Banking on the future
Big institutions are backing start-ups in a bid to ride the fintech wave, writes Deirdre Macken
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’
STONE & CHALK CHAIR CRAIG DUNN
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’