Some startups want nothing to do with big banks. Others see them as possible partners or customers.
From the point-of-view of big banks, investments in startups (or even partnerships) can serve as a kind of outsourced R&D.
However, regulatory and security issues can make partnering a minefield for both sides.
Moderator Maria Gotsch, president and CEO at the Partnership Fund for New York City opened the panel with an anecdote about a recent security breach that saw a bank fined a million dollars. She asked why a bank would share their data with a startup when it might heighten the vulnerability of that data.
“For better or worse,” she said, “the first place that a bank executive often goes is, ‘But I’m the one paying the $1 million fine.'”
She was speaking on a panel at CB Insights’ Future of Fintech Conference earlier this month. The panel also included Jaidev Shergill, head of ventures for Capital One Ventures, Karl Abbott of Scotiabank, and Luis Valdich, managing director at Citi Ventures.
Shergill sounded a cautionary note for early-stage startups.
“If you’re an early-stage consumer fintech company, don’t even go close to a bank,” he said. “It’s going to weigh you down, it’s gonna slow you down.”
He pointed to the massive compliance burden involved in any such partnership, and how incompatible it is with the way early startups work.
So how should a startup looking to partner approach the big banks?
The panelists gave some historical context. They cited the recession of 2008, the effects of which included a talent drain from the big banks and the death of a number of niche lenders (which created a vacuum filled by startups). They also pointed out that the big banks themselves were so caught up in their recoveries that they didn’t pay much attention to fintech startups until now.
Valdich of Citi advised new companies to start small and attack a narrow problem: “Take a bite of something that is chewable …. You need to be very measured, very specific.”
Once a scaled-down initiative proves successful, then startups can think about expanding the initiative or how their products might apply to other areas.
Shergill’s advice to business-to-business startups was to start conversations with banks early, while not letting any individual bank dictate your strategic direction.
“Start engaging with the bank to get that advice very early on, but also ensure that you aren’t developing a solution just catered to one customer,” he said. “You’ve got to have that discipline to ensure that it’s a scalable solution across several different organizations.”
At the end of the day, it’s all about solving problems and understanding your customer, said Valdich. Banks are huge, sprawling, complicated entities, but startups aren’t pitching companies, they’re pitching people.
Getting to know stakeholders and acquiring what Valdich called “sherpas” within target organizations are two vital steps.
Persistence is needed to build real rapport and for getting a sense for when an opportunity is real, so startups can avoid endlessly spinning their wheels with a bank that was never going to team up with them in the first place.
“Remember that banks are basically technology companies that move money,” said Gotsch, of the Partnership for New York City. “They have an insatiable demand for technology. Some of it is built in-house, but a lot of it is not. And the trick is finding the fit between what you have and what they need.”
Transcript
Maria Gotsch, CEO & President, Partnership Fund for NYC: All right. Hello, everybody. We are after lunch, so we’re gonna try to keep this lively. The panelists have promised me they’re gonna disagree, just to get a little activity. But I’m gonna start with a story that I read today as I was taking the subway down to work. So, a low-level employee of a blue chip investment bank took some client information home. His computer was then hacked and the cyber hackers tried to take the information and sell it on the internet. So, that low-level employee was disciplined, can no longer work on Wall Street, on probation, etc. The blue chip bank is paying a $1 million fine.
So, for you FinTech companies that walk into a bank and say, “If you can just give me some of your data, I will tell you and show you how fabulous my technology is and what it can do for you and your customers.” And for better or worse, the first place that a bank executive often goes is, “But I’m the one paying the $1 million fine.” So I think what I’m gonna do today with that as the backdrop, is try to demystify and give you some practical information about how to partner within that environment, because those are real issues that every one of the panelists on the podium today has to deal with.
But it’s not impossible, obviously. There was a lot of partnerships that were talked about there. FinTech companies and large banks do figure out how to partner. But you have to be cognizant of sort of the environment out there, so we’re gonna talk about that.
And then because we have a couple of the panelists who are active investors as well on behalf of their organizations, we’re gonna get a little insight into what they’re looking for these days, to hopefully help guide you in how you should be presenting your company to the financial services firms. So let’s start with a framing question. So what’s happened with FinTech investing? It tripled between 2011 and 2014, and then doubled again between ’14 and ’15. So just for each of you, kind of your perspective on what’s going on? Jaidev.
Jaidev Shergill, Head of Ventures, Capital One Ventures: Yeah, listen, I think it’s one of the most interesting and fascinating times to be in FinTech. I started a FinTech company in 2008, and as I was thinking about the idea, it was here in New York. People were still saying, “Why do you want to do a startup? Why don’t you just go and join a bank? Isn’t that a better part?” But literally over the last six, seven years, the world has changed. Right? So, in 2008, for anyone who was in the banking industry, and even if you weren’t, it was the start of the financial crisis. And I think the start of the financial crisis and the years that followed it, was just a big wake up call, not just to banks but also to talent that were in banks and talents that were thinking about joining banks.
And so, what we started seeing was, a lot of people asking the question, “Should banking actually operate the way it does? Should a consumer actually have to go through that same experience as they have been and feel that fear of a bank potentially not being around on the Monday following a massive stock drop on a Friday?” And so, I think, over the course of that time, coupled with this massive change that’s been happening, that’s making it a lot cheaper for startups to actually launch and scale, we found a new breed of entrepreneurs who started challenging the status quo in banking and started coming up with different ways by which people could actually start interacting with the money. So I think that was really the start of things.
MG, Partnership Fund for NYC: Okay. So, Karl, from our good neighbor to the north, what’s your perspective? I don’t know if there’s a Canadian overlay as well.
Karl Abbott, Senior Vice President, Scotiabank: Well, I think Jaidev hit on the main points. I think money’s been cheap. I think there’s been a technological change, and you see it in a number of different industries. And I think those combined with the old joke, why do you rob banks? Because that’s where the money is. Why come after banks? It’s a fantastic industry, and it has been for a very long time. I don’t think there’s anything particularly different about Canada. I think it’s a nice industry structure there. There’s really only five big banks, five or six, depending on how you count, similar to the Australian market. That makes it a little easier. It also makes us a little more complacent, I think, sometimes. I think there’s some good and bad that goes with being a Canadian.
MG, Partnership Fund for NYC: Okay, and then Citi, very much of a global view because you guys are probably the most active in most of the countries.
Luis Valdich, Managing Director, Venture Investing, Citi Ventures: Yeah, so my perspective on what changed and what accelerated the pace of investment in FinTech, which has been indeed quite remarkable, because when you said overall VC activity, which is volatile, you look in relative terms the share of FinTech has absolutely exploded. And even now with Q1 being overall down for most of VC activity broadly, you could see FinTech rebounding from Q4 having been down. So, to me, what’s changed and what accelerated that has to do with ’08. But I’m gonna disagree with Jaidev, just like you asked us to, that I think that regulation was also a very important factor.
So not just the greater availability of talent as a result of ’08 impacting lots of people who are in the industry, but also the fact that the type of framework that was established, including greater capital requirements and the like which diminished appetite and availability of, for example, lending, coupled with what happened in terms of the overall alternative lending industry, the specialty finance companies and the like, many of which blew up, disappeared or were gobbled up as a result of the Great Recession, created a very significant void in an area in which there’s been a number of startups that have flourished and have been able to gain scale.
And when that started to happen, I think that you had, frankly, a number of folks in venture investing that before were thinking, “FinTech, yeah, interesting,” like many other areas, and then suddenly started seeing IPOs, very significant fertile funding rounds and the like. And that triggered more interest in investing, as well, frankly, from the standpoint of many banks. And I was at JPMorgan recently and the Jamie Dimon quote of Silicon Valley’s coming has been repeated a lot because indeed I think banks also started to overall pay more attention in terms of what was happening. So I think it’s been a combination of those factors, many that were mentioned. I added a few that have created the situation in which we are.
MG, Partnership Fund for NYC: Okay.
KA, Scotiabank: And building on that disagreement, I think banks were distracted. From 2008, we’ve been doing a lot of work on other different things, and I think that created a void into which a lot of FinTech port themselves.
MG, Partnership Fund for NYC: Okay. So let’s shift now, and I think what this panel’s gonna focus on is less the disruption and more how if you’re a FinTech company, you want to partner with a bank or you want the bank to be your customer. So we’ll shift over to that. Because the title is “How Startups Can Navigate and Partner with Incumbent Financial Services Firms for Fun…”—I’m not sure how much fun that is—“…and Profit.” And I think why Anand and team asked me to moderate this panel, is we run the FinTech innovation lab which is explicitly about trying to connect early stage companies to large financial institutions.
So we’ve been in the thick of, what are the issues around that bridge? So we’ll get to some… again, another framing question around the issue. So, you all are at large institutions, you picked up on the regulation point, you work globally, in multiple time zones, with multiple products. So how do you even think about bringing in a small company to that organization where you’ve got regulators looking at everything you do, you’ve got customers all over the place, you’re dealing with money, which is what people want to steal, as well as personal information? So how do you even think about, all right, really interesting technology, very useful for our business, for our customers? How do you even start? So I’m gonna start with Luis.
LV, Citi Ventures: So, the answer is that you need to focus on taking a bite at something that is chewable. So, typically, what we would do is have a very explicit project in terms of starting with a pilot which will typically have a very clearly specified sub-product, geography, and instead of people that will be working on that specific application. At Citi Ventures, we have over 20 companies in the portfolio, and the majority of them… and we make investments in advance of commercial agreements and then we try to get those to happen. And we’ve had a very good track record of doing that, more than a majority of the portfolio companies are having in such discussions.
But it’s always started in something very narrow because just to get a big bank to be ready to start working with a startup requires crossing T’s and dotting I’s across a number of areas, including compliance, including regulatory, legal, risk, and there’s multiple of risk dimensions, all of them, above and beyond the actual design and business application model, the client relationships and the likes. So the answer is, you need to be very measured, very specific. And then, assuming that’s successful, then we think about how can we either roll this out globally, or are there other products that the startup has that could have applicability to other areas. But it’s really on a very circumscribed fashion.
MG, Partnership Fund for NYC: So, to summarize that, if you come into a bank and you say you want to change the world, quickly get to, but I’m gonna start over here with a small thing. And then I’m gonna go back and disrupt the world. So I think that’s a good piece of advice which is…
JS, Capital One Ventures: Can I just…?
MG, Partnership Fund for NYC: Yeah.
JS, Capital One Ventures: So, I actually think, from the other point of view, if you’re an early stage consumer FinTech company, don’t even go close to a bank. It’s going to weigh you down, it’s gonna slow you down, it’s gonna push into directions that you probably didn’t want to go into. It’s gonna ask you to take on a whole bunch of compliance and regulatory costs that you will not want to deal with. So, my advice is actually a little bit on the other side, which is consumer-facing FinTech, do not partner with banks until you’ve reached a scalable amount. At which point, you can.
MG, Partnership Fund for NYC: So what is that amount? So how big is that? Is it customers, is it revenue?
JS, Capital One Ventures: Well, it’s an amount… well, it’s not just a customer or a… it’s how much can you take? The sales cycle is gonna be a year. Do you have enough in your balance sheet to actually let you continue to grow extremely rapidly by yourself, focusing on the core propositions? Or is it gonna absolutely distract you to start a B2B partnership as well? So I’d be very, very careful for all those consumer-facing FinTech companies out there, to try and do that. And I have seen real life examples of this, where companies literally get handed a 400-page book of regulations and compliance stuff that they actually have to comply with before they can partner.
Now, if you’re a B2B company, and my definition of FinTech is a little bit broader, it’s not just consumer-facing FinTech companies, it’s also all the B2B infrastructure companies that provide services to banks. In that situation, I think the answer’s a little bit different, which is, ensure that you start engaging with the bank to get that advice very early on, but also ensure that you aren’t developing a solution just catered to one customer. You’ve got to have that discipline to ensure that it’s a scalable solution across several different organizations.
The third point, which I think is more general across the board, is when I meet with a lot of startups, the first thing they do is they just come and say, “Well, here’s the overall problem that we’re trying to solve. Here’s my solution.” And 80%, 90% of the discussion is just talking about their solution. I would urge you in the first few meetings, even if it’s kind of one-on-one meetings, to try and understand the pain point of that organization.
Try and really peel the onion on where exactly is that pain point and how is the bank solving it themselves or not solving it right now. Because then with that information, you can come back and be a lot more pointed about your solution and turn your discussion much more to problem solving. We all do this. When we start a startup, we spend a lot of time trying to understand what’s the problem. Do the same when you’re actually selling a large bank your solution as well.
KA, Scotiabank: Can I just… that’s spectacular. You can just write all of that down and do that. That’s terrific advice. The thing I would add, though, at the end…
JS, Capital One Ventures: We’re supposed to disagree.
KA, Scotiabank: No, I was taking notes, “I’m going to start up a startup, I know what to do now.” Understanding the problem of the bank, there’s a very interesting… banks are funny places, because on the one hand, we’ve got, in my case, an $800 billion, 90,000 people, 55 countries, 350 regulars, massive organization that nobody really can wrap their heads around. But on the other hand, they’re very personal. Because they’re so large, the personalities and the foibles of individuals become tremendously important.
And so it’s not just what does the organization want. Because the organization is too amorphous to really deal with. The specific human being that you’re dealing with will have an outsized influence, at a sufficiently senior level, that you’ve got to be able to relate to them as human beings. And there really is this funny dichotomy to these large organizations.
MG, Partnership Fund for NYC: So let’s stay in the same of people, just for… assuming I was in the audience, how many of you work in a large financial institution, medium to large? And how many of you are entrepreneurs? Okay, so, question for the panel, how do the entrepreneurs in the room know that the bank executive that they’re sitting next to is the right person they should be talking to? What are the warning signs? Like, this person is a really effect… I mean, I’m gonna achieve my objectives or get something out of this person, or this person is gonna waste my time. So, Luis, let’s start with you. What are the signals?
LV, Citi Ventures: Yeah, and it’s great that you bring that up because it’s something that you really need to figure out early so that you don’t waste time and spin lots of wheels. I think that, first, it’s really in terms of assessing what is the level of subject matter expertise an individual has about the specific topic at hand. And what is the organization that the individual is responsible for? Who else are you in touch with? What is he or she overseeing? But ultimately, I think that one of the best ways is, frankly, to develop relationships within different organizations so that you can have Sherpas, if you will.
And certainly in our case, Citi Ventures, we very much try to do that, which is navigate the big organization, both with startups in which we have invested, but others that perhaps are not racing at the time but we think are very innovative and we would like to help get commercialized within the organization and try to steer it in that fashion. But I think it is one of the most important things you can do so that you don’t really waste a lot of time.
MG, Partnership Fund for NYC: So, let’s say somebody managed to sit next Michael Corbat, who is the CEO of Citigroup, does that help? Coming in through the CEO, is that the right place to come in?
LV, Citi Ventures: It depends on what it is that you’re trying to do, but most likely not. Most likely, it needs to be somebody a bit closer to… as you were describing before, what is this addressable piece that will probably not be something that necessarily would be at the level that the CEO of a large bank would be engaged in that specificity of the project? So, it’s finding it just right. It’s almost like Goldilocks, I guess.
KA, Scotiabank: Or a unicorn.
LV, Citi Ventures: Yes.
MG, Partnership Fund for NYC: So, Karl, where is the best place…what’s your advice around finding the right person and knowing that they’re the right person?
KA, Scotiabank: Well, ultimately, it’s about the engagement that that person can deliver to you as an entrepreneur. I think you have to recognize there is a cascade of little companies coming through banks every single day. And I know, I’ve been on the other side of the table and you think that your company is special and it’s the one and it’s different than everybody else. And I’m sure it is, it’s just that I’ve seen that 12 times this morning and I’ll see it 12 times tomorrow as well. And so, how are you getting that engagement with the person? You do need a bit of a unicorn. They have to be somebody who’s a bit edgy, from a bank perspective. The normal banker is really just gonna do their job and deliver their results.
You need somebody who’s looking for change. They need to be sufficiently senior to carry some weight to bring together the innovation people, the technology people, the business people and ultimately the funding. And be your Sherpa, guide you through this whole process. And the only way you can tell is if they can actually engage. If something starts to happen, if there’s a pilot, if there’s a proof of concept, if they start talking about paper, then it’s real. If not, you’re just another shiny object and it’s not really gonna move forward.
JS, Capital One Ventures: Listen, it’s also a little bit tempting when you get an email from a large bank, right, and you’re a 15-person startup, and suddenly this bank reaches out to you and says, “Hey, love what you’re doing, would love to chat. Why don’t you come in and…” The first instinct is, “Wow, that’s awesome! All right, well, you know what, they reached out to me. I’m gonna go tell them about what I’m doing. And you know what, in three months I’m gonna go have a deal.” Two or three words of caution. Number one—and I’m generalizing over here, but I think this should be an instinctive reaction for a lot of us—if it’s a call from someone in the innovation unit, ignore it…
KA, Scotiabank: Now, you can disagree.
JS, Capital One Ventures: He’ll get back to you and let’s see where that can go.
MG, Partnership Fund for NYC: Or you can invite them to visit your office at least, right? Come on down any time.
KA, Scotiabank: We’ll use your really cool offices.
MG, Partnership Fund for NYC: Right, exactly. They’ll come down.
JS, Capital One Ventures: That’s right. Number two, if you’re a B2B company and someone from the technology unit gets in touch with you, and it’s a person who’s looking to solve a very specific problem, and that will come out very clearly in the email that they actually write to you, take the call. That could be very helpful. And even if you’re too early, take it. Because a one-hour discussion with that person will let you learn so much more about the ecosystem, about that bank’s technology stack and about the potential competitors that you may or may not be thinking about, that it will help you, inevitably.
The third thing is, when I started working with B2B companies, whenever I interacted with really successful Biz Dev people, the first question that they always ask, Biz Dev / salespeople, they said, “Who are you selling to?” So, you really need to understand companies and what kinds of people are in positions to actually carry your initiative to the next level. And they’ll be able to pinpoint and say, “Well, actually, we sell not to a technology group. We sell to a product person who deals with these kinds of problems,” and that’s why they’ve had the most success.
You need to build up that muscle as you go and pitch to different companies in that space. The last thing I would say, once again, is, if you’re a B2C company, your sales cycle to do something with a bank is basically from 12 to 15 months to infinity. So, be extremely careful about interacting with banks when you’re a B2C company, and it’s for very, very good reason, like I brought up before. The regulatory and compliance aspects are not to be underestimated, and are therefore very good reason.
LV, Citi Ventures: Can I quickly address point one and three? On the innovation, I definitely would take a different view. I do think that innovation folks can be actually Sherpas and quite effective at navigating organizations. That’s really what’s the job description, at least the ones that are effective, obviously. But on point number three, I think that totally make sure you understand who is your main buyer. But if you’re selling to a bank, it’s strategic, structured selling.
So those of you who may have experience in terms of having worked in large enterprises that sell to big companies will know what I’m talking about. It means that, in addition to the main buyer who will write the check, there’s a number of other buyers, people in legal, in compliance, in the technology review, who may actually kill your product. So it’s very important that you understand that you’re not just selling to one, you’re selling to multiple constituents and that you need to do it very systematically.
KA, Scotiabank: If I can just build on that. We’re talking a lot about selling, and I think at the first call, you want to stay well away from selling. It’s not just 12 to 15 months because we’re really slow and painful and difficult…
LV, Citi Ventures: Which we are.
KA, Scotiabank: And it’s not just because there’s a thousand people involved in the decision. It’s a very different process. And I think, early on in the relationship, you want to engage banks on something other than “Here’s my product. I’d like to sell it to you.” And again, back to there’s a dozen people that told me that this morning already. Bring some added value, some differentiator that’s outside of “here’s what I want to sell you and how you’re gonna give me money.” Bring me information, bring me understanding of the marketplace, bring me a relationship that I’m going to rely on. And I think that’s going to get you traction that a sales process can then build from.
MG, Partnership Fund for NYC: All right, so everybody’s picked up on the point that a sales cycle to large financial institutions is long and painful. So how do you know six months in whether or not you should keep going or you should fire them and move on? What are some clues to say, “I should stick with this. It’s just a matter of time. It is the regulatory issues,” versus “You know what, these people are never gonna buy my product”? Can you get that information from them? Can you ask that question honestly? How do you know? Jaidev, you’re an entrepreneur, you must have fired customers or prospective customers at some point.
JS, Capital One Ventures: Yeah, listen, it’s… Fred said yesterday that corporates are just this thing. It isn’t a person, it’s just this thing. I respectfully disagree. I think corporates are made out of people who will go to bat for you, if they actually believe in what you’re trying to do. And so, if after six months you haven’t established a relationship with at least a couple of people who you can have completely open speak with and you aren’t getting a picture of where things are going, then it’s time to quit.
If in those six months you’ve developed that relationship and that person’s got the eyes and ears of the company and is able to give you a very good indication as to where you’re going, and it takes a certain kind of person outside of corporate to do that as well, but if you aren’t getting that, just stop and continue to develop the product to go to somebody else. Because frankly, over time, they’ll come back to you because they’ve spent enough time getting to know you. So that’s just my general rule on that front.
MG, Partnership Fund for NYC: And then I’ve got a slightly different flavor question for Karl and Luis, which is the burning question of all entrepreneurs. Do banks pay for pilots or POCs, and is that a clue?
LV, Citi Ventures: My answer is, sometimes yes and sometimes no. And in fact, within Citi Ventures, besides making venture investments or venture capital investments, we also have other areas. And by the way, Jaidev used to be at Citi Ventures in a prior life as well. There is a part of money that we call an acceleration fund that we use when we believe that Citi should be doing a pilot but the business unit is not quite there yet or doesn’t have the budget in their prioritization exercise, etc.
So, it’s a small amount of money that we can use to occasionally help get things across, particularly done in conjunction with one of our R&D labs. We have eight of them throughout the world. But the reality is, we have all of that. We have some pilots that are unpaid, we have some that are paid by the line of business, and some that effectively Citi Ventures is paying for.
MG, Partnership Fund for NYC: Okay.
KA, Scotiabank: And we’re the same. We pay for some, we don’t pay for others. Tying the two questions together, it’s a great test. It’s a great test to see if there’s somebody real. When we do pay, you’re not making any money. It’s essentially cost recovery for that kind of engagement. Getting a bank to write you a check, no matter how small, is a tremendous test of how real it is. If a bank will pay you $10,000, they’re paying attention. The number of zeroes doesn’t really matter, the fact of the check means that there’s a set of greased wheels that allow this to happen. And that’s a great way to test and see if the bank is real. Will they pay you $10,000? Because if the answer is no, it’s not real.
LV, Citi Ventures: Let me ask you this though, because we’ve had good experiences in cases in which we didn’t pay anything. And my sense is that the fact that a bank is willing to do a pilot, irrespective of the money, is very meaningful because it’s not free. There is so much time, attention, dedication… it is really, you know…
KA, Scotiabank: It is, and I think it’s the same kind of thing. It focuses the mind. I think that’s why the notion of a token payment actually makes a big difference. It means that all of those various groups, finance has to agree, legal has to agree. There has to be a process in place that allows it to happen. It’s not essential. On the other side, from an entrepreneurial side, if a check exists, you’re real. If a check doesn’t exist, you can still be real but it’s different.
MG, Partnership Fund for NYC: Okay, so given that pilots are often the first entry, do you have any specific advice around how to structure the pilot to make sure, as a startup, you are coming out with successful outcomes? Or that at the end of the pilot, it’s gonna lead to the next step? What should you be thinking about when you structure the pilot, time limits, etc? Jaidev, why don’t you take that one?
JS, Capital One Ventures: Listen, it’s different from company to company and from opportunity to opportunity. So, for example, there will be situations where you may be included as part of a RFP that’s a soft RFP. Nothing has been issued but they’re looking for a solution on something. It’s more relevant for B2B companies, where the pilot and the criteria has been laid out pretty clearly by someone in either the technology or the business groups. And so you understand what you’re going to work towards at the end. The pilots that scare me are the ones that are for what we’d call consumer-facing FinTech companies which become extremely nebulous and the word learnings is thrown out a lot.
On those ones, once again, as an entrepreneur, you’re going to develop a lot of stamina, run. Run the other way fast, because inevitably what’s happened is you won’t know what learnings exactly are gonna come out of that. And then the consequences of the learnings, to go from something that’s a pilot to something that’s scaled, are actually monumental. You’re gonna get through a massive change to go from something that’s piloted to 5,000 customers to suddenly thinking that you’re gonna serve 30, 40, 50 million customers for that bank. So I’d say, consumer side FinTech, just be very real about what you might want to get out of that.
MG, Partnership Fund for NYC: Anything else you want to add on that?
KA, Scotiabank: Well, included in the scope of the pilot. So, the literal answer to the question, how you make sure it’s there, include the definition of the next phase and the scope of whatever pilot proof of concept that you’re doing, and make that one of the deliverables. It makes you really good with checklists. So, if the checklist says there has to be one of these, then there will be one of those.
LV, Citi Ventures: And clear timing, right, as well.
MG, Partnership Fund for NYC: Clear timing, okay. So, we’ve moved a little bit into our question/answer period, but I want to shift just one question before we go to the audience questions. So what are you guys looking for? Let’s shift over to the investor side. Luis and Jaidev are actively looking to make investments. They’re coming out of the venture groups. Karl is more on the… sort of as a user technology. So let’s just go down one after the other and talk about what you’re looking for, either that the bank is looking for that you’re looking to invest in. So let’s start with you.
LV, Citi Ventures: In our case, it’s pretty broad. It’s frankly anything that the bank would be a potential user or partner of. So it’s FinTech, commerce payments, security, big data analytics, marketing and technology, consumer experience. In my case in particular, I’m looking into what I call the wholesale FinTech space which includes in particular business to business payments but also market security services. Many of the institutional business activity, as well as the regulatory and compliance technology space.
KA, Scotiabank: All right, I’ll cover off a few different axes. I personally run the wholesale business, so I’m also interested in wholesale and where we can make differentiation in those. As a bank, we’re focused on cost reduction, like all the good banks are these days, and regulatory response. Regulation continues to be something that’s really hurting us. In the consumer space, we have a huge Latin American franchise… we have a funny definition of Latin America. Apologies to any in the room. But we have a huge Latin American presence, and I’m very interested in Latin American FinTechs.
JS, Capital One Ventures: So, I’ll just pick on one kind of specific area, and the pieces around that is, I think financial institutions, and frankly, most companies, large corporates, are going through this massive fundamental paradigm shift on infrastructure. So, if you think about all the infrastructure that corporates more than 15 years old have been built on, that’s changing. And a massive change on that is going from on prem to cloud. And because of that change, there’s a whole host of new applications and business propositions that are popping up on that front. And if you think about this change, it also necessitates the move from relational database, to distributed, to Hadoop.
And this is gonna continue to evolve over the next few years as well. That change of this infrastructure is probably gonna take another five to ten years to ripple through large companies. And the ones that can’t make those changes are the ones that are probably gonna be out of business in the next 10 to 15 years. And so the opportunity that’s created is to create interesting applications that would make that shift easier to happen, and potentially the ability to actually move companies from this RDBMS framework to a new world of data technology.
Most of the companies have focused on applications when you’ve already reached that state of complete cloudification. But a lot of companies are actually forgetting to think about how companies, how large corporates can actually move from their existing state to this new state. So I think that’s a slice of massive opportunity.
MG, Partnership Fund for NYC: Okay. So I think we’re gonna switch to questions, and I think there’s gonna be a voice of God that’s gonna ask the questions from the audience. So, I don’t know. There we go, voice of God.
Nikhil Krishnan, Tech Industry Analyst, CB Insights: We have time for two quick questions. The first is, what is an area of FinTech where the hype exceeds the reality from where you sit?
MG, Partnership Fund for NYC: Karl, why don’t you take that?
KA, Scotiabank: Where does the hype exceed the reality? I don’t think there’s anything that I’m prepared to bet against just yet. I think history is littered with people who have said, “No, it’s not gonna happen to us, and it’s not gonna be that bad.” Personally, my expectation is that the financial services industry, banks and everybody else is going to be profoundly impacted over the next 10 years. And actually, I’m not sure that the hype is strong enough yet.
MG, Partnership Fund for NYC: Okay. Jaidev?
JS, Capital One Ventures: I’ll answer this in a slightly different way, which is that the hype exceeding the reality, for me, happens a little bit in the lending space, not in terms of market opportunity but rather in terms of what’s actually needed to run a scaled lending company. So when you actually grow up from originating $10 million, $20 million, $30 million a month to actually originating $1 billion a month, what do you actually need to do that? What do you actually need to have in place to go through a credit downturn? What do you actually need to have in place to have a robust funding source? I think that’s an area where we’re all seeing this. It’s a pretty complicated end task business to run.
And so I think there’s a lot of excitement in this space. But I ask of everyone who’s thinking about or is currently building a lending company to think about that end state and what you need to start doing even now, slowly, so that when you get to that end state, you aren’t gonna fall down and actually have to spend a few months trying to gather up the broken pieces. I think, as you start thinking about what you’re building towards, whether it’s data infrastructure, whether small things that will start managing the compliance areas, whether it’s capital markets and how you’re gonna continue to get access to that as you scale, is going to be extremely important.
MG, Partnership Fund for NYC: Luis, anything to add?
LV, Citi Ventures: I would only say that, to me, an area which has been having a lot of hype and a lot of investing activity has been blockchain, and my sense is that it’s going to take a very long time. I am a believer that, longer term, there will be very significant changes in fundamental processes in the fabric, the financial infrastructure that will be brought about by those types of technologies. But I think that it’s gonna take a very, very long time. But not that I’m against it, I just think people should take a long view there.
MG, Partnership Fund for NYC: Okay. All right, next question.
NK, CB Insights: The last question is, outside the respective organizations that you sit, what is a compelling FinTech and financial institution partnership that you’ve seen?
LV, Citi Ventures: I would say that the JPMorgan Chase / OnDeck relationship appears very promising from the standpoint of the fact that big banks have completely not the ability to make small loans, given the nature of the processes to small businesses. And that by leveraging this technology, it’s unlocking possibilities that are win-wins for SMEs, for the bank and for the technology company providing that capability.
JS, Capital One Ventures: I’d add to that. Does anyone know Credit Karma? I think Credit Karma is an example where they found a very specific need for a bank, that actually needed to be solved, and then went and partnered with several banks to actually help them in the origination process. So I think the general theme over there is, think about that win-win, and I think that’s definitely one where Credit Karma has done quite well and the banks have actually benefited quite a bit.
KA, Scotiabank: I don’t think there’s a proven model yet for FinTech bank relationships and partnerships and what works well. What I watch and what I think is super impressive is some of my peer competitors, BBVA represented earlier, my partners here. I think watching banks that are active in participating in this marketplace is the most educational. And I think there’s some terrific partnerships in each of those. I think there’s been some mistakes and I think there’s been some bad things happen, but I think that’s how we all learn. I think you’re all here to learn, I think we’re all here to learn. I think that’s what we have to do.
MG, Partnership Fund for NYC: So, as a moderator, I’m gonna take the last word and answer that question, which is take a broader definition of FinTech and remember that banks are basically technology companies that move money. They have an insatiable demand for technology. Some of it is built in-house, but a lot of it is not. And the trick is finding the fit between what you have and what they need, and making sure that you fit within the regulatory and you understand the regulatory scheme in which they have to operate.
So, there’s been a lot of focus on consumer-facing companies partnering with big banks, but just remember there’s another class of companies out there who’ve made a lot of money selling technology to banks. So, it is possible. And I think we are out of time, so we’ll leave you on that optimistic note. We had a great panel. Thank you very much. Please join me in thanking them.
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