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How To Work With Fintech Startups

by Oliwia Berdak Why Read This Report These days, every man and his dog seem to have an incubator, a lab, or a venture fund in pursuit of startups. Many of these initiatives will disappear quietly in a
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by Oliwia Berdak Why Read This Report These days, every man and his dog seem to have an incubator, a lab, or a venture fund in pursuit of startups. Many of these initiatives will disappear quietly in a few years, unable to prove their value. It s time to move beyond startup engagements that deliver only marketing hot air. There are potential cultural, commercial, and financial benefits to working with startups, but also plenty of risks. This report helps ebusiness executives at financial services firms navigate these risks and make the most of these budding relationships with startups. Key Takeaways Financial Technology Startups And Incumbents Are Getting Closer Accelerators, labs, and venture funds are mushrooming as incumbents look for cuttingedge technology and speed, startups crave scale, and regulators give their blessing to the union. Startup Engagements Often Deliver Just PR Initial enthusiasm can wane quickly as digital teams hit the usual innovation roadblocks -- legacy technology, resistance, and competing priorities -- in addition to a host of startupspecific problems. Adopt A More Rigorous Innovation Approach Working with startups requires a tested innovation process, tailored to startups specific needs. Digital teams will need to understand these and adopt dedicated procedures, commit resources, and appoint champions. For ebusiness & Channel Strategy Professionals by Oliwia Berdak with Benjamin Ensor, Zhi Ying Ng, Diego Lo Giudice, and Alexander Causey Table Of Contents Notes & Resources Financial Services Firms Pursue Startups Digital Business Strategy Executives Engage Startups With Five Objectives In Mind But Startups Engagements Often End Up As No More Than Marketing Hot Air Move Beyond The Fintech Hype To Benefit From Engaging Startups Know Who You re Working With Choose A Structure That Matches Your Goals And Resources Build Your Startup Engagements In 10 Steps Forrester interviewed AIA, Axa, Axa Strategic Ventures, Banco Sabadell, BBVA, Betterment, Commerzbank Main Incubator, CommerzVentures, Dwolla, FutureAdvisor, Liverpool Victoria, MasterCard, MaxMyInterest, MX Technologies, Northwestern Mutual, The Pacemakers, Rebalance IRA, Startupbootcamp, Techstars, Visa Europe, and Wealth Wizards. Related Research Documents Digital Disruption Hits Retail Financial Services Digital Financial Innovation Requires Matchmaking What It Means 15 Courting Startups Is More Difficult Than It Seems Financial Services Firms Flirt With Startups 16 Supplemental Material Forrester Research, Inc., 60 Acorn Park Drive, Cambridge, MA USA Fax: 2016 Forrester Research, Inc. Opinions reflect judgment at the time and are subject to change. Forrester, Technographics, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Unauthorized copying or distributing is a violation of copyright law. Financial Services Firms Pursue Startups An amorous mood has gripped financial services. In their desire to develop better or entirely new ways to serve empowered customers, digital business strategy executives at financial services firms are scouring the earth to find promising partners. 1 Many are turning to startups. Executives who in the past might have felt at best dismissive and at worst threatened by financial technology startups are now eager to engage them through hackathons and accelerators or to invest in them (see Figure 1). Three developments are driving this change of heart and pushing incumbent firms and startups together: Many incumbents have come to terms with digital disruption. The CEOs of firms like Axa, BBVA, and JPMorgan Chase have recognized the threat and opportunity that digital technology and empowered customers present to their businesses. 2 They are granting digital business strategy executives more funding and more flexibility to work with startups to speed up digital innovation. One startup executive we spoke to summarized this change of tune: Two and a half years ago we were covered in skepticism and seen more as a novelty. We only spoke to junior employees. Now we re getting senior people who are genuinely interested, and some firms are seeing us as complementary and not just competition. Many financial technology startups have hit their limits. While emerging financial technology vendors have always been keen to work with incumbents, digital disruptors have been less so. Many were initially contemptuous of incumbents perceived inertia and poor customer service and saw themselves as alternatives. 3 But complex regulatory environments, prohibitive customer acquisition costs, and difficulties monetizing freemium models have opened their eyes to the capital, mentorship, and scale that incumbent firms can offer. Some disruptors like Fidor Bank or Kabbage have shifted their business model away from just direct-to-consumer offerings, whitelabelling their technologies to financial services firms or co-branding new products and services with them (see Figure 2). Regulators have blessed the union. Some governments and regulators are backing disruptors as a way of introducing more competition and transparency and preserving competitiveness of their financial services industry. 4 The Financial Conduct Authority in the UK and the Monetary Authority of Singapore are reducing the uncertainty surrounding collaboration between incumbents and startups by providing regulatory clarity and common infrastructure to test new ideas. 5 2 FIGURE 1 Financial Firms Are Engaging Startups Through Hackathons, Accelerators, And Venture Funds Incubator/accelerator Hackathon Venture fund Selected firms only. 3 FIGURE 2 Some Digital Disruptors In Financial Services Are Becoming Emerging Vendors Lending Club MX Technologies GoLend Dwolla Funding Circle Social Money MatchMove Number26 Fidor Bank Snapsheet Aire Wealthfront Kabbage Knip Betterment Playbasis Namu Friendsurance MaxMyInterest Acorns OnDeck Moven Mambu Moneythor Digit etoro Wealth Wizards Insly Crowdcube Mint Cardlytics Digital disruptors Emerging vendors Financial technology startups Digital Business Strategy Executives Engage Startups With Five Objectives In Mind Digital teams at banks, wealth management, and insurance firms are turning to startups, hoping to: Innovate at speed. Many digital business strategy executives turn to startups for cuttingedge solutions and speed. According to executives at Banco Sabadell in Spain: Startups are more advanced than traditional providers in areas like biometrics or digital signatures. And when you work with startups, it s fast. 6 Similarly, Christian Hoppe, the founder and director of Commerzbank s Main Incubator, says, We re investing in fintech to implement their solutions in the digital strategy and as a result we are faster. 7 Aid cultural transformation. Digital business professionals hope that working with startups will inject new energy into their teams and companies. Insurance company AIA s accelerator is supported by 40 mentors from across the firm. Steve Monaghan, head of group innovation at AIA, hopes this interaction will open executives eyes. Startups don t have constraints, they re agile from the core, they ve embraced zero-cost experimentation. This level of agility is new to most organizations, he said. 8 Firms sometimes speed up this transformation by hiring developers from startups, as BBVA did after its first data hackathon. 9 4 Make profits. Plenty of financial services firms have launched venture capital funds or are investing in startups through accelerators. For example, in two years, since its launch in November 2013, Banco Sabadell s BStartup incubator evaluated 1,489 startup applications, investing 1.9 million in 19 of them. 10 Banco Sabadell retains between 5% and 15% equity share in each of these startups, hoping to benefit when they grow. 11 The bank is also developing expertise in working with startups as clients. It has 89 branches in Spain that specialize in services for startups. Using its dedicated risk analysis, Banco Sabadell approved loans worth 36.8 million to startups in Support their ecosystem. Some incumbents defending market share have encouraged the development of a whole ecosystem of digital products and services built on their infrastructure. This is the motivation behind Visa Europe s Collab innovation hub for startups. As explained by its founder and co-creator, Steve Perry: We created the Innovation Centre to find, uncover, and nurture startups. We re not an incubator or an accelerator; we re not looking to buy their ideas, or their IP. We re growing the ecosystem. 13 Develop a reputation as an innovator. Banks like CaixaBank in Spain believe that being seen as an innovator is important for acquiring and retaining customers as well as for attracting new talent and more collaborators. 14 Working with startups can enhance that reputation. Since its launch, Commerzbank s Main Incubator was mentioned in more than 280 articles and press releases, translating into a marketing effect of a couple of million euros. 15 But Startups Engagements Often End Up As No More Than Marketing Hot Air Engaging startups can easily become just hanging out with the cool kids or searching for mythical unicorns. Any potential benefits can fail to materialize owing to: Lack of clear aims. Corporate programs aimed at startups have mushroomed recently, but many are driven by fear, herd effect, vanity, or just hope, rather than specific customer problems or business objectives. Corporate programs aimed at startups have mushroomed recently, but many are driven by fear, herd effect, vanity, or just hope. What we want is to create options. We will do as many things as we can. We don t know what will come out of this [incubator] initiative. Maybe clients? Maybe we will just learn? Maybe we will be exposed to a talented team? If we do nothing, nothing will happen. We are convinced something good will happen. We don t know yet the recipe but we are launching initiatives. In many industries, companies have not caught the disruption wave at the right time. We are trying to catch the wave before another unicorn comes along. (Head of a corporate incubator in financial services) 5 Unsuitable processes. Many financial services firms don t have an innovation process in place to turn ideas into propositions. 16 And working with startups is a whole new ball game, as you ll have to evaluate their technology, business model, and credibility. Rigid procurement processes often automatically disqualify or strangle startups with limited track records and resources. 17 As one head of a corporate accelerator told us, whether any digital innovation comes out of this initiative is a function of how ready the corporation is to take it on. Executives used to working with large vendors expect that partners will manage the project from start to finish. Startups don t know how to or have resources to do this. Typically a startup doesn t have the insurance requirements, sales organization, or capacity to service large institutions like ours. The difficulty is also scale and sometimes quality or contracting issues. (CTO of a large insurer) Technology challenges. To bypass the constraints of legacy systems, digital teams often use incubators as an alternative delivery environment where they build and test prototypes. 18 But separating testers, developers, and operations can result in wasteful handovers, or worse. 19 Working with startups often stops at the front end or doesn t progress beyond a proof of concept (POC) because of subsequent integration challenges. The biggest issue is integrating [the solution] into the core systems. Bigger projects could take a year or two, during which startups would exhaust their funds. (Head of a startup incubator at a bank) High rate of failure. Startups technology and business models are often immature. Around half of all new businesses fail. 20 Even if they don t fail, your competitor or a large vendor may acquire the startup and you ll end up working with them. Move Beyond The Fintech Hype To Benefit From Engaging Startups Working with startups should be a cherry on top of your innovation cake. Axa, for example, runs its startup incubator along other initiatives aimed at spurring innovation, including an internal employee incubator. 21 While there are some specific considerations when working with startups, a process through which you can select, prioritize, test, and implement solutions is paramount. 22 Startups have limited resources, so any lack of focus or discipline will see the more experienced startups spurn your affections and the more naïve ones fly like moths into your flame. [Incumbents] have a legal team, knowledge and expertise; they have an infinite team they can throw at you. (Director of a financial technology startup) 6 As a startup, we want to focus and do something very well. We re 75 people. Any partnership means allocating resources that otherwise could go elsewhere. [There s] opportunity cost. (Director of a financial technology startup) [Incumbents] have a legal team, knowledge and expertise; they have an infinite team they can throw at you. They will negotiate better than you will. It s like David and Goliath. (Director of a financial technology startup about working with incumbents) Know Who You re Working With Fintech, or financial technology, has become a popular catchall phrase for any startups vaguely associated with financial services. But, like many buzzwords, the term obfuscates the origins and maturity of the firms in question, which can affect how you can work with them. Financial technology startups can be: Digital disruptors or emerging financial technology vendors. Digital disruptors mostly directto-consumer products either compete with or are adjacent to what incumbents offer. Emerging vendors attack inefficiencies, providing the technology that could improve your digital customer experience or operational excellence. 23 While some startups are blurring these distinctions, it s most likely the emerging vendors that are seeking to work with you. Partnering with disruptors is a more strategic decision about the future of your company and its role in the emerging digital ecosystem of finance. 24 Early-stage or more mature startups. New ventures go through a series of stages (see Figure 3). 25 Working with startups pre-seed-funding can be rewarding but is risky and resource-intensive. 26 That s why many digital teams focus on companies with at least a working prototype. MasterCard s Start Path effort focuses mostly on global companies of between five and 25 employees that have attracted seed or series A funding, are beta-testing already, and are even generating revenue. 27 Novices or experienced entrepreneurs. The quality of the core team matters more than the product idea. 28 Experienced entrepreneurs with industry backgrounds are more likely to succeed and there are many of them. 29 Some novices benefit from a strong advisory board that may include regulators, academics, and practitioners. Beware that involvement of these partners and other funders can steer the startup in a direction you re not happy with. 7 FIGURE 3 Startups Go Through A Series Of Development Stages Pre-seed Seed Early stage Series A Late stages Activities Customers Product Team Founders Just an idea or concept None Assess the business opportunity Founders and 1-2 engineers Prototype Limited Develop the product and goto-market strategy Core team Growing team Team of over 20 Beta version Some customer interest Launch and refine product Developing product Gaining traction Grow customer and employee base Proven product Paying customers Gain scale and reach profitability Choose A Structure That Matches Your Goals And Resources You could be dipping your toes, testing how developing an idea with a startup could work, or committing serious money to an ongoing incubation program (see Figure 4). Depending on your goals or resources, your options are: Ad-hoc engagements. If you lack significant resources and want startups to simply inspire your colleagues and help you make the culture more innovative, then organize startup presentations and networking like Aviva s InsuranceTech Meetups. 30 For more tangible results, consider a hackathon. 31 In Spain, Banco Sabadell has run two hackathons since Some 10 years ago, building a prototype would have cost $100K. Now you can do it for $2K-$5K with cloud and Amazon Web Services. (Head of a corporate incubator) 8 2014 with 187 attendees, and CaixaBank s annual FinApps Party regularly attracts over 150 international designers, developers, and creators. 32 If you re looking to solve a specific problem, you could work together on a proof of concept or prototype, which has become cheaper. Some 10 years ago, building a prototype would have cost $100K. Now you can do it for $2K-$5K with cloud and Amazon Web Services. (Head of a corporate incubator) An ongoing, structured program. From three months acceleration to longer incubation programs, financial services firms are promising to help startups hone their business models and skills often taking equity in return. Running an incubator is expensive, so companies often team up. 33 Some 16 financial services firms sponsor the Accenture-run Fintech Innovation Lab in New York, which hosts six startups for a 12-week program. 34 Co-branding or licensing. More mature startups with an existing customer base might whitelabel their solution or enrich your digital customer experience. For example, Visa chose MX Technologies founded in 2010 as its prepaid card digital money management partner. 35 9 FIGURE 4 Digital Teams Can Engage Startups In An Ad Hoc Or Structured Way Ad hoc engagement Structured incubation programs Format What is it Resources needed Aim Examples Meetup Event during which startups present their work and network with company representatives. Could include speed-dating. Hackathon Single event, typically up to 48 hours, during which startups and developers code together Proof of concept or prototype 2- to 12-week collaboration to build and test a solution with a startup Accelerator Ongoing program of typically three months, often run 2-4 times a year. Can include a competition element to select finalists and a winner. Minimal if you re not renting the space: Organizer Marketing funds From $10,000 upward: Organizer Event space Judges Prize money Marketing funds Ability to expose data via APIs POC could be as little as $2,500 and prototypes under $200,000: Program team (product owner, developer, business analyst) POC funding Testing environment, virtual infrastructure Build an innovation ecosystem and reputation as an innovator; identify ideas Identify and test ideas; test APIs; build an innovation ecosystem and reputation as an innovator Build and test a proof of concept Around $1 million a year Accelerate the for two cohorts (depends development of on the number of an existing startups, the level of solution investment or prizes, space requirements): Scanning and selecting team of approximately 5 Funding Mentors Space Judges Prize money Marketing funds Testing environment, virtual infrastructure Aviva Insurance Tech Meetups Lloyds Banking Group Digital Espressos Next Bank Meetups Bank Leumi s 36-hour hackathon DBS Megahackathon RBS s proof of concept with Ripple technology Corporate accelerators: Citi Mobile Challenge UBS Future of Finance Challenge MasterCard s Start Path Professional accelerators: Level39 Startupbootcamp Techstars Y Combinator 10 FIGURE 4 Digital Teams Can Engage Startups In An Ad Hoc Or Structured Way (Cont.) Structured incubation programs Ongoing partnership Format What is it Resources needed Aim Incubator Ongoing program of six months and longer Referral Vendor contract Joint solution (often cobranded and with shared customers) Suggestion or link to each other s produc
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