Bank­ing on the fu­ture

Big in­sti­tu­tions are back­ing start-ups in a bid to ride the fin­tech wave, writes Deirdre Macken

The Australian - The Deal - - Contents -

Deirdre Macken looks at the big busi­ness bid to catch the start-up wave

‘A start-up may com­pete with you, it might re­duce your mar­gins or can­ni­balise your or­gan­i­sa­tion but in many cases it will work with you’


THE launch for fin­tech hub Stone & Chalk was over-sub­scribed. By 7pm, 500 peo­ple had de­scended on the party, don­ning coloured t-shirts to sig­nal where they be­longed. Red t-shirts des­ig­nated in­sti­tu­tional spon­sors, green was for res­i­dent start-ups, char­coal for friends, blue for gov­ern­ment and pink for media (funny). The hap­pi­est peo­ple wore green.

The 120 res­i­dents from 41 start-ups who had won the chance to work on a floor of the AMP Cen­tre, found them­selves re­galed by bank chiefs, politi­cians, ven­ture cap­i­tal­ists, ac­coun­tancy heads, lob­by­ists and each other.

The big­gest boast was: “I used to be a banker.” And it was said by those in green, who hoped to dis­rupt the bil­lion dol­lar rev­enue streams wrapped up in the 21 spon­sor­ing in­sti­tu­tions. This was a cu­ri­ous cel­e­bra­tion.

The pair­ing of legacy in­sti­tu­tions with in­fant tech­nol­ogy com­pa­nies within the space of a hub is meant to re­sult in col­lab­o­ra­tion. It’s where big, es­tab­lished money meets nim­ble, dig­i­tal up­starts – and tries to do busi­ness. But how do you col­lab­o­rate with forces that are most suc­cess­ful when they de­stroy you?

Ever since Clay­ton Christensen wrote The In­no­va­tor’s Dilemma al­most 20 years ago, in­sti­tu­tions have been wrestling with the con­cept of sus­tain­ing tech­nolo­gies and dis­rup­tive tech­nolo­gies. Sus­tain­ing tech­nolo­gies en­able ex­ist­ing com­pa­nies to im­prove ex­ist­ing busi­nesses. Dis­rup­tive tech­nolo­gies usu­ally de­stroy ex­ist­ing busi­nesses. For taxis, GPS was a sus­tain­ing tech­nol­ogy and Uber is a dis­rup­tive tech­nol­ogy.

All those who wore red t-shirts to the party are tar­gets for dis­rup­tion. A KPMG re­port on the Aus­tralian fi­nan­cial ser­vices in­dus­try re­leased last year said that dis­rup­tion threat­ens 25 to 30 per cent of ex­ist­ing bank­ing rev­enue and, fur­ther ahead, it will en­dan­ger 50 per cent of bank rev­enue.

Rachel Bots­man, who iden­ti­fied the new econ­omy ear­lier than most, says fi­nance is the sec­tor that has the high­est risk of dis­rup­tion be­cause it has so many re­tail out­lets and mid­dle­men, trust in the sys­tem is low, there are many re­stric­tions on ac­cess to money and there are com­plex fees and pro­cesses around it.

Yet, she says, “banks still see this as fringe and they think many of their core busi­nesses will re­main in­tact. They’re not ask­ing, what is go­ing to be the role of the bank in five years time? They don’t see that they’re los­ing con­trol of the dis­tri­bu­tion of value. They see it as dig­i­tal or techie but not as a sys­tem change.”

Many bank ex­ec­u­tives are get­ting it – even if they’re not too en­thu­si­as­tic about talk­ing about it. And they’re scram­bling to ad­dress it. West­pac calls it­self a 200-year-old start-up, AMP has de­scribed it­self as a border­less or­gan­i­sa­tion and other fi­nance houses have set up their own hubs, ven­ture funds and in­ter­nal swot groups. They’re all hop­ing for a chance to get in first or, at least, see the tsunami com­ing so they can start sand­bag­ging.

Dis­rup­tion might come from any­where and it prob­a­bly will come from ev­ery­where. It could be from a tech gi­ant such as Ap­ple or Face­book; it could come from a break-out space in Lon­don’s Ca­nary Wharf or it might even be in­cu­bat­ing in another hub, just up the road from Stone & Chalk, where some in­no­va­tors have just taken off the suit coat they wore into a bank and are work­ing on some­thing that could make life hell for that bank.

An­drew Cor­bett-Jones, chief of the Tyro hub, is diplo­matic about the launch of another fin­tech hub: “We think it’s great there are two hubs in Syd­ney be­cause one plus one should al­ways equal three.” But then he de­scribes how his techie ten­ants are dif­fer­ent from those at the launch party down­town.

“The only name on our wall is Tyro and be­cause we have a sin­gle spon­sor I be­lieve it gives us great in­de­pen­dence. We have some (ten­ants) who want noth­ing to do with the banks be­cause they want to eat the banks’ lunch. They don’t want banks com­ing in here look­ing over their shoul­der. We let en­trepreneurs know when a bank is com­ing in and some might say they’d like to talk to them. But oth­ers won’t. Some peo­ple in here are still work­ing in banks and come in here af­ter hours and one day they’ll say, ‘Ta, da! Here we are’ but they want to keep it un­der wraps un­til then.”

Tyro is so pro­tec­tive of its techie ten­ants’ work that it doesn’t usu­ally re­veal who is work­ing in the hub or even how many peo­ple are oc­cu­py­ing the 125 seats and what hours they usu­ally work (it was about 80 per cent full on the day Stone & Chalk was launched).

Cor­bett-Jones will say that “most have come out of the bank­ing and fi­nance in­dus­try so they have real in­sights and of­ten they no­ticed some­thing that doesn’t work in­side their in­sti­tu­tions and have an idea how to fix it”.

The idea that their own em­ploy­ees are se­cretly work­ing nights to come up with some­thing that could en­dan­ger bil­lions of dol­lars of bank rev­enue must make bank chiefs quake. And it’s a good ex­pla­na­tion for why so many big in­sti­tu­tions – 21 of them – have put their names on the wall at Stone & Chalk.

Stone & Chalk chair Craig Dunn re­mains op­ti­mistic that hubs will prove a place where Aus­tralia’s big­gest in­sti­tu­tions will learn to work with the small­est and cheeki­est of start-ups to the ben­e­fit of both.

“One of the chal­lenges of run­ning an ex­ist­ing busi­ness is that a start-up might com­pete with you; it might re­duce mar­gins or can­ni­balise your or­gan­i­sa­tion but in many cases they will work with you. I spoke to a col­league in Bri­tain re­cently and he said 70 per cent of fin­techs there have part­nered with ex­ist­ing in­sti­tu­tions.”

He doesn’t be­lieve in­sti­tu­tions have given up on in­no­va­tion. Many, in­clud­ing West­pac where he is a di­rec­tor, have set up in­ter­nal in­no­va­tion units, ven­ture funds, ex­ter­nal bank hubs and spon­sored arms-length hubs such as Stone & Chalk. But he does con­cede legacy banks are not good at dis­rup­tive change. “Large in­sti­tu­tions have had to be bu­reau­cratic. In a reg­u­la­tory en­vi­ron­ment, it’s al­most a re­quire­ment and it’s very dif­fer­ent to how a two-per­son start-up works. That’s the big cul­tural chal­lenge for part­ner­ing. Large in­sti­tu­tions will have to un­learn some of their ways of work­ing and learn ways of be­ing open, in­no­va­tive, to process ideas at speed and recog­nise road blocks.” That’s putting it po­litely. Oth­ers are more blunt. Cor­bett-Jones says: “They sim­ply can’t do it. The more suc­cess­ful they [in­sti­tu­tions] are, the larger they are, the less able they are to en­gage in dis­rup­tive tech­nol­ogy. No one wants to de­cide to re­duce prof­its, re­duce div­i­dends and then front up to share­hold­ers and ex­plain why. No one wants to be in charge when the or­gan­i­sa­tion is re­duced to rub­ble.” Bots­man, a con­sul­tant in the field and au­thor of What’s Mine

Is Yours: The rise of col­lab­o­ra­tive con­sump­tion, HarperCollins (2010), says: “It’s al­most im­pos­si­ble for them to move around these su­per tankers that have ruled the fi­nan­cial sys­tem for decades.”

Or as Clay­ton Christensen said, in­sti­tu­tions face the in­no­va­tor’s dilemma that “do­ing the right thing will kill you”.

Lit­tle won­der that at the launch party, where the cock­tails were lu­bri­cat­ing part­ner­ships, there was a strange mood – ebul­lience (mostly on the part of green t-shirts) and quiet panic (among the red t-shirts).

“Quiet panic is prob­a­bly a fair de­scrip­tion of the mood,” says Steve Maar­bani, part­ner at PwC for ven­ture cap­i­tal and pri­vate eq­uity. “On the pos­i­tive side, panic is mov­ing to ac­tion and it’s be­ing driven from the high­est level, in­clud­ing boards.”

Maar­bani, who con­nects in­no­va­tors with early stage cap­i­tal, says: “It’s not enough to have your name on the board of a cowork­ing space. In ad­di­tion to places such as Stone & Chalk, there should be a re-emer­gence of in­ter­nal cor­po­rate ven­tur­ing. And we think that’s hap­pen­ing, more in­no­va­tion strat­egy is sit­ting in­side the or­gan­i­sa­tion.”

But he says there are ben­e­fits to both up­starts and legacy busi­nesses in a fin­tech hub. “Most of the in­no­va­tors are not kids out of univer­sity, they are ex­pe­ri­enced fi­nan­cial ser­vices ex­ec­u­tives who are look­ing at dis­rupt­ing ar­eas where they once worked. So, they are older, more ex­pe­ri­enced and have deep sec­tor ex­pe­ri­ence.”

Legacy busi­nesses, he adds, might not have the agility or temer­ity of the start-ups but “they can of­fer their strengths, which are reg­u­la­tory com­pli­ance, in­ter­nal eval­u­a­tion, in­fra­struc­ture, mar­ket­ing and in­ter­nal dis­tri­bu­tion. It’s not just cap­i­tal they of­fer”.

If there are dis­putes over the na­ture of fin­tech hubs, it’s partly be­cause they are a new en­tity in the cor­po­rate land­scape. Most are only a year or two old and they take dif­fer­ent forms. Some are in­vite-only fin­tech spa­ces; some are co-work­ing spa­ces where most in­no­va­tors hap­pen to work in fin­tech; some are re­branded spa­ces around univer­si­ties and some are cor­po­rate spon­sored units.

But it’s the way they work that is most chal­leng­ing to ex­ist­ing busi­ness cul­ture. Start-ups are mostly pop­u­lated by Mil­len­ni­als, who are com­fort­able with col­lab­o­ra­tion and they are work­ing with tech­nol­ogy, which also has a col­lab­o­ra­tive tra­di­tion. The workspaces re­flect this.

Most en­trepreneurs are ef­fec­tively board­ers – pay­ing by the week or month. While some keep their ideas to them­selves, most ex­change ideas or so­lu­tions with other start-ups that might be fur­ther ahead or be­hind in de­vel­op­ment. They also share men­tor­ing, ed­u­ca­tion ses­sions and con­tacts. And, be­cause they are lo­cated in the one space they at­tract lots of out­side in­ter­est.

Says Craig Dunn: “It makes it eas­ier for wider col­lab­o­ra­tion. For ex­am­ple, in­ter­na­tional ven­ture cap­i­tal­ists know that deal flow (hav­ing in­vest­ments ripen­ing in a steady fash­ion) is es­sen­tial so they are con­stantly look­ing around the world for start-ups. If they can come into one space and meet 50 or 60 start-ups in an af­ter­noon, then some­thing like Stone & Chalk makes a lot of sense.”

Steve Maar­bani ex­pe­ri­enced this on his first visit to the hub. “I went there for a meet­ing and by the time I left I had met three or four oth­ers who needed to con­nect with me. You can lit­er­ally walk down the hall and say, ‘What do you think of this?’ ”

Get­ting to know the t-shirt econ­omy will test many in­sti­tu­tions. Rachel Bots­man says: “Some get it but what I hear from banks is mostly ex­pres­sions like – reg­u­la­tion will save us; too big to fail; not on my watch. I was at an event where a guy from Visa stood up and out­lined the five things start-ups should know about work­ing with Visa. And he was so pa­tro­n­is­ing about it. What he should have been say­ing was the five things Visa should learn about work­ing with start-ups.”

The scale of cul­tural change doesn’t just af­fect in­sti­tu­tions. In­creas­ingly, it af­fects the cities that have been made rich by fi­nance. If fi­nance houses are at risk from dis­rup­tion, then so too are fi­nan­cial cen­tres. Al­ready Lon­don and Sin­ga­pore gov­ern­ments have been most vo­cal about sup­port­ing vi­brant fin­tech cen­tres – with Lon­don alone pump­ing £200 mil­lion into the sec­tor. Most ma­jor fi­nan­cial cities recog­nise their rank­ing in fu­ture will de­pend less on what bank­ing ac­tiv­ity they have to­day and more on what start-up ac­tiv­ity they have to­day. On the Global Start-up Ecosys­tem rank­ings, Sil­i­con Val­ley is still num­ber one but there are sur­prises fur­ther down the list – Tel Aviv ranks higher than Lon­don, Chicago is higher than Sin­ga­pore and Austin is higher than Syd­ney. In the past year Mel­bourne dropped out of the top 20 and Syd­ney slipped from 12th to 16th.

There were peo­ple in dark blue shirts on the night of the launch – most from the NSW Gov­ern­ment and Syd­ney City Coun­cil – and not all of the blue t-shirts “got it”, as they say. State In­dus­try, Re­sources and Energy min­is­ter An­thony Roberts urged the gath­er­ing to “look around you and you’ll see 10 to 20 peo­ple who will be multi-multi mil­lion­aires in the next few years. Get their busi­ness cards now”.

In this first slap-up launch of a ma­jor fin­tech hub, there was a ten­dency for hy­per­bole. There was a lot of money at stake, a lot of money for the tak­ing and ev­ery­one had some­thing to prove. The t-shirts told the story. The en­trepreneurs, who once wore suits, were com­fort­able in their green t-shirts but many bankers were re­luc­tant to pull on their red t-shirts. Some only man­aged to loosen their ties. And, yeah, the media doesn’t look good in pink.

‘Most of the in­no­va­tors are ex­pe­ri­enced ex­ec­u­tives who are look­ing at dis­rupt­ing ar­eas where they once worked’

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