards and Conference’ or were approached with the help of others via the phone or e-mail. Telephone interviews prior to the semi-structured were conducted to make sure the participants had enough experience with partnership formations and were willing to share their insights. After the telephone interviews fifteen participants were carefully selected and interviews were conducted.

All interviews were recorded and took between 45 and 60 minutes. Before starting the interview each participant was asked if he/she minded if the interview was recorded. None of the participants did mind and therefore all interviews were recorded. As soon as the interviews were transcribed and the participant agreed on the transcribed version of the interview, the recording of the interview was deleted. Five participants made small changes in the transcribed version of their interview and another three participants were so kind to clarify certain statements via the telephone after the interviews were conducted.

Even though fifteen people were interviewed, the data analyzed consists of thirteen semi-structured interviews. At the very beginning of the data gathering process two pilot interviews were conducted in order to find out if the predetermined questions were clear enough. The first pilot interview showed that some questions were not clear and non-preferable answers were given. Questions were adjusted and the second pilot interview showed better results. The third interview showed that the adjusted questions worked and therefore only the first two pilot semi-structured interviews have not been taken into account when analyzing the collected data.

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34 The participants can be divided into two categories: participants that are currently working for big firms and participants that are currently working for a FinTech start-up (appendix 9.3). Since anonymity and confidentiality are reassured, all participants have been given a number and names of people/firms mentioned in the data have been changed. The numbers of the participants refer to which participant said what.

5.4 Data analysis

As soon as a participant agreed on the transcribed version of the interview, each interview was printed on paper and carefully read through multiple times. In all cases no codes were noted after reading the text for the first time. After the second time reading the first codes were noted and many more codes followed. Hence, throughout the structuring and analyzing process some existing codes were replaced by new or adjusted codes or even erased. After coding all transcribed interviews, the data and codes were inserted into an Excel sheet. The filtering and sorting options of Excel helped the researcher structuring the huge amount of data and to get a good overview of how certain concepts were related.

The coding structuring process can be divided into two phases. Within the first phase of the coding structuring process the majority of the coded words, sentences and parts of the text that are linked to the main concepts presented in the conceptual model were placed into associated categories. The second phase of the coding process adopted a more inductive coding approach and codes that were not (directly) related to the main concepts of the conceptual model were categorized in new categories. This more open approach of coding enabled the researcher to discover new relations between the different components of trust and to develop new insights on the influence of trust on the realization of partnership formations between ‘FinTech’ start-ups and big firms in the financial services industry.

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35 Appendix 9.4 provides an overview of the categories and codes used and developed during the data structuring process.

Throughout the coding process, general remarks were noted on the side of the text. These remarks on the generated data included feelings, comments on given codes and the relation to other codes. Later on in the data analyzing process these remarks helped the researcher understand how certain things were said, why certain codes were given and how the some parts related to other parts of the content.

5.5 Role of the researcher

Over the years multiple researches have indicated that the presence and behavior of the researcher during the data collection process could affect the responses of the participant and therefore the quality of the collected data (Saunders, Lewis and Thornhill 2009; Babbi 2007). In order to decrease this effect, the research guidelines presented by Babbi (2007, p. 318-343) have been taken into account and the required research skills have further developed. Hence, it should be noted that over the years the researcher of this study has been able to develop multiple research skills which increases the chance of extracting reliable data (Saunders, Lewis and Thornhill 2009; Babbi 2008).

This brings us to the next point; Saunders, Lewis and Thornhill (2009) point out that extracting reliable data does not automatically mean that the results presented are reliable. In order to make useful sense of the overload of data generated by semi-structured interviews, data-analyzing skills are required. Again, the experience of the researcher of this study and the qualitative data-analyzing workshops for master thesis students provided by the UvA, enabled the researcher to process the data in a structured way.

However, even when the researcher has the right skills to structure the data, the interpretation of the results depends on the researcher’s interpretation of meanings. These meanings differ

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36 per researcher and therefore certain findings can be interpreted differently by others (Babbie 2007). The researcher of this study is aware of this and has created an overview of the categories and codes used for structuring the data in order to create more insight on the data analysis process and to help the reader to understand the researcher’s way of reasoning. As mentioned before, this overview is presented in appendix 9.4. Besides that, the findings of this research, presented in chapters six, are supported with illustrative examples of quotes and anecdotes generated from the data analysis.

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37

RESULTS

In order to conduct this research several steps were taken. Firstly, the existing literature on trust was studied. Based on the generated insights a conceptual model was developed. In order to distract suitable data, a qualitative research approach was adopted. The data analyzing method enabled the researcher to structure the huge amount of data and to extract suitable and interesting data.

This chapter presents the main findings of the data analysis. First the findings on the main concepts of the conceptual model are presented. Thereafter other distracted insights found are shared and explained. At the end of each subheading examples of illustrative quotes and anecdotes are presented.

6.1 The importance of trust

During the interviews all participants were asked to explain why such a high percentage of partnership formation attempts fail. Based upon their own experience the participants provided multiple reasons. These reasons varied from the lack of trust up to the ‘grumpy old men on the board who are scared of change’ (participant five). The top five of the reasons mentioned are presented in table 1.

Table 1. The top five mentioned reasons for the high failure rate

Reasons mentioned Mentioned by # of participants 1. Lack of trust Thirteen participants

2. Risk level Eleven participants

3. Conflicting organization structures Eight participants 4. Conflicting organization cultures Eight participants 5. Lack of perseverance Six participants

Even though the lack of trust was mentioned by all participants, it did not reflect if the lack of trust could be perceived as the most important reason for failure. During the interviews the participants were asked to point out which reason was most important. Again trust was

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38 number one. The rest of the interviews were analyzed in order to find out if there were any statements that would contradict this finding. These were not found.

Ten of the thirteen participants described cases that indicated that due to the lack of trust from the moment they became aware of the attempt, the particular attempt was not even taken seriously. The other cases of failure described were cases whereby the level of trust dropped during the negotiation process due to certain events. These events varied from arguments about not keeping promises to not providing the right information that was required to establish a partnership. Based upon these findings it could be stated that the lack of trust explains the high failure rate of partnership formation attempts and that trust serves as a cooperative threshold.

Table 2. Examples of quotes and anecdotes that illustrate the importance of trust Participant two:

‘Based upon my experience it’s more like a gut-feeling than only meeting the requirements… In reality it goes more like: hey, interesting proposition, perhaps we can do something with it within the bank and we will invite them to come over and talk... But as soon as we have the feeling that something is not quite right, even if they meet all the requirements, we reconsider setting a partnership with them’.

Participant three:

‘So we asked ourselves, was this actually the right party to form a partnership with, could we actually trust them after this happened? ‘No’ was the answer from us all, because it seemed they just wanted to walk off with a product we would work together on, for nothing... It may sound stupid, but the trust was gone and we couldn’t get the right feeling back’.

Participant ten:

‘Trust serves as a threshold where many different factors come together… Your product has to be unique, you need goodwill of the counter firm, and you have to meet the right person at the right time within the counter firm that knows the right people and has enough influence… Only then there is a high chance that you will establish a partnership’.

Participant eleven:

Not so long ago participant eleven received an e-mail from a successful businessman out of the US. The ‘successful’ business man wanted to set up a partnership. Participant eleven explains why the lack of trust was the reason why the attempt failed: ‘It looked like a scam, who calls himself a successful businessman? We googled him and he didn’t exist…. We never say ‘no’ to meetings because we believe that every meeting is worth something, but in these cases we don’t even consider responding’.

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39 6.2 Components of trust at two levels of analysis

Whilst talking about what aspects are important when looking at a potential collaboration partner, all participants mentioned aspects that could be placed under the three components of trust: capability, goodwill and self-reference. Once these aspects were coded, it became clear that a distinction between the two levels of analysis could be made. The following subparagraphs describe the findings mentioned above. Since goodwill was described as the most important component of trust, the findings on goodwill at organizational and personal level are described first. This subparagraph is followed by two other subparagraphs on the components capability and self-reference at the two levels of analysis.

6.2.1 Goodwill at two levels of analysis

The component ‘goodwill’ was mentioned as the most important influencing component of trust on a organizational as well as a personal level. Since start-ups and big firms have totally different organization structures and organization cultures, all participants argue that goodwill is required in order to overcome these issues and to run the realization of the partnership formation as smoothly as possible. Even though all participants point out that mutual understanding is required, participants working for big firms emphasize that the start-up’s understanding of a big firm is more important than the other way around. This means that participants one to five pointed out that start-ups need to understand that big firms are not capable of changing their organization structure overnight and that some processes take longer because of the decision making structure of big firms. Therefore, the start-up requires more patience when trying a partnership formation with a big firm.

Participants working for start-ups acknowledge this, but emphasize that it is big firms that need to create a better understanding of what start-ups need. They point out that start-ups have a short term focus and rely on quick decision making processes. In order to realize a

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40 partnership formation big firms should adjust their practices wherever already possible, even if this means that some solutions are only temporary. Participant six to thirteen pointed out that offering a temporary solution is often not possible.

Moving on to the inter-personal level of trust, all participants address the fact that goodwill of a start-up/firm as a whole is not enough, since people representing the parties are involved. Finding the right people isn’t as easy as it sounds. Participants that are working for a start-up point out that many big firms exist out of multiple departments, which exist out of several management layers. Finding the right person can take a long time and waiting for a decision to be made, even longer. In order to get to the point where start-ups are waiting for a decision for approval, it is important for people working for start-ups to get connected to people that are willing to stick their neck out for them and help them to get through all the required paperwork. In the cases described this does not seem to be the case. All participants deplore this and the participants working for big firms point out that they are currently trying to change this by designating several specific people in the firm that become responsible for setting up partnerships with start-ups. Besides that, the designated people are given the time to investigate what changes should be made within the firm in order to enable the firm to make decisions process faster when dealing with start-ups in the future.

Looking from a big firm’s perspective, finding the right start-ups to collaborate with can be hard as well. Often founders of start-ups see their own business model as their baby and find it hard to see the bigger picture. All participants working for big firms pointed out that they struggle with founders of start-ups that are not willing to adjust their business model in such a way that both parties can benefit from it. In total eight participants explain that this ‘unwillingness to change’ derives from the lack of required knowledge of the start-up. This lack of required knowledge comes in many forms: the lack of knowledge of the firm’s

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41 intentions, the lack of knowledge about what is going on in the industry or the lack of knowledge about the possibilities of the product that a start-up has developed.

In order to overcome the issue of the lack of knowledge, persons representing the big firms should be aware of this before they start talking to a representative of a start-up. Instead of telling the start-up’s representative how they see it, a representative of the big firm should help the start-up’s representative to see the bigger picture by clearly explaining what the intentions are, how these intensions relate to the bigger picture and how the start-up can benefit from it. Only when the bigger picture can be created, the chance that the founders of start-ups are more willing to adjust their business model increases.

Table 3. Examples of quotes and anecdotes that illustrate the goodwill at inter-organizational level

Participant one:

‘When a start-up and big firm are trying to establish a partnership, it is important that both parties have an understanding of the greater goal and are willing to take their responsibility in order to establish a successful outcome’.

Participant two:

‘We have a lot of start-ups that want to collaborate with us. However, we don’t have skills yet and as an organization we are busy learning. We also make mistakes’.

Participant four:

‘You deal with a lot of people that work in one organization that all want to have a say… Therefore you have to be prepared to explain your story multiple times and willing to be patience… Be open-minded and show that you are willing to learn’.

Participant seven:

‘As much as we wanted to set up a partnership with firm AB, we were not able to wait any longer. We presented our business idea so many times to so many different people in the company, slightly different people… At the start we didn’t mind, but it annoyed us that a decision could not be directly made… Time is money and since this whole thing took up so much time already and we had customers that needed attention, we decided to pull the plug out. Big firms really have to understand that and offer solutions to keep us going in the meantime.

Table 4. Examples of quotes and anecdotes that illustrate the goodwill at the inter-personal level

Participant two:

‘We often struggle with very stubborn founders… When they present their ideas you can see that they are proud of their product. Of course, I would be as well. But often these founders fail to see the bigger picture… It seems that they are in love with their own product’.

The influence of trust on the realization of partnership formations : a study on ‘FinTech’ start-ups and big firms in the financial services industry