The Big Banks Are Becoming ‘Dumb Pipes’ As Fintech Takes Over

The future of banking lies in adopting more advanced tech like open APIs and tech-enabled loan underwriting, according to Dan Ciporin, general partner at Canaan Partners.

If they don’t adapt, big banks are at risk of becoming utilities, “like Verizon … dumb pipes,” said Ciporin, speaking at CB Insights Future of Fintech Conference today in New York.

The future of banking lies in open systems, he said, which banks are “simply unable” to create. “I just don’t think the DNA is there to do it,” he added.

In Ciporin’s view, consumer-facing fintech startups have arisen naturally out of the limitations in banking operations.

“If you think about the structure of how banks make money, on some level they store money at extraordinarily low rates and lend it out – usually on the credit card side – at extraordinarily high rates, so if you can find a way to lower that spread you have a great business model.”

The inefficiencies apply to enterprise banking, lending, and investment banking as well —slow and complex systems make many transactions unprofitable. “The antiquated underwriting process just doesn’t work when you’re lending $30,000 to small businesses,” said Ciporin. The same theory applies to small, but high-potential, investment banking and private equity transactions.

Ciporin was joined on the panel by Scarlett Sieber, SVP at BBVA, who agreed with some of Ciporin’s points, calling legacy systems “a huge hindrance” for big banks. She argued for the potential of banks being active in fintech startups and said BBVA is doing that by investing in startups, developing comparable technology in-house, making acquisitions, and striking partnerships.

“People say, aren’t you competing with yourself?” Sieber said. “The short answer is, absolutely. But if we don’t do it, someone else will, and we’re opening up new revenue streams at the same time.”

Transcript

Jenny Fielding, Managing Director, Techstars: Thanks for coming out early, I appreciate that. So really excited to be here with Dan and Scarlett and that presentation was great, good overview. One of the things that I’m really interested in talking about is we talked about banks as if they’re one thing. And so I thought what we could do on this panel was kind of break it down a little bit more and talk about what’s going on in retail, corporate, maybe insurance, some of the different areas within banks, and how those are being impacted by technology, startups, etc.

So just starting off with retail, obviously, that’s the one I think we hear about most I guess, maybe Dan you could give your thoughts on what’s going on in retail banks that we’re seeing.

Dan Ciporin, General Partner, Canaan Partners: Sure. Well, first of all, it’s interesting when you talk about that’s what we care about most. If you look at the reality of where bank profitability has come from over the last 15, 20 years, it’s really not been retail… it’s been trading. And trading is consumed in ever larger portion of resource and also profitability obviously until the crisis, until the regulatory framework that we now have, came into place and a lot of their proprietary trading sort of focus went away because it had to go away.

So there really has not been a lot of attention paid to retail per se, other than perhaps credit cards by most banks. Again, this is a relatively U.S.-centric view but I think it holds globally as well. So what’s happened is that you’ve had the rise of what are called Marketplace Lenders or Online Lenders that have really taken advantage of a couple things. First, they’ve taken advantage from a product standpoint of really providing a product that is differentiated in one that does not depend on the legacy systems that were articulated earlier by Anand which is a very, very real issue across a lot of different dimensions, not just product but compliance and so forth.

And so they’ve been able to take advantage of it from a product standpoint. They’ve been able to take advantage of it in a business model standpoint or from a business model standpoint where you really have… if you think about the structure of how banks make money, at some level, they take or they are able to offer I should say, government guaranteed money, insured money at extraordinarily low rates and are able to lend it out, usually on the credit card side at extraordinarily high rates. So to the extent that you can narrow that spread, you’ve got yourself a business model that actually works and works extraordinarily well. And we’ve seen that with the rise of the marketplace on online alternative lenders across the board, not just in retail but in small business and student loans as well. So that’s the real driver here, is that banks simply haven’t paid very much attention to retail innovation. And so they have let others do that for them.

Now, there’s a lot of things that online lenders have to accommodate that banks have been used to accommodating for a long time. And not least to which is compliance and controls and ensuring that you follow every single rule to the T. And as you know, entrepreneurs usually like to break rules, not abide by or make them. So that’s the part of where some of the DNA clash, if you will, happens between new FinTech firms and existing legacy banks. But I do think that…

JF, Techstars: So, when you talk about some of those challengers, I’m just going to get into like Lending Club or what like… who are you referring to and what have been some of those challenges?

DC, Canaan Partners: Sure. No. I am referring to Lending Club, Prosper, Avant, Sofi, there’s a whole range of different online lenders that attack different… I don’t want to say niches because a trillion, in their case of consumer lending three trillion dollar mark is not really a niche. But they’re attacking different verticals, I should say. And they’re doing it all on the basis of this focus on product innovation. No legacy system, so they’re building it… the way you would build it today if you were… hopefully if you were a bank and we’re building something brand new today, you would build something similar to the way they build it. But they have that big advantage, any time you’re able to erase or to start from a position of new architecture and technology that really meets the needs of today’s technology, you’re in a huge advantage from a cost perspective as well as a product perspective.

So I really think that this whole online lending sector, even though it is had some issues lately over the last month in particular. I don’t think there’s any question, at least in my mind that as a business model, it is going to absolutely grow significantly over time and is something that the banks will either have to compete with or accommodate to or potentially have be part of.

JF, Techstars: And just one more question on that before I get to Scarlett. So what about on the payment side with Apple Pay, if we’re talking about retail, where do you see that fitting in?

DC, Canaan Partners: Payments is a fascinating area and certainly companies, you know, PayPal, of course, being the original innovator in that sector, I think Stripe is probably the… what one would deem as the new disruptive innovator in that regard. But Stripe’s on the back and it’s not really a consumer brand whereas PayPal is. Consumer payment where I used to work ages… 20 plus years ago at MasterCard, I ran their global debit group there and once you have a brand, a payment brand, especially one that’s distributed and decentralized like MasterCard, Visa networks are, it’s extraordinarily hard to disrupt those on the front facing consumer side. And I think PayPal, if you look back at the last 20 years and you think about where has something from a consumer’s perspective really disrupted the payment, again, consumer facing payments arena, you could say you know, potentially Klarna or a couple of other payment brands but really fundamentally it’s been PayPal, Venmo is actually taking off very significantly. But that’s really PayPal, it’s very, very difficult to do the front facing stuff. I think on the back end, that’s where a lot of the money is going to be made and I think that’s where Stripe has… for example has enormous momentum.

JF, Techstars: Cool. And Scarlett, obviously you are at a retail bank.

Scarlett Sieber, SVP Open Innovation & Ecosystem Builder, BBVA: Yeah, two comments on the points you made earlier. Starting with the Lending Clubs and Prospers, I mean obviously they were started very heavily on the retail side but they realize that to scale, they needed the institutional money to come in as well. So it’s definitely a bit of a reciprocal relationship there and there’s a lot of opportunities for partnerships with the Prospers and the Lending Clubs. And of course, our external front Propel invested in Prosper as well. So we are pretty familiar with them.

And on the point around payments, you think about someone like Dwolla who BBVA Compass, our U.S. bank was a first to partner with. And Ben was talking at one of these conferences a few weeks ago about the fact that he was going in selling and actually when he was selling it to banks, they wanted to take away. So it’s back to the white label, kind of like behind the scenes which I think is interesting.

You also talked a lot about the technology piece and the legacy systems which Anand referred to. We have tried to be on the forefront of that. Over the last three years, we’ve invested over $700 million a year in technology. The three years prior, $850 million a year on average. And you’d asked why that number has gone down and it’s not because we’ve declined in investing but it’s because the investments that we’ve put in have actually been paying off. And so we don’t need to put as much money, but that’s a lot of money to be putting towards technology. For all those reasons, we’re on the legacy systems and they’re really hard to go after, we redid our core processing system and BBVA Compass from scratch. So that enabled us to build the open platform, our API initiatives. And so we’ve definitely tried to… We see that as a huge hindrance and we’ve put a lot of money and talent behind making that change for the future.

DC, Canaan Partners: By the way, I will say that BBVA has absolutely been on the forefront, in terms of banks. I think you have rewritten your whole or least your well down the way of rewriting your whole entire architecture and systems, taking the enormous expense hit that the companies at. And I think you’re well down the road of trying to achieve at some level the end goal of a true FinTech revolution which is open APIs everywhere. I think BBVA is somewhat of an exception, I would say, not even somewhat, a big exception. And what I see generally as far as banks are concerned, if you look at certain companies Plaid being a great example which is coming to build APIs for financial institutions. They’re an amazing technology focused company. I think their fundamental premise is that banks are simply unable to do what BBVA is down the road to doing. If for no other reason than…I don’t know what the math is, but 850, 700… you’re talking about real money, several billion dollars in terms of rewriting your systems. And that may… and a lot of time and a lot of integration effort. And you meantime have to run your existing legacy system just to keep the thing going.

It’s an open question as to whether banks will inherently take on the challenge of doing what needs to be done to truly have open APIs throughout their architecture. And not just in the consumer side where it’s I would say relatively easy or certainly easier. But when you talk about doing APIs for currency trading or commercial relationships or things that are really at the deep core of what a lot of banks do, that’s a big, big deal. And I don’t know if you’ve done it or not, but I’m not aware of banks that have gone deep inside their architecture and their technology frameworks to provide true open APIs across the board in everything they do. I just don’t think the DNA is they’re doing… for the most part. And again, BBVA maybe an exception but…

JF, Techstars: So what is the driving force though of this change? Spending all this money on technology, open APIs, is it as Anand was talking about the Push of Millennials, what is driving the change would you say within on the retail side at least?

SS, BBVA: So I think we had the lovely picture of our fearless leader up there. And from the culture is part of it and it goes, where our customer’s going, right? Every bank says that the customers are the center, we truly believe that but that goes back to, okay, I don’t see the other banks as our competition, even in the same areas where we play, it’s the Googles, it’s the Facebooks, it’s the Amazons, so that technology has really driven all the other things that we’ve been doing. This whole open platform, API, we’ve been working on it a long time. And I have some agreements with myself that you were talking about. I mean we have so many APIs and we’re figuring out which ones are the best ones to release.

We have an alpha sandbox right now, both happening simultaneously in Spain and the U.S. that we have a few different APIs, there’s a ton and we’re figuring out which ones actually our customers want. But there’s a lot that goes around that of course because we are one of, if not the most highly regulated industry, there is a lot of moving parts there, but it goes back to going to where your customers are and trying to be on the forefront of that.

So I talk about our APIs a lot, the open platform. Shamir, who is the co-founder of Simple, which the digital-only bank for Millennials that we acquired has actually left Simple and come up to head our open platform globally. And he always talks about us being the AWS of banking. And when I speak about the open platform, people say, “Aren’t you potentially competing against yourself with the open platform?” and a lot of other initiatives that we’re doing within our new digital businesses group. And the short answer is, absolutely but if we don’t do it, someone else will. So we’re eating our own lunch and also at the same point in time, opening up another revenue stream for us.

JF, Techstars: Okay. So you believe millennials are part of this, I guess. What about you Dan? Where do you feel like the push come…

DC, Canaan Partners: Yeah. I don’t think there’s any question to that. If you look at where enterprise software has gone over the last 10, 15 years, enterprise software used to be truly enterprise focused and now it’s consumers, consumer enterprises enterprise and now it’s switched almost completely around where enterprise customers expect consumer like interactivity, UI, ease of use. You can’t construct in this day in age, I don’t think an enterprise software that does not have kind of the UI that people are used to from the consumer perspective. And I think that drives… and banks did not necessarily have or customers’ banks, not to say have that expectation until some companies, Simple and others, really came forward and offered that. And I do think that from that standpoint, millennials drive the expectations around product and ease of offering that is forcing banks to really confront the fact that they’re not set up to do that at this point in time.

SS, BBVA: And I don’t think it’s only… I mean, millennials, I do think are part of the future but the other acquisitions we’ve made, it’s not a millennial play, it’s a digital transformation and digital acquisition play. So we’ve also acquired a bank, a digital only bank out of Finland called Holvi focusing on entrepreneurs and small businesses, going back to your point and then we took a majority stake in Adam, which is the first mobile only bank out of the UK that actually uses video game theory and stuff in the background to help develop their app and they have voice and face recognition.

So millennials are one piece, so we’re trying to attack it all across digital. And we’ve seen the numbers just skyrocket, I mean all the presentations yesterday talked around mobile and the influence of that, we’ve absolutely seen that. We have over 15 million digital customers right now and over 60% of that is all on mobile. So it’s just going to where the customers are and millennials are one piece of that but I don’t think all of this transparency, simplicity, mobile first is only applicable to millennials. That’s the age that we live in this technology. So I think that one else is a subset of a much larger group that’s looking at that.

JF, Techstars: It’s also interesting, I always see you and BBVA, Santander on these panels. I rarely see U.S. based banks on panels like this. So I do think it is interesting. I just came back from two weeks in Europe and I did not see a piece of currency in the whole time. So when you talk… I was in Helsinki, you talk about they just don’t use it. And so I imagine that part of the push is coming from other places.

So if we turn our attention right now just a little bit on corporate bank. We’ve seen OnDeck, CAN Capital on some of those. What’s the driving force around the change within corporate would you say?

DC, Canaan Partners: Well, I think again, it’s part of the regulatory and the new regulatory framework but even before that but certainly since then, the fact is that it just is very difficult for banks with their current cost structure and the current systems they have in place, to make money on small business loans that are truly small business. The kind of what I would say, antiquated underwriting processes that most banks engage in around, small businesses. it just doesn’t work when you’re lending $30,000 or $50,000 to small business. And as I say, there wasn’t so much of it before but that is contracted pretty massively with the Dodd-Frank and the whole… again whole regulatory apparatus has come up since the crisis.

So that’s left a wide open hole if you will, for the OnDecks and CAN Capitals of the world to drive through if you want to say it that way. They’re constantly tinkering with how they underwrite small businesses. And I think they have gotten massively better since they launched. I was with Noah Breslow at an event the other night, who runs OnDeck. And he was talking about the… even they have legacy systems. He was talking about how when they just began the company and he said, we wrote some code essentially in the afternoon, maybe it took two days. And he said, “Now that where we are, which is very large scale, we… that afternoon cost us almost a year of technical debt trying to correct it because we just didn’t think it through in terms of how the architecture should be constructed for a real scale moving forward.”

And so I think even they struggle with technical debt and they’re not legacy, but I think that the fact is that they can make that business very, very profitable because they can make it very efficient in terms of why they underwrite. And underwriting is a skill, if you will that takes time, there is a knowledge curve, it’s not just algorithms, there is an inherent knowledge curve and algorithms that utilize that knowledge curve to get better and better. And I think you see that with the OnDecks and CAN Capitals world. It’s a risky business, let’s face it, small business lending is a lot more risky than consumer lending. But I think by virtue of the fact of that we are watching the world of data and that you have companies like OnDeck utilizing that data in very unique ways, that wouldn’t necessarily be obvious or things that banks do. They are able to make that underwriting process work and therefore the profitability of that product work.

SS, BBVA: I think you raised a lot of very good points around banks in the whole SMB lending space and so actually Compass, I believe, I’m almost positive was the first bank to partner with OnDeck and have a relationship. We also, there is OnDeck CRO Jorge Sun, from a much smaller company called LendingFront here in New York City was actually a winner of our FinTech competition. We’re talking about opportunities within Compass for them now. So there’s definitely a need for that. And all the points you make are right. The other thing that we’re doing is we actually have within our… we have a separate group called New Digital Businesses which I’ve referred to a little bit. We actually are creating some startups internally through there, focusing on some of those problems because we 100% agree. And back to the point that you made in the very beginning about having a big corporate, sometimes things take too long, there’s just too many barriers to entry. And so by spinning this out and doing this within our own small group out of San Francisco, there are a lot of opportunities there and we’re really exploring that same market so.

JF, Techstars: What about investment banking? That one seems to be a hot topic these days. I guess the thing that interests me most is, I was in investment banking for a number of years and now crowdfunding seems to be… so different than when I was there. What are your thoughts on the risks of partnering with technology companies around IB products?

SS, BBVA: Well, you want to go first?

DC, Canaan Partners: No, go ahead.

SS, BBVA: I was just going to say, that’s not an area that I am typically really involved in. But it’s funny because I meet a lot of startups who are disrupting that side of the space. And so I went and I talked to the head of our CIB, our Corporate Investment Banking and I said, “So are startups really disrupting you?” And he sent me infographic very much like the beautiful ones that Anand and team have at CB Insights with just how many companies are going after that space. I mean crowdfunding, supply chain, finance, it’s everywhere. So yes, 100%, it’s just not an area that I personally deal with very much.

DC, Canaan Partners: So I am on the board 10 years as an investor of a company called CircleUp which is for those of you not familiar with the company, it is I would say an equity marketplace, private for private companies in primarily in the Consumer Product good space. So you see whatever it may be a cereal or shampoo or what have you on the Whole Foods shelf. And it’s a new product. You may see that also in the CircleUp marketplace where they’re looking for investment and funding. And that company has been growing very, very rapidly.

It also I believe takes advantage of the fact that there’s massive inefficiency in investment banking around size of transaction. In fact, Ryan Caldbeck who is the CEO there came from… his inspiration for starting the company, he was a partner in a private equity firm and he kept seeing all these, what he thought were great deals and realizing but they were raising couple million dollars. And it didn’t make sense for them, for the firm he was with, in terms of the size of the checks that they need to write. And in terms of the types of investments they need to make. And so he said, “Nobody is taking care of these folks.” And so he started the company together with another fellow by name Rory Eakin. And they did that because they wanted to serve this massive inefficiency in, you could say investment banking in a way in terms of the raising of money for small private companies. Because those kinds of companies just aren’t serviced by bankers.

Now if you look at the history of Lending Club, you will see that Lending Club started out primarily and in fact really started out almost exclusively as a retail platform, moved to high net worth individuals, moved to family offices, moved to institutions. So there was a kind of a evolutionary curve if you will that that company followed, in terms of where the money came from and where they were trying to grow to on the capital side.

So you certainly could make an argument on the investment banking side that well, companies like CircleUp start with a couple million dollars, with companies are raising couple million dollars but what is to really prevent them from going up that curve in a similar fashion and to being able to raise money much more efficiently, much more effectively and much more cheaply than an investment bank. And I think there’s a very good argument to say that that may indeed be the evolutionary path for this product.

Now the one thing I will say, just to finish up on the crowdfunding situation because I think it’s important. CircleUp has decided not to go with the JOBS Act in terms of raising money from unaccredited investors and for a lot of reasons. And I do think, to your point about all these companies rising up because the JOBS Act, I think this is very dangerous territory to tread down. You cannot be in the financial services business whether you say it’s FinTech or banking or anything else. You can’t be in the FinTech business without having crooks, 100% guaranteed, you’re gonna have crooks, you’re gonna have scammers, you’re gonna have frauds in this business in some way, shape, or form.

And I do think that, again, when you start to open things up to somebody who’s just not very sophisticated about investing in private companies and they simply think, “Well, somebody made a bunch of money on Facebook, so let me throw some money in here and I’m going to make a lot of money too.” You can have dangerous outcomes. So, I do worry about that with respect to what’s being called crowdfunding but overall, I think that companies that do it very carefully and are very focused on how the compliance piece of it, the control piece of it, can be enormously successful in this area.

JF, Techstars: Yeah. I mean another area I guess we should just quickly talk about is the robo-advisors, right? So at Techstars, we invest early stage companies and we get thousands of applications, we see these trends, my last batch of applications, dozens of people trying to do robo-advisors. So that’s another area that I think we’ve… it’s kind of hit its peak. But we love to get your perspective on that.

SS, BBVA: Yeah, we actually have… I mentioned LendingFront, we have an early stage FinTech competition on accelerate so we get a ton of applications as well and I was seeing the same trend. So in that space, robo-advice, wealth management, we create startups within BBVA and we’re doing this in the U.S. and in Spain and one of our startups is in that space in Spain called Alinco [SP]. We also have a partnership in BBVA Compass, our U.S. bank with FutureAdvisor which BlackRock acquired. So it’s a space that we’re monitoring but for me personally, I’m still figuring out what’s gonna happen because it’s so crowded and there are so many things there, so how do you really differentiate the ones that are gonna be a success, I think that’s still to be determined.

JF, Techstars: And how does anyone make any money, right?

SS, BBVA: Yeah.

DC, Canaan Partners: Yeah. I really agree. I love robo-advising, I use Betterment and for some of my personal money and I love it. And I think it’s a fantastic way to offer services. And again, in a much more efficient way, I was talking to John Mack, who is the former CEO of Morgan Stanley the other day, who was also an investor in FutureAdvisor. And he was saying, “The reason I invest in FutureAdvisor is because I remember back in Morgan Stanley days, why would anybody pay 3% for doing with this… what essentially this service can do for 25 bits. And I think there’s no question if that’s true, it’s a wonderful service.

Now the challenge is, I think Betterment, Wealthfront for that matter and SigFig, there are a lot of FutureAdvisors. The problem is that these are all good companies I think, but to your point about differentiation, I think that’s still a struggle, how do you truly differentiate your product from others? And once you start to white label robo-advising, as FutureAdvisor’s doing, as SigFig is doing and offering it to everybody, you know Schwab come out with a robot-advisor, E-Trade just announced. I think it’s increasingly hard to differentiate yourself and maybe if you’re out there early, Betterment for example, I think has built a bit of a brand now around this. Brand is going to be incredibly important here. But I think it is very crowded and I think it’s a space that is tough to differentiate in.

JF, Techstars: So I’d love to talk a little bit about how you both think about banks partnering with startups. So at Techstars, as I said, we invest in early stage companies, our FinTech portfolio has I think over a hundred companies at this point. So it’s rather big. We’ve partnered with Barclays Bank, who is very big on the partnership side and the whole program is really structured on doing commercial partnerships in various POCs with the companies. So how is BBVA looking at merging technologies and seeing that as a risk, an opportunity or…?

SS, BBVA: Yeah. I mean risk, yes. But we don’t really… I think 100% is more around an opportunity. From what I’ve seen because I spend a lot time with counterparts and other organizations outside of BBVA, I don’t really see anyone who’s doing it the exact way that we are in that. I mentioned the competition, I talked about some other partnerships were doing, like the Dwollas or some of the other ones who are winning out of our competition and it’s also very early, similar stages as the Techstars, Barclays relationship in terms of stage of the company. And then we have Propel, right… or we can acquire and we talked about some of those. We can attack in so many different ways and there is just a lot of opportunity there.

So there are certain cases where it wouldn’t make sense from a partnership opportunity right now but it might make a lot of sense for investment so then Propel can take care of it or we could acquire or… there’s just so many things there and especially with the fact that we’re now creating startups within BBVA, it actually allows us to do more with the earlier stage stuff because they’re on the same track and they can work together more quickly than if we’re bringing in a small company within Compass or within BBVA Spain because there’s just so many moving parts and the sales cycle is slow, we all know that with banks. So when we do it with our startups, there’s a lot more opportunities to collaborate and move quickly.

JF, Techstars: You guys are trying all different models. You’re building stuff internally, you’re partnering with external, you’re investing and you’re acquiring. Where do you see it?

DC, Canaan Partners: Look, I think partnerships absolutely work as long as they’re very, very carefully constructed. Lending Club is partnering with Community Banks through BancAlliance and they buy loans from a Lending Club for example, they partner with Citibank to help out on the Community Reinvestment Act. And they partner with a wide variety of different banks simply to incorporate those loans on bank balance sheets. Partnerships and then we talked about robo-advisors. There’s lots of different ways to partner.

I think investment, and this may be an area where we have a little difference of opinion. But I think investment on the part of… I think partnership is very different investment. And you can potentially combine the two but I think that’s fraught with a lot of risk and danger for both parties. And I think partnerships tend to be cleaner and by investment I mean minority investment, not an acquisition. I think investment structures tend to be a lot messier.

JF, Techstars: Yeah, so let’s talk about that corporate VC for a moment. I ran a corporate venture group for four and a half years, not in FinTech, in another vertical. You guys have a corporate venture group, what do you guys think about that? And obviously there have been some… some people recently have come out and been a little disparaging.

SS, BBVA: Yes. No, it was a good evening last night after Fred was off the stage. And to be honest, I don’t disagree with some of the points that he was making. At the very basic level, when you’re looking at a corporate VC fund and looking for the partnership side, which is what I think you were alluding to as well. The strategies don’t always and incentives don’t always align directly. So I think about when I’m looking at a company, the metrics and the things that I’m looking for is quite different than a VC would, in terms of the financial return. There’s a strategic partnership and then there’s financial returns. And that’s one of the reasons, there’s a lot of reasons as to why we ended up spinning out Propel because… so BBVA is a sole LP but they’re independent. So they can invest in other things and we were trying to reduce some of those layers of friction. And so their goal’s all around bringing in money. They have a true VC thing, they want to be like every other VC, not considered a corporate VC, which is why they’re independent. Now that being said…

JF, Techstars: Can you really do that with a single LP?

SS, BBVA: To be determined. So this is pretty new, I hope so, I believe so, but that’s the thing, there are differences. So like with Atom which we mentioned, it wasn’t an acquisition, it was an investment. Now we took a majority, not a minority, that didn’t come from Propel. That actually came from us because it was very strategic. So when we’re thinking about Atom growing and scaling, BBVA will be the person for that. In other cases when we’ve made investments, there hasn’t been a direct alignment with BBVA, we’re all in the same space but just because Jay and the team at Propel invest in something, it doesn’t mean that we as BBVA have to do business with them. So I hope and I believe but it’s definitely an interesting challenge that people have.

So I think it just goes back to thinking about where the strategies and initiatives are. And I’ve done a lot of panels with VCs who say, “Do not take corporate money until Series B further along because that’s a nail in your coffin. It’s on each entrepreneur’s choice.

JF, Techstars: And Dan, you obviously have a large portfolio, what have you seen good and bad acting, in terms of strategics?

DC, Canaan Partners: So I think it depends. I didn’t see Fred’s talk yesterday, I wasn’t here. I’m not exactly sure what he said, although, I suspect I know. Look, I do think that taking… what we have seen that works for us and for our companies in terms of the strategic investment side, is taking a small amount of money that comes, where there’s no board seat, no specific structure or preference that’s given to the strategic investor. It’s a small investment and simply says, “We like what you’re doing.” We think that by virtue that there’s no signaling risk or other kind of complications.

The biggest challenge that we… not so much banking or VCs, corporate VCs. I mean although, I would include them too, but almost any corporate VC where we see, the biggest challenge is where that corporate VC wants to have more either visibility or control, whatever you want to call it, into the company, than you really ought to allow.

The reality is that I believe when a corporate VC invests more than 10%, I mean that’s a relatively arbitrary number but it starts to become… it starts to feel a little bit more controlling. Then my argument to companies, to CEO’s is, don’t take 10%, either take a couple percent or take a 100% but between 10 and 100, all you’re doing is selling your company and in fact for much, much less than a 100%. Because ultimately what happens is, if somebody else is interested in acquiring you, they look at that structure of that other… their competitor or somebody that’s associated in the space in some way, has this investment that’s significant above 10%. And therefore why would I bother, they’re probably not going to sell to me anyway, I’m going to do a lot of work and then this other company is going to come in and either outbid me or try to work against me or in some way, not be a fair process. So that cuts out, that dampens value extraordinarily. And so again, I think that corporate strategic investment…

JF, Techstars: It seems like you agree with Fred but you just said in a nicer way.

DC, Canaan Partners: What’s that? I said, no.

JF, Techstars: All right. We’re gonna wrap up because there’s a few questions. So are those in the audience or did someone…

SS, BBVA: He’s back there.

Nikhil Krishnan, Tech Industry Analyst, CB Insights: Yeah, we have two questions from the audience.

JF, Techstars: Great.

NK, CB Insights: The first is recently, we saw Goldman Sachs make its first early stage FinTech acquisition of Honest Dollar, what are your expectations for the FinTech M&A by banks and financial incumbents over the next few years and what’s the tipping point where a startup becomes an acquisition target?

SS, BBVA: Do you want to go first?

DC, Canaan Partners: I think Goldman’s really interesting. As you may know, they bought the old GE Bank and they bought with it $138 billion of retail deposits. Retail is a very, very sticky source of money, unlike institutional money or most institutional money. And so they now have this enormously stable and large pool of money that they can utilize to invest in different things with. And in fact, they have announced and are working on starting their own marketplace lending company, one of the things I find truly remarkable. If you think back to five, six, seven years ago, when you actually said the Goldman Sachs will start a marketplace lending company, I think you have been laughed out of whatever room you were in which really goes to show how much things have changed again, driven a lot by the regulatory apparatus that’s come up since the crisis.

But I think Goldman, along with a lot of other classic investment banks has recognized that the institutional market, particularly on the trading side is not gonna be the source of profitability that it was in earlier times. And therefore, where do they need to go? They need to go on the retail side and that’s exactly where they’re headed. So I think it’s a strategic decision for them and I think you’ll see more of those kinds of decisions from different kinds of banks absolutely.

JF, Techstars: Next question.

SS, BBVA: I was just gonna add one thing really quickly. Sorry. First of all, Fred should be happy because one of things he was talking about was, well, why don’t you just go by them? We’ve done that a fair amount. So I think that it will continue, there will be a lot more acquisitions, especially as the market starts to stabilize a bit, where people can’t raise the funding that they could before and there’s a lot of opportunities for acquisition during that time at a price that banks are gonna be more comfortable than they have historically. And you can invest or you can acquire a five person company or something much bigger than simple. So it’s all across the gamut at least for us.

NK, CB Insights: This is the last question. Industries frequently go through periods of bundling and unbundling, banking included, is this just another phase in the cycle which will lead to rebundling of certain services and products or is this time fundamentally different?

SS, BBVA: it’s a good question.

JF, Techstars: I mean who knows that?

DC, Canaan Partners: It could be, you never know. I do think that look, the whole famous Bill Gates quote about banks are, “You need bank, you don’t need banks,” banks are dinosaurs and all that stuff. The reality is there’s always going to be banks, that’s never going or…

JF, Techstars: I mean I think the question is, are these challenger banks gonna really take hold?

DC, Canaan Partners: Exactly. Yeah. And to your point, the real question is, I liking a little bit to the whole debate about Verizon, all these comments, “We don’t want to be a dumb pipe, we’re not a dumb pipe. How dare you call us a dumb pipe?” They’re a dumb pipe. And they should recognize that in my opinion and suck it up. And you can make a lot of money from being a dumb pipe. And I never understood why they’re so… they keep launching these marketing initiatives that try going towards the consumer and they never work.

So I think the real question is, what are banks or banks going to be whatever you want to… I don’t want to use the word, necessarily dumb pipe. But are they going to be a utility or they’re going to try to be something much broader? My guess would be more on the utility side but we’ll see.

JF, Techstars: Scarlett, final thought?

SS, BBVA: No, I agree. And part of it, I mean think about how much money AWS makes doing what they’re doing. And so the APIs in the backend stuff is a really profitable business if you can do it at scale, so there’s lot of opportunities there.

JF, Techstars: Well, thanks guys. That was great.

SS, BBVA: Thank you.

DC, Canaan Partners: Thank you.

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