05

Jul

2015

When Finserv Incumbents interact with the Fintech eco-system

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I recently started a conversation with the head of a European bank’s Innovation program who has recently been asked to elaborate a strategy to engage the fintech eco-system. The below is a summary of our email conversations. In certain ways, it is the pendant to my previous post advising startups thinking about participating in accelerators and incubators, see here.
As a finserv incumbent vying to transition to a fintech incumbent – a bank, an insurance company, an asset manager wanting to be more data, technology and customer focused –  that has decided to interact with the fintech startup community you first have to define your goals.
I see several top level goals: a) transition to the digital age, b) transition to mobile, c) transition focus to new generations of customers and companies, d) acquire/integrate/implement cutting edge technology, e) transition to become data driven, f) transition to amazing consumer experiences, g) rejuvenate its executive and management DNA
I see several second tier goals:  a) reduce cost of acquiring/implementing technology, b) accelerate technology life cycles. c) make investments in fintech that make economic sense
Let’s assume the finserv incumbent has set its goals, it is then faced with an array of tools to interact with the fintech world
  1. Hackathons: These take place over a day to a couple of days.  Purpose of the hackathon is to identify engineering talent and how that talent solves concrete problems. The organizer will either run a directed hackathon (by providing challenges, ideas for coders to work on), an open hackathon (coders are free to show their stuff) or a hybrid hackathon where corporate meets coder, brainstorms and out comes ideas to hack.  Monetary prizes may be given. Incumbent may want to track coders, or offer them a job immediately or later.   PROS: flexible structure, low cost, low risk, good way to gather buzz and interaction with coders.  CONS: not a clear line of sight on what comes next, hackathon needs to be embedded in a greater vision to bear fruit long term, might be difficult to get buy in from IT for example.
  2. Innovation programs: Usually programs run form within, by management focused on innovation, with employees, maybe from R&D or Technology/IT units and some business line employees working on projects. Purpose is to foster startup quality ideas from within. PROS: safest route, does not threaten internal constituencies as controlled from within.  CONS: incumbents have done a traditional poor job at R&D internally with low success rate, high failure of projects, too inwards looking both in terms of solutions, tools to tackle problems and resources to solve problems
  3. Incubators: Similar to innovation programs, but more structured. Usually run as a separate structure where teams of employees are assembled as a startup and spend time in a dedicated space.  Goal, hopefully is to recreate a real incubator run by third parties. PROS and CONS are similar to Innovation programs I believe plus the length of time to incubate teams may be open ended and not truly run as potentially commercially viable entities.
  4. Accelerators:  An incumbent will usually invest and partner with an accelerator – as an outside entity. The accelerator will be run by a management team specialized and experienced with interacting with entrepreneurs, startups and technology. Some accelerators only partner with one bank, exclusively, such as Barclays with Techstars. Other accelerators partner with more than one incumbent. PROS: more independent outfit that knows how to interact with startups and entrepreneurs. CONS: an incumbent may exercise less control than with an incubator but is this a con really?
  5. VC Unit: An incumbent will set aside a pool of capital, build a team with a combination of outside hires and selection from within and agree to an investment charter. Many banks have a VC arm. Few are good at it. Several insurance companies and asset managers have followed suit. The ones that excel create an arms length relationship with the investment team where striking the right level of independence is crucial for optimal investment decisions and the right level of interdependence is crucial for optimally drawing from the bank’s internal resources (business units wants, needs and knowledge). Underperformance usually comes from the incumbent wanting to exert control so tightly that creative investment decisions are stifled.
  6. Investing in a VC fund: To date few incumbents have chosen that route and the few that have chosen to do so have not, to my knowledge built a holistic partnership off of their LP status. I see more incumbents choosing investing in a VC fund in the future thereby creating meaningful relationships as informed LPs in top VC firms. PROS: focus on what you excel in and chose the right professionals to partner with. CONS: if you do not chose wisely…
Here are a few guidelines a finserv incumbent should mine:
  • Hackathons are needed but not sufficient alone.
  • Innovation programs, incubators or accelerators should be outsourced with the right oversight parameters and controls. Not too much control. Rather, the right intelligent oversight and guidelines.  Better leave to professionals the running of such beasts.
  • If you invest and partner with an accelerator, make sure you do not end up with a captive that ends up rubber stamping what you think you need. Such format leads to adverse selection in the long run. You want great startups to apply and be accepted and for that you need informed independence, not bureaucratic fiat. Focus on the accelerator’s credentials and create as wide of an investment charter as possible. Finally, think of creating as many business links as possible between your business units and the accelerator.
  • If you invest in a VC unit, the unit should reportto a C level executive, preferably to the CEO or Chairman. The VC unit should have strict investment parameters but leeway in what it invests in – investing only in what the incumbent thinks it is interested in may be too limiting. Openness of mind and running the business as an economic unit lead to positive reinforcement loops. Hire professionals and find creative minds from within, then build the team by mixing them together.
  • If you invest in an independent VC fund, then obviously chose the fund and its partners wisely, and build a true partnership that includes but is not limited to: a) ability to co-invest alongside fund if warranted, b) access to knowledge and thought leadership built by VC, c) access to workshops organized by VC partner to educate management  on business and investment trends, d) access to conferences organized by VC partner, e) access to startups the VC has invested in to better understand technologies, innovation, new products, new services… e) make sure access includes various constituencies within the bank, i.e. Business lines, IT people, lawyers, compliance…, avoid access to and from only C or executive level people. Build access across the organization.
Risks to be cognizant of:
  • Certain internal constituencies will be resistant to any of the above.  These may include IT, R&D, Compliance and Risk Management, Counsel
  • Certain internal constituencies will automatically say “we can do it better, we do not need help”
  • Muddled reporting lines will create chaos
  • Lack of buy in from C-level means doom
  • Lack of power and decision making ability within accelerator/incubator/hackathon/VC arm will mean doom

Of course, if you chose to invest in an independent VC fund, then we should talk immediately!

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Pascal Bouvier
pgb2008@gmail.com

Life and work experiences have given Pascal an unmatched vantage point, seeing things as both venture capitalist and aspiring entrepreneur. He currently is a Venture Partner with Santander Innoventures – Santander Group’s Global Fintech fund.

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