just follow while i innovate

"cruisin' on the interstate, just follow while i innovate

too many try and imitate, medallion like a dinner plate

front and get your dinner ate, chinchilla for the winter, wait

i'm tryin' to bring the 'sexy back' with Timbaland and Timberlake"

Campfire - Wu-Tang Clan

Following up on my previous post announcing a new fintech venture capital chapter and thanking the excellent Santander InnoVentures team and Santander Group individuals I worked with, I wanted to share some of my key learnings around innovation - the past two years working with the Santander’s venture team and various parts of the banking group have been enriching, and then some. I worked with InnoVentures under three different group innovation heads and therefore witnessed three different approaches to innovation. I was able to peak in and collaborate on many innovation projects at the group level and country level, some incremental, some moonshots, some purely technology driven, some business model driven. I was able to interact with individuals on the retail side of the bank, the corporate side, at group level, with the UK bank, the US bank, the Nordics operation, the Spanish bank, with technology & operations, with teams focused on lending, asset management, savings, blockchain or AI projects, bank as a service or platform and digital identities initiatives.  To boot, I worked on some of the venture team’s prospective investments as well as overall portfolio management. Inadvertently, following my time as an investor at an independent VC, I got an education on cutting edge innovation from a leading incumbent’s perspective, and most importantly, what works and does not work.

I also encountered the severe regulatory limitations banks/incumbents operate under, be it from local regulators, legislators or global risk and compliance frameworks which cannot be violated one iota. Obviously, these limitations are one of the explanations why banks find it so difficult to innovate and re-think their businesses in a swift and nimble way. Some banks find these limitations more difficult to overcome than others, other venture down the road of direct investments, innovation partnerships or venture capital partnerships. Santander, with its various in-country innovation efforts and its venture arm, with an excellent portfolio of venture investments built in the past three years and the major innovation wins across various countries, is attempting to stay at the forefront of innovation in a rapidly changing landscape. Its efforts are indeed laudable.

I took some time over the past week to reflect on my experiences in fintech beginning back in 2009 with Route 66 Ventures through my time with Santander InnoVentures, including my various interactions with consulting firms, accelerators, startups, academics, and other incumbents. Through the sum of these experiences I have pieced together a set of theories on best practices in financial services innovation at the incumbent level, heavily centered around venture investing and venture building (e.g., internal innovation around new businesses).

Here, humbly submitted, is my attempt at a best practices framework:

• Innovation is a partnership game. If you (as an incumbent) think you can innovate on your own without the outside world’s help, you are on the wrong track. Innovate with others, don’t innovate solely for and with yourself. It is always better to augment one’s internal efforts with partnerships bringing external expertise. For venture investing it means investing in an accelerator, or even an independent fund. For venture building it means partnering with a consultancy firm specialized in innovation in financial services.
• Absolute control is an impediment.Given that partnering is so important to achieve positive innovation results, it is crucial to realize that some level of control will be relinquished. This is probably one of the most difficult learning points a bank has to digest and put in practice.
• Innovation requires a portfolio management approach. There is no unique silver bullet. The trick is to build a multi-varied approach that best fits the organization and includes internal venture building, fintech accelerator initiatives, venture investing, iterative and small projects, a few moonshots, as many innovation centers across the organization as possible, and a central innovation nervous system to coordinate all activities. Centralized innovation often fails. So does uncoordinated decentralized innovation.
• Innovation cannot be abstracted.  Innovation cannot be a completely separate function; it must balance an incumbent’s tactical and strategic goals. Overweighting either side of the spectrum leads to excessive behaviors that will not lead to optimal outputs.
• Silo-ed thinking is the enemy of innovation. From the same token, the innovation team needs to be cognizant of banking, inside and out, while incorporating outside thinking. Again, the extremes are dangerous: not being well versed in what it means to be a banker or not being able to bring new outside non-banking thinking are deathly risks and very difficult to overcome.
• Modest early wins will enable bolder visions. Early successes will enablereasonable risk-taking over time. Alternatively, an early loss can be very difficult to mitigate.
• Culture is a crucial component of innovation success.Thus, education and evangelizing are necessary and required. At the same time, education and evangelizing without substance lead to innovation theater and empty showmanship. This is unfortunately all too common amongst incumbents today.
• Best to abstract more than less for either venture building or venture investing initiatives. If given a choice, err on the side of more Investing on balance sheet is a very difficult balancing act to pull off that is tied closely to bureaucratic decisioning and approvals, while creating a new venture team in a separate legal entity is an easier proposition. The same applies to venture building. Abstracting means creating new and/or separate legal or operational entities.
• Find the right mix between strategic and financial returns. Investing purely for strategic returns is extremely vulnerable to negative outcomes. Investing entirely for financial returns will not address immediate corporate needs. It is crucial that the venture investment function be built with the right mix in mind, and with a healthy portion of capital dedicated to purely financial returns untethered from the constraints of what the bank needs or wants, while at the same time dedicating capital to startups that overwhelmingly fit a strategic goal. Strategic investments will be made in some Horizon 2 and many Horizon 3 startups that by definition may be less mature. Financial investments will be made in some Horizon 2 and many Horizon 1 startups that by definition need to be more mature.
• Substance over form for startup engagement. Interacting with startups or third parties for a specific project is of paramount importance. However, paper milestones (such as a proof of concept) should not give false comfort that a prospective investment satisfies a strategic and/or financial hurdle. A PoC may be necessary but it is not a sufficient condition for investment.
• An incumbent needs to bring something special to the table when interacting with a startup.Simply digesting the startup’s value proposition leads directly to a vendor/client relationship that should be avoided at all costs. Vendors are fine but they are not strategic. Too many incumbents chase vendor solutions instead of strategic engagements. In other words, very few incumbents are investing in Horizon 3 startups. Many are easily seduced into Horizon 1 startup investments that could just as easily be vendor relationships. As such, careful examination of what the startup needs and how the startup’s platform or technology can be enhanced (e.g., with data or subject matter expertise) to produce something different or superior is the key to delivering real and sustainable returns. Hence, my comments above on the meaninglessness of proof of concepts as a strategic relationship. Strategic investments do not require a PoC, particularly Horizon 2 or 3.
• Strategic and financial returns require a practical risk-taking ethos.In general, bank employees are in the business of managing risk while innovation is all about taking risks. These approaches are at odds with one another. A healthy risk appetite in the context of a balanced organizational structure is of great importance.
• Innovation inputs require a holistic approach and innovation outputs should be treated holistically. By that I mean that innovation is not only about adopting new technologies, or designing a new work-flow. It is about integrating customer needs and business models and employees in a systemic manner (see Horizon 3 ideas). Further, much like with Amazon where innovation for the core business leads to new businesses that were not initially foreseen, applying new technologies to existing banking business groups or processes may lead to broader use cases – for example, a new risk management framework powered by AI for internal uses may be also useful for the bank’s corporate customers.

These are but a few thoughts and lessons I gathered along the way and built in a non-exhaustive way -- my own roadmap of innovation and venture investing ideas so to speak. These thoughts are clearly not exhaustive, and will clearly evolve and expand as my venture journey continues. As referenced in my prior post, I will be back to you with some detailed news on my next project in the next several weeks.