Banks Experiment With How To Harness Start-Ups

Most bankers acknowledge the obvious: of course banks have to innovate. Digital is transforming everything and the banks are woefully behind. A July 2014 McKinsey report decried the fact that retail banks have digitized only 20% to 40% of their processes and 90% of European banks invest less than 0.5% of their total spending on digital.

Trouble is, banking and innovation are strange bedfellows, says JP Nichols, a former senior banking executive and a scheduled speaker in the Innotribe track at Sibos, an annual gathering of around 6,000 banks from around the world.

The Barclays CEO has already visited the London accelerator twice

“If you think about banking and bankers and the personality traits that get rewarded, the kinds of skills that get screened for in hiring and promotion, it’s reducing risk,” he says. “The guy in the room who can say, ‘Guess what? I found another way this could go bad. Don’t worry I, killed it.’ Those are the people that are promoted.”

The innovation process is about taking risks and failing, says Nichols. And “it’s just not in most banks’ DNA.”

One way of bringing in new genetic material is to work with start-ups in incubators or accelerators. Banks are taking very different approaches and the jury is still out on which works best: some are setting up their own; some are teaming with other banks and credit card companies; still others are working with third parties that set up the incubators and accelerators for them.

Barclays Bank, for example, has asked TechStars, the U.S. accelerator program that started in Boulder, Colorado in 2007, to run its accelerator.

Barclays declined to be interviewed, but Greg James, managing director of the program, located in a former department store in London’s East End, says a dedicated program is the best way to ensure the maximum commitment from the sponsoring company.

“If a corporate decides that they are going to work with start-ups, then we want the full pressure of that corporate’s brand name to be on the hook,” says James. “This isn’t just a ‘petting zoo’; this is serious. We feel that by focusing on one corporate relationship, and specifically a corporate relationship in which the mandate is coming from the CEO on down, that results will be profound.”

Substantial Commitment

Aside from the standard TechStars deal, $20,000 for a 6% stake in the company, what the 11 companies selected get is access to the very top level of Barclays.

“To give you a sense of what this means, [Barclays CEO] Anthony Jenkins has been in here twice already to meet the teams,” says James.

Barclays’ commitment, apart from CEO visits, is substantial, he says. “Each team was assigned roughly three to four people based upon what the team was trying to do. There are 11 teams, four people, that’s 44 people.”

However, he says there were much deeper connections. “There were an additional roughly 50 people from Barclays which have met each team in an ad hoc style. We’ve seen roughly 100 people from Barclays being involved.”

Nor are these just junior trainees. “It would typically start at the absolute highest level. If it is a team that’s doing something new in mortgages, then it would be the head of mortgages. What he would do is assess what they needed, and he would assign people from his team, so it is the managers on his team who would then help a start-up.”

According to Nichols the single company accelerator can make a lot of sense, especially when run by teams like TechStars. “Accelerators really understand the high-tech product development business very well,” he says. “Certainly better than most banks.”

If You Want Barclays To Be Your Main Customer, Go With Barclays

However, for the entrepreneur it is a high-risk strategy, says Nektarios Liolios, managing director of Startupbootcamp FinTech, also based in Europe’s financial capital, London. “If you really want Barclays to be your main customer then you go with Barclays,” he says. “If you want to sell into one bank or, or at least start with one bank, then it makes sense.”

Since Liolios runs a rival set-up you wouldn’t expect him to be too ebullient with praise. The sponsors for the three-month Startupbootcamp FinTech include MasterCard, Russia’s SBT Venture Capital, the UK’s Lloyds Bank and Utrecht, Netherlands-based Rabobank.

“If you look at what Barclays has done with TechStars, it’s a slightly more selfish motivation which makes sense for the bank perspective,” says Liolios.

“Sourcing innovation helps the bank. But we think it’s slightly limiting for the entrepreneurs. We think that it’s a lot more attractive for an entrepreneur to have access to multiple organizations,” he says.

Samad Masood, Program Director, FinTech Innovation Lab at Accenture, a global 12-week program run in New York, London and Hong Kong, agrees.

“What we say to start-ups is come to our program for three months and spend three months with 12 banks instead of spending three years with one bank, and still not have any answer to all its questions,” he says. “It does take two or three years to sell technology to large corporates like a bank because of all the different layers of regulations, different departments that have been involved, the difference security protocols, and all this sort of thing.

There’s also the general inertia that exists in any large corporate because of existing and ongoing investments in technology which make it harder for them to make a snap decision.”

And unlike other programs, the seven start-ups selected to join Accenture’s program, now in its third year, do not get funding.

“When you are dealing with multiple banks and you start investing, it muddies the water,” says Masood.

The list of sponsors for Accenture’s program includes Bank Of America, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan, Lloyds, Morgan Stanley, RBS Group, UBS and Nationwide.

“We like to think that through our program not only are the start-ups learning how to deal with large organizations, but the large organizations are learning how better to deal with the smaller ones,” says Masood.

Everyone Is Trying To Find The Correct Model

This, says Startupbootcamp’s Liolios, is key. For the banks, working with start-ups is a way of accessing innovation.

“Just finding out what is going on: what are the next disruptors actually building? Then with the option of partnering with it, or using the technology in some way.”

Level39, which is based in London’s Docklands at Canary Wharf and bills itself as Europe’s largest accelerator space for finance, cybersecurity, retail and future cities, has yet a different model. Partners and other organizations that make use of Level39’s space include Accenture, EY, Dassault Systemes and SWIFT, the global entity that organizes Sibos and each day handles financial transactions such as wire transfers for more than 9,000 banks.

Like Accenture, Level39 does not take stakes in start-ups, and while it actively works to bring financial institutions, investors and start-ups together (it organized some 250 events in the last 12 months), it is not owned or sponsored by any bank.

“What that means is we get the widest possible choice of start-ups and innovators because there is no baggage that comes with us; there is no bias; it is a nice neutral position to be in because the main backer is Canary Wharf, which reaps the rewards of success if the industry thrives,” says Eric Van der Kleij, head of Level39.

While the different incubators and accelerators may vary in approaches to helping banks with their innovation problems, for Startupbootcamp’s Liolios all roads lead to Rome. “Everyone is trying to find the correct model,” says Liolios. “I’m just happy to see banks doing this in the first place.”

The Role Of The Convener

Connecting with start-ups is not enough. Banks need to figure out as an industry how they should respond to disruptions. That’s where conveners like SWIFT’s Innotribe, UK’s Innovate Finance and the U.S.’s Bank Innovators Council come in.

Innotribe, for example, organizes financial ser​vices start-up competitions around the world in order to spur better collaboration with the banking community. Launched in 2009, SWIFT Innotribe brings together global innovators, investors, financial industry executives, strategists, banks’ operations and technology leaders, and venture capitalists, to drive change in the financial services industry.

While SWIFT’s approach is global national bodies also play important roles. The UK’s Innovate Finance was founded earlier this year as an industry body to promote the UK’s rapidly growing fintech sector with Claire Cockerton as the organization’s founding CEO. It aims to be a single access point to the full financial services and technology ecosystem and connect its members to policymakers, regulators, investors, customers, educators, talent and key commercial partners. The larger partners of the 50+ strong group, which is still growing, include Aviva, Barclays, Lloyds, MasterCard, Visa, Silicon Valley Bank, Santander, and Royal Bank of Scotland.

The U.S. has its own trade body, called the Bank Innovators Council, which is headed by JP Nichols, a former senior banking executive. “We’re not an accelerator, we’re not an incubator but the reason that we started the Bank Innovation Council was that as we surveyed the fintech landscape, we thought that the fintech companies had a lot of support,” says Nichols. “They have the accelerators and venture capitalists. But the banks stood alone. No one was bringing them together and helping them create a collective and helping them to help one another.”

Nichols is generally bullish about the future for banks and their innovation efforts. Groups such as Innovate Finance, spaces like Level39, and the accelerator programs, like TechStars and Accenture, he says, are about bringing everyone together to speak a common language.




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