March 17, 2015 / 12:58 PM / in 3 years

Money, scouts and speed dating: banks fight for technology edge

LONDON (Reuters) - Hoping to link with tech entrepreneurs and get ahead of a wave of digital innovation, Europe’s top banks are setting up multi-million dollar investment funds, hiring scouts in Silicon Valley and hosting “speed dating” sessions.

Financial technology, or fintech, is shaking up the sector, allowing savers and borrowers to bypass traditional banks with smartphone apps and websites for loans, payments and all areas of financial services.

The changes will be profound. Consultancy McKinsey said the shift to digital could see more than 30 percent of European banks’ revenues up for grabs as customers shop around for online deals, while banks could cut a quarter of their costs.

Getting digital right was a “do or die challenge”, McKinsey said, while banks also see technology as a way to reconnect with customers and improve their image after years of scandals.

“For the last five years the industry has tended to communicate strategy through the rear-view mirror,” said Kevin Hanley, responsible for strategy, architecture and data within operations and IT at Royal Bank of Scotland (RBS.L).

“We are now starting to lift our heads up, look out of the windscreen and talk about where we want to go,” Hanley said. “It’s a much more forward-looking story that is centered on the customer and enabled by technology.”

    To meet and feed off the fintech challenge, banks are buying into or partnering with start-ups as well as developing ideas in-house.

    “All of them are now doing many things to build a wider ecosystem to help them reinvent their business models,” said Richard Lumb, head of the financial services group at consultancy Accenture.

    Many banks are buying minority stakes in start-ups, giving them financial support and advice and in return get to roll out new ideas to their customers.

INNOVATION PROJECTS

Spain’s Santander (SAN.MC) and BBVA (BBVA.MC), and Russia’s Sberbank (SBER.MM), for instance have each set up funds to invest about $100 million in fintech firms, while HSBC (HSBA.L) has an investment team that could spend even more on innovation projects. All say those amounts are flexible.

    Sberbank said its fund, Silicon Valley-based SBT Venture Capital, could swell to $700 million, and is only one element of a strategy that also includes in-house development and partnerships.

    SBT Venture Capital has invested about $50 million in less than 18 months in companies including Moven, which allows customers to track spending on a mobile, and NetGuardians, which uses behavioral analysis to monitor risks in a bank’s operations.

    Whether banks can avoid being outflanked by the wave of innovations remains to be seen, given the speed at which fintech is overhauling how people manage their money, threatening banks’ dominance in lending and payments.

    Peer-to-peer lending sites are linking lenders and borrowers, spearheaded by San Francisco-based Lending Club (LC.N) and European rivals like Zopa; payment is being shaken up by the likes of TransferWise, a UK start-up offering a low-cost way of sending money around the world.

And customers have a dizzying array of financial apps like Osper, which allows teenagers to manage spending, and Acorns, a digital piggy-bank that hoovers up “loose change” from an electronic purchase and stores it in a savings account.

SCOUTING NETWORKS

No wonder then that banks are trying to ride the same bandwagon via ideas that could improve their own offerings, such as replacing identification numbers and passwords with fingerprints, and looking to firms such as Norway’s Zwipe, which signed on with MasterCard for a payment card that uses fingerprint technology for authentication.

    European banks are also building out their scouting networks to spot targets.

    While London has become Europe’s fintech hub and is growing fast, RBS is not alone in putting a small scouting team in Silicon Valley, which lured around a third of fintech investment in 2013, far above the 13 percent invested in Europe, according to Accenture.

    So-called “accelerator programmes” which involve banks paying for office space and offering advice to fintech companies in return for hearing their pitches in a series of “speed dating” sessions are proving popular.

    Seven firms picked for this year’s Fintech Innovation Lab in London are visiting HSBC, Intesa Sanpaolo (ISP.MI), JPMorgan (JPM.N) and more than a dozen others, perhaps pitching to up to 70 bankers in an intensive two-hour rotation across business areas.

“It helps us bridge the gap by actually speaking to the practitioners and refining the technology and proposition,” said Joshua Wallace, co-founder of Cytora, set up two years ago in the English university city of Cambridge to analyse social media and give early warning of geopolitical risks.

    Banks are still spending tens of millions of euros on their own development teams, but want to make them more nimble.

    Barclays (BARC.L), whose Chief Executive Antony Jenkins has hailed a technological revolution that will transform banking, has set up about 40 units dubbed “hoppers” to develop ideas more quickly.

    “We needed to change the way we worked,” said Derek White, Barclays’ chief design officer. “We needed to act like a start-up.”

Editing by David Holmes

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