One of the things that makes this job so much fun is the ability to talk to the really smart people in a dynamic market. Doing a startup is hard; we are entrepreneurs ourselves so we get that. However we want to counter the myth that all innovation comes from VC funded startups. To do that we need to find real innovation that has had an impact (not just “innovation by press release” about experiments) and then find people within established financial institutions who are willing to talk about on the public record.
Having done 5 of these interviews, we decided to reflect on what we had learned.
The 5 Interviews
These are all in Consumer Banking. We have done interviews in other segments but we have seen the quickest uptake in Consumer Banking, because this is a segment within Fintech that is already fairly mature. Pioneers recognized the disruption some time ago in Consumer Banking and some of them took action.
9 Themes that emerged from these 5 interviews
- The Bank spinoff intrapreneurial model works. The Bank spinoff model is clearly working from the examples of ING DiBa and Chebanca! One can also see that the overnight sensation idea popularised by startup banks and Fintechs may not be realistic. For example Chebanca! was founded in 2008 and ING DiBa took 15 years to get to the amazing scale they have reached today. Banks have more patient capital than traditional VC Funds; so Banks can afford these longer runways to success. Both were started when Internet and mobile penetration was much lower. It would be interesting to see how quickly a digital bank can get to the scale that ING DiBa achieved now that Internet and mobile penetration is so much higher.
- Crisis is spur to action that drives cultural change. This came out most strongly in the story of Hellenic Bank in Cyprus, but is also evident in the banks from Italy (a country that has gone through a lot of turmoil during the Eurozone crisis). Frogs in slowly heating water feel comfortably warm until it is too late. The greatest big company transformation – IBM under Lou Gerstner – was made possible because of an existential crisis.
- Omnichannel Banking, cultural change and the cannibalization challenge. In the SpareBank1 and Unicredit interviews, neither Christopher Hernaes nor Holga Tavlas attempt to downplay the cannibalization challenge. It is hard. Mediobanca as parent of Chebanca! did not face this issue because it was an investment bank launching a retail bank. Goldman Sachs launching GS Bank may follow the same trajectory. The banks like Hellenic Bank, Unicredit and SpareBank1 that create services which customers interact with through multiple channels including existing branches is tougher but maybe more sustainable over the long term.
- Bank Scale is bigger than venture scale, but it takes time. In the ING DiBA interview I was staggered to learn about a digital only bank with 8.5m customers and EUR 1 billion in pre tax profit. And that is only one part of ING Direct and that is only one part of ING. Yet it took 15 years to get there. VC funds that have to give liquidity back to LPs don’t usually have that kind of patience.
- Friction eradication is key to scale. ING DiBa has partnered with Fintech startups that use video chat for onboarding, fingerprints to make payment data entry quicker and new ways to avoid passwords and pins without jeopardizing security,
- Customer centric thinking matters more than technological innovation. Holga Tavlas summed this up best when he said “we can do great innovation with what we already have”.
- Some Banks have moved to level 3 on the partnership maturity curve. In this post we define 3 levels of maturity in the relationships between Fintechs and Banks. Although the PR we read is almost all about Level 2 (Corporate Venture Capital), in these interviews we heard about many real partnerships that moved the revenue needle for both parties. For example, ING DiBa referenced ways to eradicate friction in onboarding and payments as well as new upselling partnerships and SpareBank1 referenced partnerships in mobile payments.
- The challenge of Education Awareness Understanding (EAU) in the Bank. While we may define 3 levels of maturity in the partnerships between Fintechs and Banks, the reality is more complex because some people (such as the people we interview) have a very high level of awareness while other people running a line function need a lot more help to come up to speed and it is hard to change mental models of how to work if different stakeholders have radically different levels of understanding of what is happening in Fintech and digital banking. This came out particularly strongly in the Unicredit interview when Holga talks about the differing business practices and regulations in the 12 different countries where the Bank operates.
That was what I learned by listening to the podcasts. I asked Efi Pylarinou, who conducted the interviews for her perspective and this is what she had to say:
“The last two Pirates with Ties interviews, revealed real consumer banking innovations that came about from necessity, which has been and still is the mother of invention. Two regional digital transformation stories that came about in dark times. Hellenic Bank was inevitably in the midst of the financial earthquake that hit the Cypriot economy 3 years ago. Natasha Kyprianides implemented a mobile first transformation to keep the existing customers from fleeing. This may seem simple in theory, but it is not easy in practice. The biggest challenge is how the internal corporate culture unconsciously resists because of fears of cannibalisation. Anytime a bank is looking to move from a 100% branch and relationship based way of doing business, to a hybrid online-relationship way of interacting there is a friction. Up north in Milan, Chebanca! (pronounced Ke-banca) is another retail banking transformation story that came about much earlier (2008) to solve a liquidity problem of an established investment bank. Stepping into a market that was very much saturated in Italy (retail banking) at a very dark time (Italy hit by the financial crisis) and with very low mobile adaptation rates of the Italian population; this really takes vision. As Roberto mentioned to me (off the record), if anybody tells me it is easy to step into a new business (an investment bank moving into retail banking) I will be very surprised.
There were two different regional stories that solved actual problems for the existing organisations. Hellenic bank’s story is a delivery story. David Brear picks an image of fast food to convey the essence of the innovation. I see the EuropaPark foodloop as the appropriate one. Chebanca is more of an Alessi design, functionality and experience, image; this is a growing business from basic checking, saving services now offering only investment capabilities with a yellow robo offering.
ING-Diba is has been leading branchless and digital banking before anybody was paying attention. The simplest evidence of catchup from the conventional consumer banking businesses comes from Canada. ING-Direct moved to Canada 20 yrs ago and nobody paid attention. They have built a 1.8 million customer base and Scotia Bank decided to buy them at $3+billion in 2012. Now renamed Tangerine Bank. M&A of early but mature Fintech with a traditional business.
ING continues to digitize and lead in Fintech consumer banking in several European regions. Very recently, they launched a financial advising app, Coach Epargne, in France. They have Genoma in Spain and Noje in Poland.
Unicredit has made a major announcement since I interviewed Tolga. This is the launch of a new mobile-only banking subsidiary in Italy called BuddyBank; this another example of a Bank spinoff. Unicredit will fund the new smartphone-only banking subsidiary bank with €50 million.
SpareBank1 is a story of how an alliance (owned by the participating banks) can continue to innovate, with a strong commitment to community education, cultural adaptation and a partnership approach. ”