In our discussions lately with CXOs and innovation heads of major banks, we have been seeing an interesting trend shaping up. Many of them are trying to find ways to measure the success (or failure) of innovation programs and accelerators – essentially trying to find the KPIs for benchmarking innovation (internal and external data). Some of them even said, “We will be looking to buy those startups. It’s not just about collaborative innovation.”
I think what we are going to witness is how innovation takes a corporate development turn from here. It will not be a full U-turn but maybe the splitting of teams into two and sending them in different directions. If you believe in FinTech and want to make a bigger play, an accelerator program is only one piece of the puzzle. Remember the original reasons why all this “FinTech” thing started:
End-customers demanded everything to happen in four clicks on their mobile phones. The next-gen financial services experience built by startups became a growing phenomenon. All these lead to a fairly new set of expectations from banks and FIs
Banks needed a comprehensive digital transformation strategy to make this happen.
But there was a problem. There was a lack of time, skills, infrastructure, and also, the right culture to do it. So most banks chose the easy and quick steps – let’s bring about a perception change by organizing and participating in startup events, hackathons, third-party accelerators, et al; let’s launch a few new mobile apps/applications here and there, and talk about omnichannel.
Some of them were able to build a bigger and more meaningful roadmap. They set up an innovation office and have a structured innovation program including shortlisting startups and had their own bank accelerator. Good start. And to be fair, it’s okay to make mistakes and learn and evolve. Any bank which has reached this stage is worthy of appreciation.
It doesn’t take more than two to three years to realize that even that is not enough. There are questions about the ROI of these investments. How do we make sure it’s helping with our core #1 and #2 objectives? And those are the key conversations you need to have if you are a bank.
Comprehensive digital transformation is a big, big undertaking. It’s almost as if you are setting up a new organization. I am not going to go into too much detail on what it is and how it should be done. Please see my note* at the bottom to know more.
But what I am going to discuss is something that is going to be an important part of the comprehensive digital transformation and specifically one part of it as it relates to working with startups. And that is where the funds and corporate development and the M&A machinery of the bank (old or new that will be set up) will come into the picture. Why will this happen?
As explained by a bank that when we acquire or invest and take a board seat, we can guide the strategic product roadmap. In a typical no-commitment collaborative experimentation, startups keep focusing on 10 different things. This is also because banks don’t show them the right level of seriousness. Even in an accelerator program, sometimes there is a conflict of interest as startups don’t want to change their path for a half-baked and lightweight commitment. It’s a chicken and egg problem. Once the bank’s money is invested, it is important to see the results for the bank. There will be more seriousness and startups will be able to move things, ship, integrate, and go to market quickly. As banks look to benchmark innovation, investing in FinTechs looks like a major move in 2018.
This is FinServ; it is different. This is not telecom where you can make incumbents look like dump pipes. Even if you can, you will have to have a completely new financial system that doesn’t favor banks and provides a level playing field for small and big FinTechs – a new tech layer on which to operate. Is that the cryptocurrency/blockchain world? I don’t know yet. Incumbents in this space move fast and are not going to give up becoming digital and FinTechy. In fact, they were early adopters of technology as compared to any other sector and they will beg, borrow or steal but certainly try. They will buy or build.
There is some good data available that I can use here to back my arguments. Some of this activity has already started:
Allianz converted one of their innovation labs into a VC arm – Allianz has announced the changeover of its in-house incubator, Allianz X, into a new venture capital investment arm intended to bolster digital and core technology. As part of the pivot in strategy, the German insurer will discontinue all early-stage projects and heavily invest in startups with expertise in mobility, connected property, connected health, wealth management, data intelligence and cybersecurity.
Ally Financial had bought online brokerage TradeKing Group in a $275-million deal. In India, Axis Bank’s acquired FreeCharge. BlackRock also decided to tap into FinTech with the $150-million acquisition of FutureAdvisor, an online investment firm. JPMorgan Chase acquired WePay, a small-business-focused payments company. In the last three years, Silicon Valley Bank acquired Standard Treasury, BBVA acquired Simple, and Ally acquired TradeKing. BNP Paribas completed the acquisition of Compte-Nickel this year as well. **And we have a whole list with us; **we have had several discussions with FIs.
In 2018, you may finally see new venture arms/funds of FIs/banks coming up. You will see more action from existing venture arms of banks. In some banks who may not have these arms or may not call them that, you will see corporate development and M&A teams getting into action. How will the innovation team and the investment group play it out in the market? Will they compete or work together? Who will take the lead? These are going to be some of the important operational questions.
But will it make sense for the FinTech startups to have banks as investors and buyers?
From a startup’s perspective, the narrative has changed – it’s going from breaking banks/total disruption, to partnering/working with banks, to also raising money/getting acquired by banks. What’s wrong with that? Startups need scale, right? “New tech” being acquired by the old companies – it’s a win-win situation.
So, Oracle bought Apiary, Palerra, Eloqua and so on, and Apple acquired Shazam, Workflow, Siri and more – all these companies that were bought are in a bigger world (scale) today and witnessing growth at a global level.
Of course, there will be exceptions. There will be a few FinTechs in each region who will achieve scale like Klarna, Sofi, Paytm, and will not want to sell. Sure, but I might argue that there is an interesting thing happening there as well – they are becoming banks: TechBanks. (My next article is coming soon).
*If you are a Chief Innovation Officer or a CDO of a bank and if you have started thinking about this or if your CEO/board has started asking you questions about ROI, please talk to us. We have a primer/workshop and discussion material on this to get you started.
For us, it has always been about FinTech foresight based on what we see as a global FinTech think tank and platform/community. We have been a leading indicator of sorts for the things to come in FinTech. In 2013, it was crypto; in 2014 – blockchain; 2015 – bank innovation programs/accelerators, and so on. And this is one of the things we foresee for 2018, and there are others as well. Do let us know your feedback and comments.