Innovation Units at Four Banks Gear Up for Investment, Acquisition

To build innovative products and meet — or even exceed — customer expectations, banks are employing a mix of internal and external investment. Four bankers took to the stage last week at PayVest to discuss the innovation units at their institutions and how they are cultivating innovation both inside and outside the banks’ walls.

Thomas Whiteaker, executive director, BBVA Ventures, said that his unit was focused primarily on external partnerships, but devoted resources to cultivating innovation within the bank as well. BBVA Ventures set aside an impressive $100 million for strategic investment in startups. One startup that the group funded is Berlin-based Square rival SumUp, according to Whiteaker.

The primary obstacle to innovation for bankers? “Bureaucracy — layers of management make it hard, so we partner,” Whiteaker said. BBVA, as a consumer bank, is looking primarily at consumer-facing technologies in the startup world, but backend applications focused on big data and cybersecurity are also of interest.

Whiteaker also addressed the place of the large tech vendors in the conversations between banks and startups, saying, “If we’re bringing vendors to the table, we’re failing to do our job.” The field is wide-open, and banks need to be surveying it for startups that fit their goals. After all, Whiteaker said, “There’s no shortage of startup activity in payments.”

Chitra Narashiman, managing director, Citi Ventures, said that Citigroup’s innovation arm has three divisions: an investment group, an incubation venture not related to investments, and an internal innovation group. The investment arm is looking for “strategic equity investments” in a variety of areas: big data and analytics, mobile payments, commerce, security and authorization. The bank is interested in startups in the later rounds and is not looking to do any seed funding.

The standout items Citi looks for in startups are disruptive technologies, a good management team and a strong business plan. It has invested in Square and Pindrop Security, among others.

Narashiman pointed out a challenge to banks in the active startup scene and the rise of large nonbank players such as Amazon, Apple, Google, and Intuit. Following these large companies is an army of financial startups, especially in payments. “Which will be the scaled player? They’re raising the bar. The landscape is ever harder to monitor and track,” she said.

Citi Ventures met with 800 startups (that’s more three per weekeday) in the past year, Narashiman said. That’s a broad net to cast, but as she said, “There’s more art than science to finding suitable partners.” She compared banks’ relationships with startups to dating. A lot of intangibles can determine success or failure.

Part of what guides Citi Venture’s incubation efforts with younger startups is seeking out technologies that may be used “against us in the future. We incubate because we need to look at disruptive business models.”

Miranda Hill, VP and manager for digital innovation capabilities, digital channels group, Wells Fargo Labs, described Wells’s slightly different focus. Wells Fargo Labs does not look to outside startups for ideas, though other areas of the bank do. Instead , the lab serves as an internal sandbox to test out technologies and see what works and what doesn’t.

One item that didn’t work out was a social payments or crowdfunding solution called Settle Up. While popular among beta testers, it did not make the cut as a standalone product. Some of its capabilities were folded into Wells Fargo’s existing P2P solution, ClearXchange. Another initiative from the sandbox, Cash Flow Monitor, has rolled out to some ATM machines and has online banking applications as well. “You need to experiment; test and learn,” Hill said.

Though the labs has an inward focus, Hill said, “We’re monitoring the [startup] space, and looking at the core elements of interesting startups.”

Jaidev Shergill, head of digital venture investing, Capital One, offered insight into Capital One’s  digital venture investing unit, which just begin this spring. The unit studies “how to connect with the fintech ecosystem,” Shergill said, and works closely with Capital One Labs. The Labs have an inward focus, while the ventures face outward.

“Capital One is full of entrepreneurs. Our founder is an entrepreneur,” Shergill said. Consequently the bank maintains an open mind with regard to startups and prides itself on being a technology company as much as a bank.

Shergill pointed out that while a startup may offer very interesting technology the relationship still may not work. The venture “must be guided by customer needs. The business unit that looks at digital strategy” must see the strategic value in the partnership.

Startups are key partners for banks, Shergill said, because “Startups go after nascent markets, they go on journeys.” A startup may not fill a product gap in six months, he said, but the journey banks take with them may fill a bigger product need two to three years down the line.

Shergill offered succinct advice for startups looking to partner with banks; “Understand bank venture units.”

Given the variety of units fielded by the banks, that may be easier said than done.