How To Work With Fintech Startups - Welcome · … to Work With Fintech startups march 7, 2016 2016 Forrester research, Inc. Unauthoried copying or distributing is a violation of copyright

How To Work With Fintech StartupsPartner With Financial Technology Startups To Boost Innovation

by Oliwia BerdakMarch 7, 2016

FOr EBusinEss & ChannEl stratEgy PrOFEssiOnals

ForreSTer.com

Key takeawaysFinancial Technology Startups And Incumbents Are Getting closeraccelerators, labs, and venture funds are mushrooming as incumbents look for cutting-edge technology and speed, startups crave scale, and regulators give their blessing to the union.

Startup engagements often Deliver Just Prinitial enthusiasm can wane quickly as digital teams hit the usual innovation roadblocks -- legacy technology, resistance, and competing priorities -- in addition to a host of startup-specific problems.

Adopt A more rigorous Innovation ApproachWorking 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.

Why read this reportthese 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.

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table Of Contents

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

What it Means

Courting Startups Is More Difficult Than It Seems

Supplemental Material

notes & resources

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

Financial services Firms Flirt With startups

FOr EBusinEss & ChannEl stratEgy PrOFEssiOnals

How To Work With Fintech StartupsPartner With Financial Technology Startups To Boost Innovation

by Oliwia Berdakwith Benjamin Ensor, Zhi ying ng, Diego lo giudice, and alexander Causey

March 7, 2016

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How To Work With Fintech StartupsMarch 7, 2016

© 2016 Forrester research, inc. unauthorized copying or distributing is a violation of copyright law. [email protected] or +1 866-367-7378

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Partner With Financial Technology Startups To Boost Innovation

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, white-labelling 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




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FIGUre 1 Financial Firms are Engaging startups through hackathons, accelerators, and Venture Funds

Incubator/accelerator

Hackathon Venture fund

Selected �rms only.




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FIGUre 2 some Digital Disruptors in Financial services are Becoming Emerging Vendors

Digital disruptors Emerging vendors

Lending ClubMX Technologies

Kabbage

Moven

MaxMyInterest

Funding Circle

Number26 AireSnapsheet

Namu

Mambu

Social Money

Fidor Bank

OnDeck

Dwolla

BettermentWealthfront

Wealth Wizards

Knip

Friendsurance

Digit

Mint

Acorns

eToro

Crowdcube

InslyCardlytics

Financial technology startups

Playbasis

Moneythor

MatchMove

GoLend

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 cutting-edge 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




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› 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 2015.12

› 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.

“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)

Corporate programs aimed at startups have mushroomed recently, but many are driven by fear, herd effect, vanity, or just hope.




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› 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)




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“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 direct-to-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.




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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

FIGUre 3 startups go through a series Of Development stages

Act

iviti

esC

usto

mer

sP

rod

uct

Team Founders

Founders and1-2 engineers

Core team Growing team Team of over 20

Just an ideaor concept

Prototype Beta versionDeveloping

productProven product

None LimitedSome customer

interestGaining traction

Payingcustomers

Assess thebusiness

opportunity

Develop theproduct and go-

to-marketstrategy

Launch andre�ne product

Grow customerand employee

base

Gain scale andreach pro�tability

Pre-seed Seed Early stage Series A Late stages

“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)




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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 white-label 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




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FIGUre 4 Digital teams Can Engage startups in an ad hoc Or structured Way

Format What is it Resources needed Aim ExamplesAd hocengagement

Meetup Event during whichstartups presenttheir work andnetwork withcompanyrepresentatives.Could includespeed-dating.

Minimal if you’re notrenting the space:• Organizer• Marketing funds

Build aninnovationecosystem andreputation as aninnovator;identify ideas

• Aviva InsuranceTech Meetups

• Lloyds BankingGroup DigitalEspressos

• Next BankMeetups

Hackathon Single event,typically up to 48hours, duringwhich startupsand developerscode together

Identify and testideas; test APIs;build aninnovationecosystem andreputation as aninnovator

• Bank Leumi’s36-hourhackathon

• DBS “Mega-hackathon”

Proof ofconcept orprototype

2- to 12-weekcollaboration tobuild and test asolution with astartup

Build and test aproof of concept

RBS’s proof ofconcept withRippletechnology

Structuredincubationprograms

Accelerator Ongoing programof typically threemonths, often run2-4 times a year.Can include acompetitionelement to select�nalists and awinner.

Around $1 million a yearfor two cohorts (dependson the number ofstartups, the level ofinvestment or prizes,space requirements):• Scanning and selecting

team of approximately 5• Funding• Mentors• Space• Judges• Prize money• Marketing funds• Testing environment,

virtual infrastructure

Accelerate thedevelopment ofan existingsolution

Corporateaccelerators:• Citi Mobile

Challenge• UBS Future of

FinanceChallenge

• MasterCard’sStart Path

Professionalaccelerators:• Level39• Startupboot-

camp• Techstars• Y Combinator

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 prototypesunder $200,000:• Program team (product

owner, developer,business analyst)

• POC funding• Testing environment,





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FIGUre 4 Digital teams Can Engage startups in an ad hoc Or structured Way (Cont.)

Format What is it Resources needed Aim

Structuredincubationprograms

Examples

Incubator Ongoing programof six months andlonger

Develop an ideaor concept

Corporateincubators:• Crédit Agricole

incubator• Axa’s Kamet• Yodlee’s Ynext

Incubator

Professionalincubators:• Idealab• F10 FinTech

Incubator• BrightBridge

Ventures• FinTech

Sandbox

Ongoingpartnership

Referral Suggestion or linkto each other’sproducts

Find newdistributionchannels,generate revenuefrom referrals,offer moreservices tocustomers

NatWest/RBSand Santanderwith FundingCircle

Vendorcontract

Licensing startup’ssoftware

Improve and/orcreate newproducts andservices

• BECU and Visawith MXTechnologies

• Ally Bank withPersonetics

Jointsolution(often co-brandedand withsharedcustomers)

Enhancing yourproducts andservice byintegratingstartup’s solutions

Variable costs of co-creating a solution orintegrating technology:• Project team• Marketing funds• Variable technology,

development resources

Improve and/orcreate newproducts andservices

TD Bank andWestpac (NewZealand) withMoven

Around $1 million a yearfor two cohorts (dependson the number ofstartups, the level ofinvestment or prizes,space requirements):• Scanning and selecting

team of approximately5

• Seed funding• Mentors• Space• Judges• Prize money• Marketing funds• Testing environment,


From just a link on thewebsite to educatingstaff and integrating aproduct into yourplatform:• Marketing funds• Potential integration

resources

• Variable license,subscription,integration fees

• Project team• Variable technology,

development resources




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Build your startup Engagements in 10 steps

to ensure that working with startups delivers more than just a costly and temporary marketing boost, digital business strategy executives must:

1. establish explicit business objectives. narrow down your aims to avoid wasting your time on just another technology solution looking for a problem to solve. are you looking for a complete solution to target a new customer segment? are you trying to reduce the costs of offering financial advice? Business scenarios focus conversations and help identify relevant technologies.36

Example: to ensure that collaboration with startups involved more than just meetings, axa’s team responsible for setting up its incubator involved teams within axa global Direct to understand “their needs and what they are expecting from the startups. We identified internal challenges and found startups that could help address these specifically.”37

2. Set up a good scouting program. unless you’re a regular tech meetup attendee, chances are that you don’t know the right startups and they don’t know you. When axa was launching its incubator, one of its key objectives was to “communicate our core business and our challenges about big data. startups in big data don’t think ‘insurance’ when thinking about potential use cases.”38 attracting attention is a job half done; identifying which startups to work with is the real challenge, so don’t be afraid to ask existing accelerators for help.39

Example: uK’s Barclays has partnered with techstars, pan-asian life insurer aia partnered with nEst, and banks like italy’s intesa sanpaolo or rabobank in the netherlands have chosen startupbootcamp to connect them to the global startup ecosystem. these professional accelerator networks find suitable startups and provide the framework for the partnership between them and the incumbent firm. they also ensure that the accelerators are attractive for startups and support executives’ aims. as payment, they usually retain a share of startup equity — startupbootcamp takes 1%, and its corporate partners retain another 5%.40

3. Adopt fair rules of engagement. you may be tempted to protect your potential competitive advantage or investment by restricting startups’ independence. Don’t. Demands for exclusivity will turn startups away from you. as one startup director told us: “We were offered funding twice in our history — we turned it down both times. Partly on commercials — we weren’t ready, and partly because they would have killed us — taken away our independence.”

Example: Wells Fargo’s new incubator is nonexclusive. according to Wells Fargo Vice President Braden More, participating startups can grow more by pursuing other investors, which in the long run could benefit Wells Fargo if the bank were to partner with these startups as vendors.41 the agreements that MasterCard makes as part of start Path “have been designed to be startup-friendly, with no equity investment upfront and instead an option to invest in the future. if participants are approached by competitors on strategic transactions, we ask to be notified first.”42




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4. Tweak processes to suit startups. Digital teams need to work with technology management and sourcing colleagues to build separate processes that will be suitable and appropriate.43 you must also help startups achieve your information and security standards.

Example: One head of digital innovation at a global insurance firm has arranged for his legal, compliance and procurement teams to visit Procter & gamble to learn about its Connect & Develop program and how to innovate with external partners.44 Banco sabadell built a “separate track” to deal with startups, with dedicated process, funding, and executives.45

5. Appoint a startup champion. as the head of one startup told us: “if we talk to a large bank, one problem is that nobody knows who should own us if they want to do a partnership. they have head of retail, tech, digital strategy, and wealth management offering and we fall under all of those. no one knows who should lead the conversation.” this complexity wastes startups’ time and pushes them away. Consider having one champion or relationship manager who will liaise between startups and the rest of the firm.

Example: recognizing that it’s hard for startups to “get a foot in the door and talk to the right people,” Bank of america created an internal group inside its tech division, called technology Partnership Development. its purpose is “to engage with the emerging and start-up tech community around the world. When we find new players, the partnership development team helps guide them into the bank.”46

6. commit sufficient resources. as a head of one corporate incubator told us: “Most of our colleagues understand the challenge but they have business to do. they don’t always have the time.” But working with startups requires funding, networking opportunities, and ongoing support from trained mentors. understand what’s required, and commit the resources upfront.

Example: Banco sabadell’s Bstartup is a comprehensive startup program supported by a dedicated team of seven. One part of the team works with startups in a banking capacity; it connects them to the bank ecosystem and facilitates loans. Other team members focus on the incubation and investment in startups, mentoring and training them on entrepreneurship, legal issues, or investment options. the team doesn’t participate in advisory boards of startups once they finish the program but meets the startups on a monthly basis.47

7. Assemble the required technology. Digital teams often use virtual infrastructure and/or cloud to set up incubation sandboxes that allow for safe experimentation. they may also use integration layers to safeguard systems of record such as core banking or policy management systems. you need to work with your technology management colleagues to develop these environments and to put suitable guardrails in place.48 at a minimum, make sure that technology management colleagues have a plan for how to host or integrate startup solutions.

Example: Before Banco sabadell and Citi could run hackathons, they needed to develop a set of aPis that external developers could use to develop and test solutions.49




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8. embrace Agile working all the way through. One startup executive quipped: “We can move very fast, much faster than anyone else. We present to a bank, they get excited and say they’ll get back to us in three weeks.” Many digital business strategy executives have responded by creating separate innovation teams, which work with streamlined process and modern development methods.50 One head of a corporate incubator agreed: “We need to be able to move in days or weeks, not months — the speed which the startup needs. this is something we’re evolving towards. Our incubator, the innovation arm of the company, was built with startup mindset.” Chances are your technology management organization might be adopting some form of agile, so let them in on your plans and help them accelerate.51

Example: Visa Europe Collab adopted a new methodology — its 100-day proof-of-concept (POC) sprint. the 100-day process takes ideas from initial scoping and qualification through market testing and design to proof of concept and live testing. the team’s aim is to have at least 20 working proofs of concept within a year, of which it will hand back five commercially viable services to the Visa business for further incubation and development.52

9. Link back to the business. if you don’t want to encumber your colleagues with a proof of concept you developed and they don’t believe in, you need to have the right governance process and plan your handoff carefully. according to one digital banking executive: “you need to get internal buy-in from people — product managers — who will benefit from it. think carefully how you engage colleagues, how you integrate this, and what happens next.”

Example: the Bstartup team at Banco sabadell works very closely with the Department of Digital transformation and with lines of business. they are running seven pilots with startups inside the bank, and four of them will become bank’s suppliers in the near future.53

10. Define what success looks like. as one digital banking executive remarked: “at some point, some executive will look back and ask about benefit to customers and stakeholders. this is why you need a path to profitability.” this doesn’t mean you need an immediate return on your investment, but you need to identify and track the outcomes you do want, even if those vary for incremental or radical innovation.54 according to Banco sabadell’s digital executives: “sometimes we are dealing with disruptive technology and cannot integrate it into the bank. But this technology could be important in the next five to 10 years. in some cases, we are looking to set up spin-offs to explore how to monetize these assets.”55

Example: Barclays Bank is looking to implement solutions from startups that participate in its accelerator to create new value for its customers or improve the bank’s operational efficiency. at the end of its first program in london, Barclays signed contracts with three of the graduating startups to implement their technology within the bank. in 2015, it had agreements in place with seven of the 10 graduating companies.56




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What It means

Courting startups is More Difficult than it seems

Competition among financial services firms for the most innovative ideas and cutting-edge technology is stepping up. accelerators can fail, and they will.57 to succeed, digital business strategy executives will need to heed these recommendations:

› challenge assumptions. While you must understandably proceed with caution, don’t let your assumptions about startups be a cause for inaction. Many digital disruptors in retail financial services are regulated and compliant with money-laundering and tax regulations.

› Be humble and empathetic. as one startup executive told us: “incumbents are too cocky — they think they can partner with the disruptors. But these startups have started to disrupt banking.” When negotiating with disruptors, you will often be talking to the founders who have a growing product and a vision and who will walk away if you can’t match that vision.

› Show partners how you can help them grow. are you offering sufficient financial rewards and other benefits — training, office space, connections, or help navigating the regulatory minefield of financial services? large financial institutions should be in a good position to offer all of these. But the real meaning of partnership goes beyond this. One head of a financial technology startup described his successful partnership thusly: “i think on both sides we’ve been very transparent on things in the pipeline and on sharing of information and data. this has built an environment of trust which makes us mutually aligned.”

› Develop or hire talent, or partner with the right facilitators. Digital business strategy executives probably won’t have the right skills to run a venture capital fund, a mergers and acquisitions team, or an incubator. Partner with colleagues in corporate finance or corporate strategy, hire entrepreneurs, or work with established mentors or accelerators to rectify this.

› Build the innovation ecosystem. if you’re in a place that doesn’t have an existing startup ecosystem, you may have to build it from scratch. this is what Commerzbank’s Main incubator has been doing, as, unlike Berlin, Frankfurt didn’t have a vibrant startup community. the incubator started in a simple way, by launching an event series about financial technology in October 2014. around 200 people came to that first meeting, and the incubator has been growing this community ever since.

› expand your global reach. if you have the resources, you should consider expanding your reach to other geographies. But think carefully about the place you choose. in the words of one head of a corporate accelerator, some places have a fantastic entrepreneurial community, but not a good ecosystem with the requisite support of regulators, funders, and other companies.




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supplemental Material

companies Interviewed For This report

We would like to thank the individuals from the following companies and others who generously gave their time during the research for this report.

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

http://forr.com/1einFan

http://www.forrester.com/Analyst-Advisory/-/E-MPL172




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Endnotes1 to develop and deliver digital innovations, eBusiness and channel strategy executives at financial firms need ideas,

data, technology, software development skills, design experience, and change management support. Often, they can’t source these components internally in a timely and cost-effective manner. Partners like innovation agencies, systems integrators, adjacent firms, startups, and even competitors can help you add capabilities quickly. see the “Digital Financial innovation requires Matchmaking” Forrester report.

2 in april 2015, JPMorgan CEO Jamie Dimon wrote in his annual letter to shareholders, “silicon Valley is coming.” source: seth Fiegerman, “the CEO of america’s biggest bank is worried about silicon Valley and Bitcoin stealing his business,” Mashable, april 10, 2015 (http://mashable.com/2015/04/10/jp-morgan-ceo-letter/).

3 For example, adam nash, president and CEO of Wealthfront, has written critically about intelligent Portfolios that Charles schwab launched. source: adam nash, “Broken Values & Bottom lines,” Medium, March 9, 2015 (https://medium.com/@adamnash/broken-values-bottom-lines-3d550a27629).

4 the uK’s Financial Conduct authority (FCa) launched Project innovate in 2014 “to foster competition and growth in financial services by supporting both small and large businesses that are developing new products and services that could genuinely benefit consumers.” similarly, the Monetary authority of singapore (Mas) formed a new Fintech & innovation group (Ftig) in 2015 to “to facilitate the use of technology and innovation to better manage risks, enhance efficiency, and strengthen competitiveness in the financial sector.” source: “Financial Conduct authority’s Project innovate celebrates first anniversary with plans for ‘regulatory sandbox,’” Financial Conduct authority press release, november 10, 2015 (https://www.fca.org.uk/news/project-innovate-first-anniversary-regulatory-sandbox-plans) and “Mas sets up new Fintech & innovation group,” Mas media release, July 27, 2015 (http://www.mas.gov.sg/news-and-publications/media-releases/2015/mas-sets-up-new-fintech-and-innovation-group.aspx).

5 For example, FCa has published plans for a “regulatory sandbox” — a “‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of pilot activities.” source: “Financial Conduct authority’s Project innovate celebrates first anniversary with plans for ‘regulatory sandbox,’” Financial Conduct authority media release, november 10, 2015 (https://www.fca.org.uk/news/project-innovate-first-anniversary-regulatory-sandbox-plans).

6 source: Banco sabadell interview with Forrester, June 7, 2015.

7 source: Main incubator interview with Forrester, June 3, 2015.

8 source: aia interview with Forrester, May 29, 2015.

9 BBVa held its first data hackathon in 2013. the bank hired five of the winning participants as data scientists. see the “Case study: BBVa takes an iterative approach to innovation” Forrester report.


11 source: Banco sabadell (http://bstartup.bancsabadell.com/inversion-bstartup-10/).

12 Most of the branches are located in Barcelona, Madrid, and Valencia, although Banco sabadell has at least one branch specialized in working with startups in every major city in spain. source: Banco sabadell communication with Forrester, January 28, 2016.

13 source: Visa Europe interview with Forrester, July 27, 2015.

techstars

Visa Europe

Wealth Wizards







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14 the bank has received a number of awards as a leader of digital innovation, including the prize for the world’s most innovative bank at the 2011 global Banking innovation awards, sponsored by the Bank administration institute and Finacle. this has translated into the CaixaBank team regularly receiving project ideas from some of the most innovative startups in spain, thus feeding the cycle of innovation. see the “Case study: Digital innovation is seeded throughout CaixaBank” Forrester report.

15 source: Main incubator interview with Forrester, June 3, 2015.

16 Digital innovation is both art and science. While creativity, design instinct, and good timing all play a role, eBusiness executives at financial services firms need processes to convert creative ideas into value for the business. see the “inject Discipline into your Digital innovation Process” Forrester report.

17 unfortunately, the world of digital technologies sometimes conflicts with sourcing goals. yesterday’s methods of lengthy business-case development and long request for proposal (rFP) cycles will not succeed in the new, digital world. sourcing executives must approach digital initiatives through a more agile, iterative sourcing strategy that helps business executives move quickly from concept to goals to action. see the “setting a technology sourcing strategy For Digital Disruption” Forrester report.

18 Many technology management colleagues flatly object to working with startups on the grounds that introducing new technology always increases cost and complexity, and that is a big “no-no” in their neck of the woods. But what digital teams win in speed when they bypass their technology management organizations, they will lose in the scope, quality, and integration of their software. to innovate with emerging technology, digital executives must work much more closely with their technology management colleagues. see the “tune your Organization For Emerging technology innovation” Forrester report.

19 Cross-functional teams enable agile success, but 40% of Forrester’s Q2 2015 global agile software application Development Online survey respondents say they don’t have them. see the “agile Experts Focus On Downstream Delivery” Forrester report.

20 scholars haven’t arrived at a precise figure, as the rate of failure differs between industries, economic cycles, definition of failure, and the length of time after launch. however, failure is the rule, not the exception. source: stephen spinelli and robert adams, new Venture Creation: Entrepreneurship for the 21st Century, Mcgraw-hill Education, 2011.

21 axa supports employees’ innovation initiatives through its start-in competition. this internal innovation program lets any employee suggest a solution to one of axa’s business challenges, identified twice a year by the firm’s senior executives. Finalists get funding and the help of mentors to work on a prototype, which they later pitch to the group executive committee. see the “how to Create an innovative Culture in Financial services” Forrester report.

22 the innovation funnel is a tool that many successful digital innovation teams use to move ideas from inception to execution, to understand any blockages in their process, and to maintain a pipeline of innovations. see the “inject Discipline into your Digital innovation Process” Forrester report.

23 Many firms proudly point to their mobile app and proclaim, “hey, we’re digital!” While they may be driving incremental revenue, all they have done is bolt on another touchpoint. real digital businesses go much further, reshaping the way they create value for their customers. achieving this requires that firms approach digital business from the outside in, pursuing two dimensions of digital in parallel: digital customer experience (DCX) and digital operational excellence (DOX). see the “the Digital Business imperative” Forrester report.

24 Disruptors’ digital prowess has helped them attract and serve niche customer segments that incumbents left unaddressed due to cost or regulatory constraints. Working with digital disruptors can open up these segments while letting you focus on areas where you have competitive advantages. see the “Disruptors Belong in your Digital Ecosystem” Forrester report.

25 there are different ways to consider a startup’s life cycle. Many financial services firms’ startup programs have built on the concepts and methods of venture capital firms.



















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26 Early-days startups are just building on their concepts and will need time, capital, and plenty of mentoring to build an effective team and product.

27 start Path is a six-month incubation program that was launched at the end of 2013 with an objective to help early-stage startups. source: MasterCard interview with Forrester, april 30, 2015.

28 there’s a common saying among venture capitalists that it’s better to back an “a” team with a “B” product than a “B” team with an “a” product.

29 Former banking executives are behind many financial technology startups. For example, gal steiger, who previously worked at uBank, is one of Wayerz’s founders. the startup seeks to optimize global wire transfers. there are many other examples. source: Mary Wisniewski, “Why these Ex-Bankers Bailed for tech startups,” american Banker, March 17, 2015 (http://www.americanbanker.com/news/bank-technology/why-these-ex-bankers-bailed-for-tech-startups-1073291-1.html).

30 aviva’s innovation team has been running insurancetech Meetups since June 2014. initially the group met in pubs or on google’s campus but moved to aviva’s innovation hub, the Digital garage, in December 2015. source: “insurancetech,” Meetup (http://www.meetup.com/insurancetech/).

31 hackathons are events where startups, developers, and employees compete to quickly “hack” together. Most hackathons involve coding a new app, but some focus on designing an innovative user experience or exploring and visualizing a “big data” set. see the “Energize your Developers With a hackathon” Forrester report.

32 the hackathons aim to build actual mobile application prototypes in 24 hours with original functionality, graphics, and navigation and usability features. see the “Case study: Digital innovation is seeded throughout CaixaBank” Forrester report.

33 the costs of running an accelerator or an incubator vary enormously based on the level of investment and the number of startups included. good accelerators accept about 1% to 2% of applicants, so that’s a lot of work to scan and sift through applications. then there are the space and administration costs, as well as some upfront investment. Often, accelerators invest about $20,000 to help startups with running costs during the program. Many accelerators accept up to 10 startups in each cohort and host two to three cohorts per year. Winners often get another $100,000 in prize money.

34 these are aig, ally Bank, american Express, Bank of america, Barclays, Blackrock, Capital One, Citi, Credit suisse, Deutsche Bank, goldman sachs, guardian, JPMorgan Chase, Morgan stanley, new york life, and Wells Fargo. the Fintech innovation lab is an annual 12-week accelerator program that brings together early-stage financial technology companies and banks. the lab exists in new york, london, asia Pacific, and Dublin. source: Fintech innovation lab (http://www.fintechinnovationlabnyc.com/).

35 source: MX technologies (http://media.mx.com/resources).

36 this is not about crafting road maps or business cases, which are absolutely not the right tools to track emerging technologies. however, before you start exploring the potential of disruptive technology like artificial intelligence, blockchain, or voice analytics, you need to understand if they could create opportunities that are right for you. see the “Emerging technology innovation needs new tools” Forrester report.

37 source: axa and axa strategic Ventures interview with Forrester, July 2, 2015.

38 source: axa and axa strategic Ventures interview with Forrester, July 2, 2015.

39 good accelerators accept only around 1% to 2% of all applicants. identifying the most promising candidates is a task that takes a lot of time and requires a unique set of skills.

40 source: startupbootcamp interview with Forrester, March 24, 2015.

41 source: Cat Zakrzewski, “Wells Fargo launches accelerator to Promote innovation in Financial services,” techCrunch, august 20, 2014 (http://techcrunch.com/2014/08/20/wells-fargo-launches-accelerator-to-promote-innovation-in-financial-services/).







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42 source: interview with stephane Wyper, global lead, startup engagement for MasterCard, april 30, 2015.

43 sourcing professionals are playing an increasingly important role in the emerging technology evaluation process, although they would typically get involved later in the process. see the “sourcing Professionals need to Clarify their role in Evaluating Emerging technology” Forrester report.

44 in the early 2000s, Procter & gamble realized that its closed innovation approach was not yielding results. the firm opened up its innovation process to change this. By 2006, more than 35% of the firm’s new products had elements that originated from outside P&g, up from about 15% in 2000. the new approach doubled the success rate of innovation and reduced its cost. source: larry huston and nabil sakkab, “Connect and Develop: inside Procter & gamble’s new Model for innovation,” harvard Business review, March 2006 (https://hbr.org/2006/03/connect-and-develop-inside-procter-gambles-new-model-for-innovation).


46 source: steve Cocheo, “David reilly’s quest: Data that’s portable yet secure,” Banking Exchange, July 2, 2015 (http://www.bankingexchange.com/technology-channel/item/5598-searching-for-data-that-s-).


48 Many digital innovations are opportunity-driven and self-contained — typically but not exclusively at the interface to customers — and thus pose less business risk and can be subject to looser rules. Conversely, business-sponsored initiatives that have high business impact and risk, or that require more complex technology implementation, need greater diligence. see the “shifting From rules to guardrails” Forrester report.

49 Banco sabadell held its first hackathon — the instant Banking hack Day — on October 11 and 12, 2014. the participants worked on new web and mobile applications in the areas of payments, transformation of customer service, the internet of things, and contextual and predictive services. this was the first time participants gained access to the bank’s service aPi, with direct access to a test area that is an exact replica of the internet banking services of the bank. source: “Banco sabadell is organising the first hackathon to boost digital innovation in the financial sector with the collaboration of Mobile World Capital Barcelona,” Banco sabadell press release, september 4, 2014 (http://prensa.bancsabadell.com/en/news/2014/09/banco-sabadell-is-organising-the-first-hackathon-to-boost-digital-innovation-in-the-financial-sector-with-the-collaboration-of-mobile-world-capital-barcelona).

Citi organized its Mobile Challenge as a completely virtual developer competition. the bank released its aPi on October 10, 2014, giving participants until October 19, 2014, to submit their concepts. the aPi was a prototype that offered developers opportunities to query and interact with fake bank accounts. source: David Berlind, “how 200-year-Old Citibank totally nailed its hackathon,” ProgrammableWeb, December 15, 2014 (http://www.programmableweb.com/news/how-200-year-old-citibank-totally-nailed-its-hackathon/analysis/2014/12/15?utm_content=bufferaaac2&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer).

50 Organizations face an existential threat: deliver more value to customers faster than their competitors, or die. in the past, faster delivery usually meant lower quality and higher risk. leading organizations have shown how applying agile and DevOps practices enables faster delivery with higher quality and lower risk. see the “agile and DevOps adoption Drives Digital Business success” Forrester report.

51 For more on how agile is being adopted in the industry, see the “the 2015 state Of agile Development” Forrester report and see the “agile Experts Focus On Downstream Delivery” Forrester report.

52 source: “Our approach to innovation,” Visa Europe Collab (http://www.visaeuropecollab.com/innovation-approach/).


54 Forrester defines three different types of innovation: chaotic and rapid innovation to address the fastest-paced change; sustained innovation — a robust process for finding and funding new ideas; and strategy-driven annual investments to address well-understood opportunities for which a business plan can be prepared. Digital innovation











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encompasses all three approaches, and the right strategy is to make a series of innovation investments, building a portfolio that complements the firm’s strategic plan and strategic needs. see the “innovators Will Be the Winners in the age Of the Customer” Forrester report.


56 source: Penny Crosman, “Why Barclays’ schools for startups are Different from the rest,” american Banker, august 4, 2015 (http://www.americanbanker.com/news/bank-technology/why-barclays-schools-for-startups-are-different-from-the-rest-1075854-1.html).

57 source: Pankaj Mishra, “accelerators in india’s nascent startup Ecosystem Face a reality Check,” techCrunch, February 6, 2014 (http://techcrunch.com/2014/02/06/accelerators-in-indias-nascent-startup-ecosystem-face-a-reality-check/).



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