A little more than a decade ago management consultancy Booz & Co explained in a report “why banks and telecoms must merge to surge”.
Booz said correctly: “The epicentre for a transformation of consumer banking will be the convergence of banking and telecommunications players, as well as internet service providers and web portals.”
The report started with a quote from Hugh McColl, then chief executive of what is now Bank of America, who said in 1995: “As every schoolchild knows, the dinosaur didn’t survive…
“It’s not that he lacked the capacity to evolve. He just didn’t have the time. Unlike the dinosaur, bankers can see the changes ahead. We have a choice in the matter. The dinosaur never did.”
Eleven years on from Booz’s report, and the NJTC/Edison Ventures FinTech Conference can in all apparent seriousness ask: “Are banks toast?”
In response Neil Platt, executive vice-president of banking and payments for CashEdge, a division of Fiserv, demurred on this prospect at the NJTC panel and said: “The good news is banks that ‘get it’ are stepping up and devoting more resources to thinking about how they will meet new challenges.”
And Mehmet Pasa, senior vice-president of global mobile alliances and investments in the emerging payments group at credit card provider MasterCard, added at the same event that though telephone companies tended to be the largest companies in any given country, they were not going to replace the banks.
Banks will partner search engine provider Google, telecoms operators and other payment companies, such as Visa and American Express, to create better models, he added.
Earlier in the year, the Isis mobile payment service backed by phone operators AT&T, T-Mobile and Verizon gained three financial partners – Chase, Capital One and Barclaycard – to join Visa, MasterCard, Discover and American Express.
But others feared the collaboration could eventually turn to more competition.Mike Lee, head of Rogers Ventures, the California-based corporate venturing unit of Canada-based telecoms operator Rogers Communication, said: “It is like Battle Royale [a Japanese filmin which contestants kill one another until a single winner remains] between retailers, PayPal, telecoms, banks and Google.”
In August, retailers including Wal-Mart, Target and Best Buy formed a company, Merchant Customer Exchange (MCX) to help customers pay with their mobile phones as the emerging mobile-payments industry expands to $170bn in 2016 from $60bn this year, according to Juniper Research.
Firms
That banks, roiled by the credit crunch since mid-2007, can be thought of as having a future as “toast” is symptomatic of the change sweeping financial services in general.
But as well as disruption to bank branches and fee models from the rise of digital channels, there are opportunities.
FIS’s strategic innovations group said it was evaluating as potential “growth engines”:
l Alternative banking.
l Next-generation authentication.
l Data analytics.
l Leveraged marketing.
l Payday lending.
l Small business electronic invoice presentment and payment.
l Social media management.
And part of the search for answers involves corporate venturing.
Global Corporate Venturing has tracked at least 10 launches in the sector since 2010, including Credit Suisse’s SVC – Ltd for Risk Capital for SMEs (small and medium-sized enterprises), China-based insurer Ping An’s venture group and American Express’s Amex Ventures, and expansion or reinvigoration of others, such as Visa and BBVA under Jay Reinemann and his former Visa venturing colleague Thomas Whiteaker.
Switzerland-focused SVC is an example of banks trying to support the local economy. In its annual report – a rarity in corporate venturing but reflecting the public relations value from investing in entrepreneurs – SVC said it had invested in 25 out of 850 companies that applied since June 2010. Its portfolio companies had 400 employees and more than 200 patents.
A similar model is used by Italy-based bank Sanpaolo, which used its Atlante Ventures Mezzogiono corporate venturing unit to invest €1m ($1.3m) in Remocean, a start-up in the south of the country.
In the UK, the bank-backed Business Growth Fund has been making nearly a deal a month, although one of the big five, Santander, stayed out in order to set up a £200m ($300m) fund in December providing mezzanine debt to back businesses with sales of up to £10m that are growing at more than 20% a year.
Given financial services covers all firms that raise or manage money, corporate venturing units include the groups that use their parent’s money to invest – even if it can be leveraged by other investors – and gain some strategic benefit from the minority equity stakes taken in entrepreneurial third parties or incubated internally.
This description, therefore, covers banks backing start-ups with technology to reduce latency or private companies as a bid to win flotation mandates or other roles; insurers looking at new markets, such as weather forecasting or intangible assets; and credit card and other companies worried about being replaced as intermediaries.
There have been other changes, with some units being apparently inactive for a number of years, such as Unicredit Capital, Tokio Marine Capital and MU Hands-On Capital.
The tensions for financial services providers to retain or spin out venturing units has also been apparent since the credit crunch. Crédit Agricole Private Equity was renamed Omnes Capital after a sale to private equity firm Coller Capital from the French bank in March.
Fabien Prévost, executive chairman of Omnes Capital, said: “It is a natural development for a captive asset management company [with €1.9bn under management] to become independent.”
But the change can lead to new funds. Japan-based SMBC Venture Capital, a member of Sumitomo Mitsui Financial Group (SMFG) and Sumitomo Mitsui Banking Corporation (SMBC) that was formed in July 2010 to succeed the demerged Daiwa SMBC Capital corporate venturing unit, said it would launch a ¥14bn ($180m) fund aimed at helping small, owner-run firms make shareholder and structural changes, according to news provider Nikkei.
Investments and exits
And, as Global Corporate Venturing’s feature on financial services noted last year and news provider New York Times reported in September, corporations are increasingly turning to entrepreneurs based in and around Silicon Valley in California to find start-ups that might disrupt financial services, such as Visa backing mobile payments provider Square.
While there have been relatively few exits, bar the flotation of exchange MCX and US bank Citigroup’s sale of portfolio company SilverTail (this year’s most influential corporate venturing unit in the sector – see table), two-thirds of the more than 50 financial services deals in the 12 months to the end of October involved US-based entrepreneurs, according to Global Corporate Venturing’s records.
However, whereas last year’s featured focus was on disruptive financial services deals coming out of California, there has been a resurgence of activity in the existing financial centres of New York and London.
In January, Euclid Opportunities, trader Icap’s early-stage financia technology project, backed London-based software firm Model Two Zero, which provides matching, reconciliation and data-translation technologies.
In September, management consultancy Accenture launched its London incubator to complement its New York peer operating for the past two years and with a dozen incubees.
Accenture’s FinTech Innovation Lab London is backed by financial institutions, including Bank of America Merrill Lynch, Barclays, Business Growth Fund, Credit Suisse, Deutsche Bank, Euclid Opportunities, HSBC, JPMorgan Chase, Morgan Stanley, Royal Bank of Scotland, UBS, UK Business Angels Association and VocaLink.
This comes as Canary Wharf, the part of London housing primarily financial institutions, plans its own accelerator and as entrepreneurs move towards the city.
In March, Sweden-based mobile payments company IZettle recruited Stewart Roberts, credit card provider Barclaycard’s director of innovation, just before its launch of the IMoney online portal, of which Canada-based Bayshore Capital owns 13%.
But with online and mobile payments increasingly important, a host of start-ups in emerging markets are developing, such as Jana, Sanskrit for People, which was renamed from Txteagle and has backing from Royal Bank of Canada.
People
Financial services groups have also been bolstering their ranks with so-called acqui-hires.
Capital One bought assets from US-based BankOns a year after its launch, hiring some of its founding team to join the bank’s digital labs division.
Last year, Capital One’s digital innovation lab asked for job applications for an entrepreneur in residence. In a job post seen by news provider American Banker, Capital One said “the role requires a unique combination of general management skills, a proven track record of partner relationship management and business development success”, who will also interface with senior officers in Capital One’s business units with the explicit “objective of accel-erating the firms enterprise-wide digital agenda through research and learning, rapid prototyping and applied pilot market tests”.
Other groups have restructured their teams, including US-based insurer Hartford Financial Services, when Jacqueline LeSage Krause and Thomas Whiteaker left.