Paradigm shift — #Aegon is using Ohpen to create an integrated #platform where customers can see and work with multiple accounts through a single #cloud-based platform running on AWS.
Financial Technology
Paradigm shift — #Aegon is using Ohpen to create an integrated #platform where customers can see and work with multiple accounts through a single #cloud-based platform running on AWS.
Tom Groenfeldt – Financial Technology
If my thesis on the growing importance of Corporate Venture Capital, b2b business models and #finserv (banking or insurance) #Incumbents as strategic partners for #fintech #startups – in lending, capital markets, payments, asset management and insurance &8211; then it is of the utmost importance for said startups to know how to #engage with their future investors/customers/partners. To be clear, for the purposes of this exercise I will assume there is a business/#technology rationale and intent to partner.
The most optimal way to know how to engage with someone is to learn how they engage with you.
A finserv Incumbent will engage you along three vectors: a) the venture investing vector, b) the innovation vector, and c) the business vector.
Answering questions around what, how, who and where along these three vectors is paramount to your future success. Answers to many of the questions I am mapping out below will help you gauge not only the mechanics of engagement but the culture of the strategic partner you are dealing with and if that culture fits with your vision.
Your goal is to figure out how difficult the road ahead is and what to do to maximize success. Remember that dealing with a finserv Incumbent is eminently more difficult that dealing with an independent venture investor.
As a rule of thumb the more abstracted, specialized and sophisticated each of these vectors are, the easier it will be to achieve your goals, assuming business alignment and intent are present. Picture a finserv Incumbent where there is no venture or innovation team per se and where all decision will be made on balance sheet by business leaders with little understanding of early stage technology or business models and you will readily understand that your path will be rather arduous.
Here are a few pointers I recommend fintech entrepreneurs pay heed to when interacting with a bank or an insurance company. Answering these questions will lead you to better understand what beast you are dealing with.
1) How does an Incumbent invest in startups: Does the group you are dealing with have a dedicated team specialized in venture investing or a generalist team that takes care of any type of investment? Is the venture team investing on balance sheet or are they organized as a separate entity? How much capital is dedicated to venture investing? Who sits on the Investment Committee, only the venture team, only executives, a mix? What can they invest in and what cannot they invest in? What makes them consider making an investment? Can they invest without a commercial or strategic rationale?
2) How mature is an Incumbent’s venture investing practice: How many investments have they made? What is their due diligence and investment process? How long does it take? How deep is the due diligence process? How much capital is left to make investments in the next 3 years? What is their reputation? Are they specialized enough to know venture investing is as much of an art as it is a science, if not more?
3) How does an Incumbent approach innovation: Do they have an innovation group? Is it centralized or decentralized &8211; especially important if you are dealing with a global incumbent? In case there is a central innovation group and decentralized teams, who is the decision maker when considering innovation projects? Is the innovation group divided into specialized teams?
4) How mature is an Incumbent&8217;s innovation group: How long has the group been in existence? How many projects has the group worked on? How many projects can the group work on simultaneously? Does the group work on projects with early stage startups as well as established service providers? How savvy are they with your technology? What is their reputation in the marketplace? Are they leaders, “me too” players?
5) What is the role of the business group involved: Do they have decision making powers when contemplating an investment, when contemplating a commercial agreement? When do they get involved &8211; early in the process, late? Can they contemplate a commercial agreement without making an investment?
6) How mature are the Incumbent&8217;s business groups when dealing with startups: How many startups have they dealt with? How many commercial agreements have they completed? Where they front line or did they rely on Venture and Innovation? What is their reputation? What is the average time for them to go to market with new projects? How is their incentive, top line or cost wise, with your particular business? Are they urgently in need of your business solution?
7) Interaction between Venture, Innovation and the Business groups: Who leads, who follows, who reports to whom? Is the interest in interacting with your startup initiated by Innovation, by Venture, by the Business group and what are the implications? How will Venture or Innovation help you navigating potential commercial agreements with Business groups? Who has &8220;skin in the game&8221; compared to the others? Who has more &8220;skin in the game&8221; than others?
8) How is the decision making process influenced: Who are the decision makers, the gatekeepers and the champions? Where do they sit in the org chart and among the Venture, Innovation and Business groups.
9) Motivations of each of Venture, Innovation and Business groups: Are the motivations aligned? What are the goals? Pay special attention to how aligned the Business group is with Venture and Innovation. Do commercial imperatives trump innovation imperatives? Do long term strategic imperatives trump short term commercial ones? How do these motivations and imperatives apply to you and your startup?
10) Reporting Structure: Who do Venture and Innovation report to? Directly to the CEO, the CFO, the Board? If not who do they report to? Does Venture report to Innovation? Are both Venture and Innovation hidden within the bowels of an Incumbent or do they have the necessary and required exposure and support from C-level executives?
11) Explore the role of legal, compliance and regulatory: How convoluted will be the legal and compliance process? Will you be dealing directly with legal and compliance or will you be shielded by Venture, Innovation of the Business group? When will legal and compliance be involved? Are they well versed in the legal arts of early stage investing? Will they bring a bazooka to a knife fight? How much of a burden will they impose on you? Will there be a regulatory approval hurdle to clear?
12) Explore the role of procurement: Assuming there is a vendor management or procurement group, will you need to clear that hurdle too? What will it mean to you, how many resources will you have to engage immediately and over time? What type of data will you need to provide? Are they gatekeepers or decision makers too?
13) Explore who will be in charge of a commercial project implementation and integration: Will the Business group be responsible? Will they have the skills and understanding required to fully digest your technology and business model? Will they rely on a separate IT or operations group? If so, how does the IT/Ops group interact with new vendors when implementing and integrating? How mature and sophisticated is the IT/Ops team? Have they engaged startups in the past or are they more of a &8220;we build our own stuff&8221; outfit?
14) Explore how your future finserv Incumbent partner interacts with the broad ecosystem: Are they aligned with independent hackathons, independent accelerators? Who are their natural peer partners &8211; other #banks or insurers they have invested with in the future or entered in JV or commercial agreements with? Who are their natural competitors &8211; those they will not want to deal with or invest with or JV with? Which traditional VC investors have they invested with in the past? Which non-bank companies do they partner with? Does partnering accelerate your chances of additional partnerships?
15) Gauge how you will need to adapt: Inevitably, you will need to adapt based on answers and observations you glean along the way. I do not mean adapting in fundamental ways such as radically changing your business model or your technology, and if that is a requirement then you #should think twice about the costs and benefits before engaging fully. Rather I mean marginal adaptation to clear certain understandable hurdles around technology delivery for example. How much professional services will you need to incorporate? Will you need to localize to a certain geography? Will your partner&8217;s compliance thresholds lead you to tweak your technology? The sooner you get clarity on the need to adapt and how you will need to adapt, the sooner you will be able to quantify and qualify the associated costs.
16) Explore post integration life as a startup partner: Are the rules of engagement well defined? Will there be periodic reviews? How will you be reviewed? Will the relationship be balanced? Who will participate? Will the champions, gatekeepers and decision makers that you identified during the pre commercial phase be the same?
I realize I have mapped many questions. My purpose is not to scare a fintech entrepreneur. Do realize the end goal is a potential prize of investment, referenceable client, commercial agreement and cash flow generation. In other words, the rewards are overwhelmingly worth the pain of discovery and engagement strategy building.
Additionally, even if there is a demonstrable strategic/commercial rationale, answer to the above may lead you to realize you are not ready for that particular finserv Incumbent as a partner, or that they are not ready for you. That type of epiphany may save you form serious heartburns down the road.
More specifically, dealing with a finserv Incumbent is unique from the point of view of regulatory, compliance and legal complexities as well as the type of individuals you will encounter (business leaders may not know how to engage with a startup, IT/Ops may not be up to par knowledge wise). Knowledge will allow you to mitigate more effectively.
Finally, remember that the mature service providers and vendors that sell to banks or insurers are very sophisticated and know how to sell, to whom to sell, how complex it is to sell. As a fintech entrepreneur you are competing with these mature service providers with limited resources. You need the smarts and the framework to close that gap and become a sophisticated &8220;enterprise&8221; focused fintech startup in your own right.
Roberto Ferrari recently tweeted this:
From roboadvisory to p2p lending to crowdlending, to PFM, to mobile wallet concepts focused on payments, to the early days of #bitcoin, there is a long list of #fintech d2c business models which have not reached the escape velocity investors had hoped for since 2008. I would be hard pressed to find one fintech startup out of this list that reached escape velocity without any help from a #finserv incumbent – partnership, commercial agreement, warehouse facility, distribution access, white label deal, acquisition you name it. To be clear, I am speaking of real traction, not gravitation-free valuation. This factual observation has led many fintech pundits to state that, although the financial services industry will be disrupted and is in need of innovation, a direct and material challenge from fintech startups is unlikely.
Bringing this factual observation in historical context I wanted to order the immediate waves of fintech we have experienced and attempt to forecast the industry’s immediate future. This immediately led me to seek out the past. A much trickier proposition than I initially thought when studying financial services and #technology.
I came up with the following non-scientific historical narrative:
– Ancient Financial Technology Period &8211; 3200 BC to 500 AD: Little is known about financial technology in this period marked by the beginning of mathematics and what astute observers can only assume was archaic credit provisioning and proto-fraud.
– Financial Technology Middle Ages Period &8211; 500 AD to 1499 AD: Arguably the greatest advance in financial technology during this period was the invention of double entry accounting by Italian merchants.
– Classical Financial Technology Period &8211; 1500 AD to 1900 AD: Much like the two prior periods, little is known about classical financial technology. We note the invention of the pantelegraph in 1865 in France (could not resist mentioning that), to verify banking signatures, and the laying of the first transatlantic cable in 1866 which was a crucial starting point for the globalization of financial communications
– Modern Financial Technology Period &8211; 1901 AD to 1980 AD: As with every other human endeavor, this period sees an acceleration of innovation. We note the invention of the ATM, the credit card, the telex. The creation of FedWire, SWIFT, NASDAQ. The deployment of consumer credit on a massive scale, mortgages, securitization.
– Postmodern Financial Technology History &8211; 1980 AD to 2008 AD: The rise of the internet permeates this period. Few people realize that Etrade was founded in 1982, online banking started in the mid 80s, that Intuit started in 1985 with Quicken, that by the mid 90s all major #banks had been pushed kicking and screaming into internet banking. Lest we forget, Paypal was founded in December 1998. The bulk of financial technology action centered around financial technology service providers selling decidedly “unsexy” technology to incumbents.
– Contemporary Fintech History &8211; 2008 AD to present: The rise of a new term and a new activity by 2008, &8220;FinTech&8221;. The first FinTech wave, from 2008 til 2014, focused on d2c models (mainly) + payments (mostly retail) + roboadvisory + p2p lending + digitizing distribution channels of banking and asset management. Competition and disruption were the central buzzwords. VC investors the main providers of capital. The second FinTech wave, from 2014 to 2016, saw a shift to b2b and b2b2c models and a widening to other areas of financial services such as insurance + capital markets + specialized lending. Collaboration between startups and incumbents became the central buzzword. VC investors saw the rise of Corporate VC investors (CVCs owned by banks, insurers). I believe we are witnessing the last moments of this second wave. Indeed, I believe we are witnessing the beginning of a third &8220;FinTech&8221; wave, starting with 2016. One which will still focus on b2b or b2b2c models. One where CVCs will play a more dominant role, relatively speaking, compared to their VC brethren. One where more startups will focus on becoming the new service providers to the industry and where the industry will acquire enabling technologies (Artificial Intelligence (AI), Augmented Reality (AR), Internet of Things (IoT), Quantum Computing (QC), #Blockchain/Consensus Ledgers) to upgrade itself in all manners and across its business/tech stack. I call this third wave the TechFin wave, to differentiate it from the origins of financial technology and the first two waves of fintech.
As you can see from the above historical timeline, financial technology ruled prior to 2008. Most innovations were either b2b or b2b2c in nature. Direct to consumer was the exception (Intuit, Etrade, maybe Paypal to a certain degree). I chose 2008 as a pivot away from financial technology and towards fintech because startups such as Wealthfront and Betterment were founded that year and because, the 2007-2008 global financial crisis finally broke the dam so to speak with systemic and systematic innovation being enabled. Might the period from 2008 to 2015 be an anomaly where d2c became more prevalent than b2b and where for the first time there was a hope, a promise and an intent for startups to directly dislodge incumbents? If true, is the new TechFin wave of the Contemporary period borne out of a natural consolidation stemming from the breathless pace of investments since 2008? Or will it become the new normal for a long period? Food for thought assuredly.
Let us focus on why this new TechFin wave makes sense.
Think about how vulnerable most incumbent service providers are to innovation as they have mostly aborted any meaningful internal R&D efforts and resorted to M&A activities to stay relevant over the years. Think about how some independent VCs may reduce their exposure due to either losses from early investments or less than expected returns. Think about how CVCs will expand to include not only banks or insurers, but also consultancy firms, systems integrators, other third parties that live off of selling/implementing/integrating technology for finserv incumbents. Many of these top firms will want to make sure they stay relevant to their clients and will start investing in promising startups. (Whether firms that do not have a strong culture of venture investing will make good venture investors is another topic entirely.). Think about the wealth of subject matter expertise, capital, brand (even if eroded) and the advantage of being regulated (even if it comes at a cost) finserv incumbents&8217; CVCs can leverage.
This third wave has the potential to help finserv incumbents close the technology gap. I wrote about this gap in one of my previous posts, see here: a dual gap where basic infrastructure will be upgraded (a necessary step but not a sufficient one on its own) AND where cutting edge technology will be embedded throughout an incumbent&8217;s business stack &8211; for a sense of what that means, see this post on the &8220;plasma&8221; approach to technology/business.
I do mean &8220;potential&8221;. Incumbents will have to operate a cultural evolution in order to learn several skills necessary to actualize this potential.
These are in no particular order and non-exhaustively:
&8211; Master a platform strategy (think of the comprehensive platform strategies tech giants have deployed)
&8211; Redefine their core businesses/services
&8211; Develop new ways to deliver their core businesses/services (API, marketplaces, Banking/Insurance/Asset Management as a Service, or as a Platform)
&8211; Learn how to collaborate (it is not enough to sing commercial agreements and partnerships)
&8211; Upgrade and retain knowledge experts across a variety of subject matters
&8211; Master and execute intrapreneurship (corporate entrepreneurship)
&8211; Architect the right innovation &8220;engine&8221; to translate, digest and disseminate innovation, new technologies, new business models coming from the outside world.
I am sure I am missing a few salient vectors here. The purpose of this exercise is to hint at the possibilities incumbents could create with the right approach.
With capital, brand and knowledge expertise it is not far fetched to imagine a future where a finserv incumbent would be adept at: 1) building businesses from within, 2) spinning off said businesses, 3) invest and partner with young startups, 4) reinvent their core businesses. The end result would make for mean, lean fighting machines.
I believe we are in the first innings of this potential transformation. We can witness most large banks and insurance companies as well as asset managers tinkering with venture investments, with both internal and external innovation groups, with participation in accelerators, incubators. Baby steps all, but important first steps nonetheless.
Setting aside outside stimuli such as regulatory overview, interest rate environment, political interference, the central question is &8220;How should incumbents architect themselves to successfully operate such a transformation and ride the third TechFin wave?&8221; This I believe, is the issue finserv incumbents are in control of and which will define their future. Innovating from within when one is a large organization is also one of the most difficult if not the most difficult exercise in the corporate world, for reasons most know &8211; not flexible, not nimble, natural barriers to change, smartest minds focused on keeping main business afloat. Many corporations have tried in the past and failed. Indeed, some voices firmly believe genuine innovation can only come from outside of a finserv incumbent. Further, finserv incumbents face formidable competitors in the likes of GAFAA (Google, Amazon, Facebook, Apple, Alibaba)
I am firming up my thinking around that central question and would be interested in your thoughts. In the meantime, are we observing the #return of finserv Jedis and the rise of TechFin service providers? Is TechFin here to stay?
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