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When bankers and start-ups collide: rise of the fintech 'innovation lab'

Testing your innovation

You run an early-stage start-up with grand plans of shaking up a certain part of the finance sector, but your product isn’t finalised and your funding isn’t fully in place. You also know that fintech is now a crowded, competitive space.

Where will you go for mentorship and potentially more money? Increasingly, nascent firms like yours are turning to the very institutions that fintech is supposed to be disrupting: large banks. More precisely, they are applying to ‘innovation labs’ in which they join other start-ups at a bank’s office, receiving business and technical advice and ultimately competing for financial support.

Citi launched its programme, called the ‘mobile challenge’, in the Americas last year and is now running it across EMEA and Asia Pacific. It has so far received nearly 2,000 applications from start-ups across the three regions, says a bank spokesman. Those that make the cut pitch their ideas to industry experts at the end of the event, vying to get their technologies into production with Citi’s help and to claim a share of a cash award.

Singaporean bank DBS set up a similar scheme in Hong Kong earlier this year, offering eight start-ups the chance to work in a new dedicated office space before pitch day. Meanwhile, consultancy firm Accenture runs labs in New York, London and Hong Kong involving banks such as Bank of America Merrill Lynch, Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan, and UBS.

Start-ups on speed

Organisers of innovation labs claim they give start-ups the chance to work with banks – who could be potential end-users or acquires of their products – far earlier on than they would if going it alone.

“All of our labs put start-up entrepreneurs in direct contact with C-level executives, whom they otherwise would not likely easily meet. These executives can give them real-world, practical and immediate advice,” says Julian Skan, the Accenture MD overseeing the firm’s London lab. “This senior mentoring enables them to not only test and improve their technologies, but also to find new business applications and growth opportunities they might not have envisioned.”

“Speed and innovation are the main objectives for a start-up, but it can take years for a start-up to navigate the intricacies of a large bank, so the innovation labs are the most efficient routes for entrepreneurs,” agrees Huy Nguyen Trieu, an MD at Citi in London and author of the blog Disruptive Finance.

The feedback received during the labs and after the final pitch also provides start-ups with a quick gauge on whether their product might succeed or fail in the marketplace, says Nguyen Trieu. This can help them make vital tweaks before launch date.

And, of course, innovation labs are also alluring because of the financial benefits potentially on offer. Accenture says its labs’ alumni companies have collectively raised $240m after taking part in the programme. Alastair Paterson, CEO of cyber-security start-up Digital Shadows, which participated in Accenture’s London innovation lab, says being able to rapidly prototype products and sell them to banks after the lab helped his firm to raise its critical first round of venture capital financing.

Banks benefiting

Unsurprisingly, large institutions don’t run innovation labs purely for the benefit of the fintechers. For consultancies, labs are another business opportunity. “Accenture is helping the world’s leading corporations become the digital disruptors – instead of the disrupted,” explains Jon Allaway, the Accenture MD in charge of the firm’s Asia Pacific labs. “Through our labs, you can think of us as matchmakers in financial services. We are marrying the start-ups and the banks themselves.”

For banks, labs are a way of spotting new and potentially disruptive financial technology before their competitors do. “Banks know that technology is transforming finance and that a lot of innovation will come from smaller structures,” says Citi MD Nguyen Trieu. “Working with start-ups allows banks to identify the latest innovations, but also to find start-ups that could be good partners or suppliers, as well as potential investments.”

But therein lies the rub for start-ups: innovation labs require collaborating closely with banks, not competing against them. This doesn’t sit comfortably with some entrepreneurs, especially those who have recently quit the banking sector and now want to mount a challenge to its traditional technology.

“Innovation labs are a sign that banks are taking the fintech threat seriously as they recognise that we’re coming to eat their lunch,” says a start-up founder and former banker in Asia, who asked to remain anonymous. “But I think there’s more in it for the banks. They can spend relatively small money on running these labs and have the potential to eventually buy the technology down the track at an attractive price. You have to question how committed they are to keeping it open source.”

The entrepreneur adds that bankers and start-ups have “a clearly different business agenda”. “As a start-up you want to get exposure to enable you to grow independently, but a bank may not ultimately want you to grow and succeed in this way as you may become a competitor. The moment you start relying on a bank, your business starts going out of your control.”

Nguyen Trieu says the appeal of innovation labs to start-ups can vary according to their business objectives. “There are many start-ups whose business model is to work with banks – for example in big data, news processing, trading optimisation, etc. These start-ups would want to be closer to the banks,” he says. “Start-ups whose business model is to directly compete with banks would not normally want to collaborate with the innovation labs, although we still do see many of these companies wanting to learn from us and we of course can learn from them.”

AUTHORSimon Mortlock Content Manager
  • Ge
    George ILIEV
    11 February 2016

    I can think of an important reason why fintech startups succeed more often than other startups. Granted, the experience of the founders in finance and technology is clearly an advantage. But the key reason is that finance is NOT A HOBBY. Hence if someone is launching a fintech startup, they know what they are doing and are not being delusional. I wrote an article about the dangers of confusing your hobby with a startup:
    If you have a cactus garden, do not sell cactus bunches for Valentine's Day!

    The dangers of confusing hobbies with business: a tale of bonsai and stunted trees.

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