December 17, 2016
As groundbreaking and disruptive proprietary solutions may seem to their creators, their success in the market is rarely attributed solely to a solution itself – especially when it comes to financial technology. The surrounding ecosystem and critical industry stakeholders are the ones playing the biggest role in enabling growth and development of the startup community.
In the financial services industry, those stakeholders include watchdogs, financial institutions, FinTech-focused venture funds and the targeted consumer market among other members of the ecosystem. Altogether, they led to the 30 largest FinTech funding rounds during the first half of 2016 exceeding $4.6 billion in aggregate funding.
Although the funding is vital for startups at various points in their lifecycle, there are other ways the ecosystem supports entrepreneurs and facilitates innovation adoption.
Aside from being open to building beautiful friendships with FinTech startups, financial institutions are quite passionate about financially supporting the entrepreneurial community. Banks continue to be very active in discovering talent and supporting innovative solutions – over the last five quarters, Goldman Sachs, Citigroup and Banco Santander or their venture arms have invested in 25 VC-backed FinTech companies. Moreover, three of the largest FinTech investors are international financial institutions – Citi Ventures by Citi, followed by Goldman Sachs and JP Morgan.
From the year 2000, Citi Ventures invested over $1.39 billion across 48 deals, while JPMorgan dedicates ~$3 billion each year in technology with a large portion of that funding going towards FinTechs. Another industry leader, Bank of America, was reported to be setting aside $3 billion from its annual budget for investing in technology and innovation.
As Brian Hughes, Co-Leader, KPMG Enterprise Innovative Startups Network and Partner, KPMG in the US commented, "We are seeing more partnering by traditional financial services companies with FinTechs to help develop new business models, while also enabling FinTechs to expand their customer base and get the support they need to become sustainable.
Moreover, Citi along with JP Morgan are among the most active financial institutions patenting solutions across segments. Citibank has also set up three separate systems within the bank that deploy blockchain-based distributed technologies.
The role that financial institutions play in the growth of FinTech ecosystem is not limited to financial support. More importantly, banks have built and actively participate in incubation and acceleration of startups at various stages, providing them coworking spaces, mentorship, certain funding at the entrance and the opportunity to access banks’ vast networks of partners and customers. And recently, some of the most forward-thinking institutions have been making bits and pieces of their internally developed software available to outsiders through open APIs.
Institutions such as Barclays, Citibank, Bank of England, Commerzbank, Wells Fargo, MasterCard, JP Morgan, Capital One and a range of other industry stakeholders are operating dedicated incubator/accelerator programs to turn the competitively-posed landscape into a supportive. Through these ventures, they gained access to the most talented teams with groundbreaking ideas. They have enough funds to financially support the development of disruptive solutions under their wings and harvest the results.
Not only are institutions firmly rooted in the startup ecosystem for a beneficial outcome, they see opportunities for collaboration, they see and recognize strengths of former rivals – FinTech startups are noted to be driving financial inclusion, foster economic growth, accelerate and boost the quality of innovation, create new value streams and shed international barriers for entry among other things.
Moreover, financial institutions such as Barclays, Santander, RBS and others, are also eager to explore opportunities with open banking standard, which they have outlined in a paper earlier this year. Institutions have emphasized the importance of building services that are targeted to meet the needs of customers, suppliers and other innovators in finance.
Open banking comes with enabled access to data for all relevant participants of the market. While the access to one’s own banking data will enable consumers to make better choices of financial products and ensure the best available terms for the relatively young startup community, it will enable the opportunity to build better products and services.
With an established ecosystem of incubators and accelerators comes the model to transfer knowledge and expertise accumulated through experience in the financial services industry. Experience, shared through mentorship as part of accelerator programs, board membership in startups, advisory, festivals and conferences organized and sponsored by large institutions, translates into better solutions, expertise and experience-based pivot of ideas.
Long-established relationships with customers established by banks not only benefit those institutions economically, they also generate a vast amount of important data, which eventually is also translated into practical advice to newcomers. As the British Bankers’ Association suggests, The vast pool of customer data that can be derived from such interactions means banks can understand more accurately what customers are trying to achieve, and use digital to interact with them in a more meaningful and relevant way to help them make good financial decisions.
Moreover, decades-long experience in the financial services industry and tech background often lead experts to leave corporations to apply accumulated knowledge in building something new or at least puts them at a position of top influencers in the FinTech industry. Examples include former Barclays CEO Antony Jenkins, who launched a new startup that aims to modernize the back-office technology used by banks as well as tech and banking veterans Sharad Hegde, CS Prasad and Ritesh Agarwal, who with a century of combined experience started FonePaisa, an omnichannel payment platform.
As for the top influencers in the FinTech industry in US, for example, worth mentioning Ron Karpovich, MD at JP Morgan; Shamir Karkal, Head, Open APIs at BBVA; Stephen Kehoe, SVP, Head of Global Financial Inclusion at Visa; Ajay Banga, President and CEO of Mastercard; Marleen van Kammen, VP, Corporate Strategy, Development and M&A at Visa; Ricardo Henzler, Risk Director at Deutsche Bank; Pascal Bouvier, Venture Partner at Santander InnoVentures; Arif Ahmed, SVP Payments Innovation at US Bank; Scarlett Sieber, SVP, New Digital Businesses at BBVA and many more.
While financial authorities are aimed to keep the guard up for risky endeavors in the industry to protect healthy competition and the end user, there is no denial authorities have always been closely tied to institutions in directing their policies. And political influence is one of the most important assets often underestimated or neglected.
For examples, at the end of last year, BBA, Payments UK, the Council of Mortgage Lenders, the UK Cards Association and the Asset Based Finance Association – five British trade associations – were set to merge their efforts to create a stronger lobbying power, backed by nine British banks, including HSBC, Lloyds and Barclays, and building society Nationwide. Among other things, the effort towards a merger is also aimed to cut costs and increase efficiency and power over European regulations. In addition to strong ties, some estimates suggest that a range of commercial banks have contributed over $30 million on banking lobbying efforts in 2016.
Banks’ influence on regulatory authorities also translates into expressed suggestions to adjust regulatory policies – community banks, for example, have been urging regulators to toughen up on FinTech. Having enough funds to fuel their ‘campaign,’ they have a vote in the way the market environment will work for FinTech.
The result of institutional influence in political and economic arenas, recognized strengths of the FinTech community combined with the accelerating scale of partnerships, investments and joint initiatives led authorities to the development of appropriate regulatory frameworks. Therefore, Regulatory Sandboxes have been launched by a range of forward-thinking authorities to address the changing landscape and allow all parties – institutions, national businesses and startups – to work in a mutually beneficial way to deliver the best solutions to local markets without the hurdle of jumping through fences.
The most vivid example of the mutual strengths recognition is openness to collaboration. There has been no lack in collaborative initiatives in the financial services industry involving banks and startups. Just to name a few – JPMorgan Chase and Digital Asset Holdings partnered on a trial blockchain initiative that aims to make the trading process more efficient and cost-effective; Barclays is working with Safello to explore how it could use blockchain in everyday banking; BNP Paribas Securities Services and SmartAngels, a direct investment platform, signed a strategic partnership for the use of blockchain technology; Barclays also linked up with Circle Internet Financial, a US mobile payment startup backed by Goldman Sachs; etc.
Just like with accelerator programs, through partnerships, financial institutions gain access to talent and advanced technologies. Since stringent regulatory environment in finances does not always allow banks to easily jump into uncharted waters, partnerships allow them to explore opportunities without risking their position and compromising security. Instead, they enrich their knowledge base with the latest advancements and trends in the market and are able to steadily pave a way for themselves into interesting initiatives and pilots.
Until recently, all experimentation and adoption of blockchain technology has been mostly happening behind the doors of small startup teams. Financial institutions, however, are now as strongly involved in adoption of DLT as the startup community. Through a variety of consortiums, industry stakeholders around the world participate in blockchain research and trials to find the best application for the technology in finances.
Examples include the ‘Big Four’ Blockchain Consortium, Russian Banks Blockchain Consortium, Credit Unions Blockchain Consortium, Japanese Banks Consortium and, of course, R3 CEV. While it is true that recently some institutions have been quitting the latter, R3 CEV could still be the most advanced of all mentioned as the consortium is far beyond discussions and has already filed a patent application for software within a new platform it calls Concord. As the WSJ explains, Concord is a platform that takes its cues from bitcoin, Ethereum, and other blockchain-based networks, but changes up key features and concepts to create a platform that takes the best of those other networks and makes it something with which banks will feel comfortable.
It is likely that at some point in the future financial institutions will have accumulated enough practical and research-based knowledge driven from collaborative efforts to jump into scaled implementation. From that point of view, they will become influential and powerful members of the market segment, posing a substantial competition for existing tech rivals or any newcomers.