12 priceless lessons from BBVA and Goldman Sachs

“Innovator’s Dilemma”: are the banks capable of making innovations by themselves?

The theory of disruptive innovation was invented by Clayton Christensen (the most influential business thinker in the world, according to Thinkers50), of Harvard Business School, in his book “The Innovator’s Dilemma”. Mr Christensen used the term to describe innovations that create new markets by discovering new categories of customers. They do this partly by harnessing new technologies but also by developing new business models and exploiting old technologies in new ways. He contrasted “disruptive innovation” with “sustaining innovation”, which simply improves existing products. Personal computers, for example, were disruptive innovations because they created a new mass market for computers; previously, expensive mainframe computers had been sold only to big companies and research universities.

The “innovator’s dilemma” is the difficult choice an established company faces when it has to choose between holding onto an existing market by doing the same thing a bit better, or capturing new markets by embracing new technologies and adopting new business models. Netflix took a more radical move, switching away from its old business model (sending out rental DVDs by post) to a new one (streaming on-demand video to its customers). Disruptive innovations usually find their first customers at the bottom of the market: as unproved, often unpolished, products, they cannot command a high price. Incumbents are often complacent, slow to recognise the threat that their inferior competitors pose. But as successive refinements improve them to the point that they start to steal customers, they may end up reshaping entire industries: classified ads (Craigslist), long distance calls (Skype), record stores (iTunes), research libraries (Google), local stores (eBay), taxis (Uber) and newspapers (Twitter). Google promises to reinvent cars as autonomous vehicles; Amazon promises to reinvent shopping (again) using drones; 3D printing could disrupt manufacturing.

But perhaps the most surprising disruptive innovations will come from bottom-of-the-pyramid entrepreneurs who are inventing new ways of delivering financial services for a fraction of the cost of current market leaders. According to Christensen,

“When big companies fail, it’s often not because they do something wrong but because they do everything right. Successful businesses are trained to focus on what he calls sustaining innovations – innovations at the profitable, high end of the market, making things incrementally bigger, more powerful, and more efficient. The problem is that this leaves companies vulnerable to the disruptive innovations that emerge in the murky, low-margin bottom of the market. And this is where the true revolutions occur, creating new markets and wreaking havoc within industries.”

A study made by Christensen shows that big and successful corporations are not capable of breakthrough innovations. Their internal processes are built the way that they always chose a more predictable course of events losing sight of the future at the same time. The only possible solution for a big corporation is to detach an entire team or even a company that will be responsible for working on “disruptive” innovations. They get a separate office and unusual titles, they are not obliged to keep any dress-codes or working hours, they don’t have to defend their budgets or KPIs based on typical corporative standards. Steve Jobs provided the exact same conditions for Jony Ive after heading Apple for the second time. These people should have an entrepreneur’s spirit – even when they are hired managers. This way the company artificially creates their own startup – they must feel like this company belongs to them and they work for themselves.

Due to my work I meet a lot of bankers from around the globe and see their attitude to fintech startups: some don’t bother at all, some laugh, some even play  with them as if they are some trendy toys (running hackathons and fake accelerators), some say they would realise better services using their current employees and technologies… Two banks that staggered me the most (that have also succeeded in fintech) are BBVA (thanks to Jay Reinemann, with whom we made a number of interesting deals) and Goldman Sachs (thanks to Alokik Advani, Terence Lim and Andy Tai for their long-term vision).

From competition to synergy: when brains beat balls

1. Investing early on for insights, not profits – BBVA Ventures, which was started in 2011, has been making relatively small investments in start-ups, allowing the bank to gain access to the companies’ founders and early insights into how their technologies are playing out. The small office on the edge of the financial district in San Francisco serves as a kind of listening post for a giant Spanish bank. “Investing is the first step in a working relationship,” Mr. Reinemann said.

2. Bank executives say they are most interested in forming partnerships (not competition, buying, white-labeling or doing by themselves) with the start-ups by making investments of as little as $500,000, rather than focusing entirely on scoring huge profits like a traditional venture capital fund. “We want to be backing the best entrepreneurs,” said Jay Reinemann, the head of BBVA Ventures, “the ones that will have the best success at disrupting the industry.” Herein lies the central paradox for big banks pushing into Silicon Valley. Some banks want to borrow ideas from the start-ups – or even buy their technologies outright.

3. Learn from startups instead of teaching them. Startups that are having the most success at disrupting the industry’s profitable business lines may not be easily persuaded about the merits of teaming up with an established bank. For one thing, the culture of big, lumbering banks is antithetical to nimble startups. And at the moment, start-ups have their pick of venture capital investors. “These little companies really don’t want to be a bank,” Mr. Reinemann from BBVA said. Goldman’s aim isn’t just to invest in tech companies but also to learn from them and even emulate them. The firm and its clients – big corporations, private-wealth customers, asset managers – are struggling to navigate the new markets technology is creating. Banking and finance, in particular, expect to be hit with big upheavals. Startups such as peer-to-peer banker LendingClub and Wealthfront, a financial advisory platform, are aiming to pick off just about every part of the industry. We “try to disrupt ourselves,” Blankfein from Goldman Sachs said.

4. Big banks corporative culture may kill startups if those would be placed in the corporative environment of corporations. If Simple (Life.SREDA VC was one of the investors) is swallowed up in BBVA’s bureaucracy, not only does it risk losing its loyal customers, it may also lose the engineers and programmers who went to work at the start-up precisely because it was different from a traditional bank. Those technology experts have been vital to Simple’s success. BBVA executives say Simple will preserve its independence by maintaining its own board (although BBVA will have a majority of the seats). The expectation is that Simple accounts will be transferred to BBVA Compass, from its current partner bank, Bancorp. The real test for a branchless bank like Simple is whether customers will feel comfortable conducting complex transactions like mortgages entirely online. Larger banks say that the majority of customers still insist on doing much of their banking in the branches. But BBVA is not convinced.