Banks are loosening up internally so they can work with startups

As banks and financial technology startups collaborate more closely, banks are beginning to pull apart the image of their institutions as segmented bureaucratic machines that can’t innovate quickly.

With public confidence in them in the U.S. below 50 percent across the political spectrum, banks have a branding problem — one that gets even more problematic when they have to work with those outside the industry.

Fail fast is not in their ethos,” said Jon Zanoff, founder of Empire Startups and managing director of the Barclays Techstars accelerator in New York — one of several panelists commenting on industry culture at the FinXTech Annual Summit Wednesday, part of New York Fintech Week. “If you’re not paying people to take chances and fail, you’re not going to innovate.”

Wells Fargo is one of the banks that has taken active interest in facilitating dialogues with startups. While most major banks have accelerator programs, Wells Fargo said one of the focuses of its startup program is helping banks understand startup culture and vice versa. Wells Fargo’s accelerator program mentors companies for six months and provides up to $500,000 of equity investments for selected companies. The companies may also work on proof of concepts across different business lines within the bank after the completing of the program.

“We’ve created an internal accelerator where we bring fintech companies in  — we can learn and they can learn,”  said Sherrie Littlejohn, Wells Fargo’s evp for internal innovation strategies. “It’s about our learning how they think what’s possible and also for them to understand what it’s like to work in a large corporation and how to work with regulators.”

How workspaces are organized is key, say experts. Zanoff said that what facilitates creativity in the Barclays Techstars accelerator program —  a 13-week development for startups run by Barclays Bank and Techstars — is the open design that encourages agile teams, which represents a shift for an industry synonymous with large boardrooms.

“Much of what Barclays is doing is hedging and understanding what a modern workplace may look like — what does it mean to have small agile teams of three to five people working on laptops in open working spaces,” he said. “How fast can they move, how can we integrate that technology?”

For smaller banks, a focused approach ensures that the relationship will be productive. Boston-based branchless virtual bank, Radius Bank, has a staff member dedicated to partnerships with startups who carefully vets each startup for compatibility.

“Are we aligned with what you’re trying to create? Are you going to solve a problem for me?” said Michael Butler, Radius Bank’s president and CEO, speaking about the startup vetting process.

A more thorough assessment process is important for smaller institutions, because a failing startup could have a much bigger impact on the bank’s operations, said Jay Tuli, svp of retail banking and residential lending at Leader Bank.

We’re going to vet how long and why they stay in business, and are they profitable, and if they went out of business, how would it affect us.”

How First Green Bank is selling customers on its environmental ethos

A solar roof. A green wall. Countertops made of recycled money. These are a few outward examples of how Florida-based First Green Bank uses its environmental credentials to appeal to customers that want to put their money into an bank that aligns with their green values.

The company, a regional bank with seven branches across Florida, fuses environmentalism into its branch design, product offerings and social media presence in an effort to woo customers.

Ken LaRoe founded the bank in 2009 after selling Florida Choice Bank to Alabama National BanCorp three years before. He said he drew inspiration for the concept after reading Patagonia founder Yvon Chouinard’s book “Let My People Go Surfing” and learning more about the green banking movement, which includes banks that put environmental principles at the core of their operations. It’s a sector that’s not particularly crowded, and includes private (like New Resource Bank in California and Houston-based Green Bank) and quasi-public institutions like Green Bank of New York and Connecticut Green Bank.

A large component those who flock to the company are millennials, who, according to Morgan Stanley research, are far more likely to invest in areas that have a social or environmental impact. “Some people come to us because we’re a community bank that provides good service and personal attention, and some people come to us for the value proposition,” said LaRoe. “We get a lot of millennials — as a demographic cohort, they seem to get it.”

 

Solar Roof
Solar roof on top of First Green Bank’s Mount Dora location.

LaRoe said that the design of the branches encourages openness and energy conservation, including a flagship Mount Dora, Florida branch that’s certified to LEED Platinum rating, the highest ranking a building can be given by the U.S. Green Building Council. He said it uses 30 percent of the energy a comparable sized building would consume, and along with a solar roof, there are mechanisms to collect rain water for plumbing and irrigation uses. The building’s interior design is open concept and uses recycled materials, and the bank offers free coffee and sitting areas for customers.

“The first thing when you walk in the door, you see the living wall, and then if you look down the terrazzo floors are made of sustainable products, the countertops are made of grounded up recycled money and if you look up there’s a gym that all the co-workers can use,” he said. The bank offers discounted interest rates for commercial and residential building projects that meet green building criteria, along with solar loans.

In addition to its design and products, First Green is also active on social media in voicing support for environmentalism and getting in on political issues. Earlier this year, it posted on Facebook to draw attention to the fact that it wasn’t supporting the Dakota Access Pipeline, a flashpoint that LaRoe said prompted many customers to switch to First Green Bank.

“On the Dakota Access Pipeline, we’ve had people call us from all over the country,” he said. “They’re saying ‘I’m moving my mortgage from Bank of America because they’re supporting the Dakota pipeline and I want to move my business to you’ — it’s that kind of thing over and over again.”

When asked if the bank’s social media activity leans too far towards political advocacy, LaRoe said he feels it’s important to post content that reinforces the values-centered message.

I don’t mind being polarizing and my board sometimes has that concern, but especially in this age of ‘Trumpism,’ it needs to be in their face.”

Photos courtesy Steve Williams

Yoga classes and snacks: Umpqua Bank wants to make banking less of a chore

Portland-based Umpqua Bank is embracing its decidedly West Coast roots, with branches that offer yoga classes, Wi-Fi, meeting rooms, coffee and snacks. The approach is part of the bank’s strategy to attract more customers by shaking up what it means to head to a bank.

“Finances are intimidating for people, and banks have followed that model by creating an intimidating and chore-like experience,” said Eve Callahan, evp of corporate communications at the company. “Why can’t we create a banking experience that’s approachable, engaging, and fun?”

In an age where banks are evolving their bricks-and-mortar branches by creating stripped-down, employee-less branches for digitally savvy younger customers, Umpqua Bank is taking another turn by reframing the branch as a community center where people can hang out and use the co-working spaces and meeting rooms.

“We thought ‘let’s operate the stores like community hubs — let’s augment the neighborhood around us’,” she said.

Umpqua Bank branches, which number over 300 in Washington, Oregon, Idaho, Nevada and California, resemble open-concept co-working spaces more typical of startup culture. The design structures of the branches are meant to stimulate interaction. For example, when the bank’s South Lake Union branch opened three years ago, the outside of the building hosted an interactive “conversation wall” where passersby would text their thoughts, some of which would appear as installation art. Inside, the branch hosts meeting rooms and event space accessible to the public. The customer service area is an open space where staff members interact with customers.

Yoga class at umpqua
Would you take a yoga class at your bank?

The versatility of the space also extends to the organizational structure. Instead of tellers, the bank has a smaller number of “universal associates” — employees who can help customers with a range of inquiries, without having triage requests that has often been the norm in larger banks. And if there’s any matter they can’t address, customers can use a phone that takes them right to the CEO (Callahan noted that if he is not in the office, his assistant will take messages.) The bank also worked with Ritz-Carlton hotels on a consulting basis to train its staff in hospitality.

“The whole idea of a flat organization comes from Silicon Valley, where startups have people doing a lot of different things and are very much connected to management,” said Stephen Greer, an analyst at Celent. “If you have employees that are more skilled, they can be more entrepreneurial.”

Homepage image courtesy of Umpqua Bank

Inside Wells Fargo’s mission to create a password-less future

In a few years, when you need to get some cash out of the ATM, an eye scan may have replaced the need to enter your passcode.

At least, that’s what Wells Fargo is hoping. The bank is in the process of testing out various technologies in the arena of biometrics — whether it’s voice, fingerprints or eye scans — that it hopes will eventually phase out passwords altogether.

“One biometric doesn’t fit every situation,” said Steve Ellis, head of Wells Fargo’s innovation group. “Our view is they can decide which they want to use in the moment they’re trying to. For example, if I’m driving in my car and I want to talk to the bank, I’m not going to authenticate with my fingerprint but maybe my voice could be the password … we see this idea of biometrics replacing user IDs and passwords.”

Accessing a bank account through a thumbprint, voice print or eye print has become second nature in many parts of the world. Aadhar Pay, India’s system to unlock banking services through a thumbprint, will launch on Friday, and Australia’s ANZ Bank just announced a pilot program to let customers use their voices to authorize transactions of AUD 1,000 ($750) or more.

Banks in the United States lag behind as they figure out what combination of sign-on methods will work.

Wells Fargo has made notable strides on biometrics. For example, when you have to reach a call center, you don’t have to enter a pin; instead, you can use voice verification to get authenticated. In a more commonplace scenario, you can also use your fingerprints to access the bank’s mobile app. And late last year, it announced that by the end of this quarter, it will allow commercial customers to use eyeprints to authenticate customers. The software recognizes a customer by matching a picture of a user’s eye with information it has on the micro features of their eye, including blood vessels and other details. Wells Fargo is working with software developer EyeVerify, a company that was once part of its accelerator program that has since been acquired by Ant Financial.

Others in the United States that implemented biometric features include Citibank, which recently launched the capability to log into its mobile app through fingerprint, voice, facial recognition, PIN and password. Others, including U.S. Bank and JPMorgan Chase, let customers log into the mobile app with a fingerprint.

Companies that work on biometrics say what’s keeping banks from moving further is a mixture of concerns about regulation around biometric data and more importantly, a sense of skepticism from senior executives.

“Facial recognition is awesome, but do you really see yourself scanning your face to use an ATM?” said George Avetisov, CEO of HYPR, a biometric security company that works with major American banks. “There are banking executives that aren’t convinced.”

User habits also influence how quickly banks can roll out the technology. In many emerging markets, the transition to biometrics was easier because mobile banking has been a mainstay for a longer time.

“A lot of those countries skipped the desktop phase and went to mobile,” he said. “That’s why they’re more innovative on the mobile.”

U.S. banks also lag on biometric ATMs as well, in part because of the lack of a single standard that works across banks. “There is a lack of standards with regards to biometrics [for ATMs], which further delays in investment in biometric technology for fear of choosing the ‘wrong solution’,” said Dominic Hirsch, managing director of consulting firm RBR.

Hirsch added that data sharing and storage would also complicate a biometric ATM rollout. These concerns apply to emerging markets, although some countries (including India) have national biometric databases that can be used.

What may be the biggest influence on bringing biometric banking to mainstream may be the move towards internet-connected devices, which will help build a culture of biometrics in daily life.

“What’s going to be the catalyst is the internet of things,” said Avetisov. “You’re not going to lock your door with a password — these will be fully biometric experiences.”

Tanaya Macheel contributed reporting.

How finance brands use Instagram

A mountain top view. A close-up of a hand-rolled pastry. These images, while almost pedestrian on Instagram, are hardly what you’d expect out of a finance brand.

But that’s exactly what American Express’ presence on the platform is all about: An effort to connect with an experience rather than a product. “Instagram is really about engaging — it’s so powerful because it’s so visual,” said Mark Arnold, a branding consultant who specializes in financial services companies.

With Instagram, finance companies are focusing on content that generates interaction, since peddling products outright can easily be shut out by users who may not want to see advertising on the platform.

“If you engage, the sales will come, but if you sell on Instagram, that will backfire on you in a heartbeat,” said Arnold.

Among finance companies, American Express is seen by many as a leader in Instagram outreach. With its 173,000 followers and average of over 1,000 likes per post, its content is an assortment of high-quality food and travel photos.

“That’s not surprising, because they have lived in the lifestyle arena for a long time,” said Mariana Rittenhouse, senior director of brand strategy for Instagram analytics company Dash Hudson. “All the benefits from being an AmEx member wrapped up in food and dining are niches that perform well on Instagram, and they had a natural relevance there.”

The brand is so closely intertwined with travel and fun that even images of its card are popular on Instagram.

Similarly, Mastercard, with 61,000 followers, also uses Instagram to drive interest through fun experiences. To Mastercard, the tools enabled by Instagram’s parent company, Facebook, offer the ability to focus on specific demographics.

 “Instagram enables us to micro-target content around consumer passions and interests,” said Jennifer Stalzer, vp and senior business leader for external communications for Mastercard. And who wouldn’t be interested in winning a trip to Paris, like this photogenic young couple? 

For retail banks, making the banking experience less impersonal is a common goal. Instagram can make a bank seem more like a community center rather than a necessary evil.

TD, with 6,100 followers, plays up the human aspect of banking.

“TD’s objective is to unite people around common stories,” said Arianna Orpello Lewko, head of brand of digital marketing at TD Bank. “Banking has traditionally been transactional, but we know money is very emotional, therefore our goal is to create social content reflective of that emotion to help build better relationships with people.”

TD’s posts have emphasized diversity and strived to spark financial conversations among customers. Others, including Citibank, build brand awareness by showcasing the company culture. Citi has four Instagram accounts with a combined following of over 42,000 followers.

Curating a positive company image is also important for recruitment, particularly for younger people who are more likely to be Instagram users. An important player in this area is investment bank Morgan Stanley. With its 10,000 users, a good portion of its feed is dedicated to recruitment. What’s unique about Morgan Stanley is its engagement rate, the percentage of the account’s audience that has interacted with the content by liking or commenting. According to Dash Hudson, Morgan Stanley’s engagement rate over the past 12 weeks was over two percent, more than double that of American Express.

“We want our Instagram presence to give our followers insight into Morgan Stanley’s community, culture and impact,” said Alison Garrett, executive director of digital strategy at Morgan Stanley. “We use Instagram to give people a peek into our offices and events around the globe. We share images of our employees exemplifying Morgan Stanley values, volunteering in their communities or leading with ideas at technology or leadership events.”

RBC is using video conferencing to bring the human touch back to banking

With talk of intelligent machines making the banking experience less personal, at least one major institution is taking a turn in the other direction by letting customers video conference with real people.

The Royal Bank of Canada, Canada’s largest bank, launched its MyAdvisor pilot this week — a feature that lets customers schedule video conferences with financial advisors. The bank said it’s making the move because talking to a real person still matters for their customers. “Clients told us that when it comes to investing, trust is key,” said Michael Walker, vp and head of mutual funds distribution and financial planning at RBC. “For most clients, they build trust with human beings first — not just technology.”

For now, MyAdvisor will be invite-only to a group of 500 customers in Ontario, but the bank plans to roll out the service across Canada by July. RBC is currently focusing on investment advice, but Walker said it plans to roll out video conferencing for other services as well. During a video conference, the customer and investment adviser can review the customer’s portfolio together and assess progress towards financial goals — mimicking an in-branch experience.

Analysts say RBC’s virtual real human advice service is optimal for the more complicated interactions, particularly when a concrete answer isn’t available.

“The robo-advice stuff may be great for entry-level consumers that have more simple needs, but for more a more complex investing picture, it’s difficult to get that programmed in — the complexity of human needs and wants require more of a human interaction connection,” said Ron Shevlin, director of research at Cornerstone Advisors.

RBC said the feature is not intended to take away from its efforts to use machine learning to improve the banking experience.

In the United States, video conferencing is currently available within branches, with Bank of America’s ’employee-less branch’ pilot earlier this year being the most recent example. But the capacity to do that remotely has been slow to catch on, in part because of money and infrastructure requirements.

“RBC has the resources to make this happen — this is not an inexpensive proposition because of the bandwidth and technological infrastructure required; they’re making a big investment and big bet that the customers are going to want it,” said Shevlin.

RBC’s use of technology to connect with real people may be a sign of an emerging consensus that the future of banking will be more about choices rather than a barreling towards automation.

“Often when the topic of digital and machine learning or artificial intelligence comes up, it’s in the context of a binary debate, either one or the other — humans or automated — the reality is that this bank and others serve very diverse audiences whose behavior and preferences are rapidly changing,” said Bob Meara, senior analyst at Celent.

Despite the advances in automated customer service capability, the human touch may be difficult to replace.

“The question isn’t so much ‘whether AI can do it all?’ but ‘do we want it to do it all?” said Martin Häring, chief marketing officer of banking software company Misys. “The emergence of ‘human’ advisors via video is not a backlash to bots, instead it enables banks to add the human touch to complex decision making processes.”

Photo credit: RBC

‘A slow-moving wave’: Why cardless ATMs haven’t taken off in the US

As mobile banking and digital wallets become more common, smartphones will increasingly be the key to unlocking cash on the go. 

Wells Fargo’s launch this week of cardless capability to its 13,000 ATMs across the U.S. is the latest example of how banks are touting the technology as the next big thing in consumer banking. The sales pitch notes that they save time, and since no card enters the machine, it’s harder for a fraudster to steal the card details. But cardless ATM banking in the U.S. is still far from the norm, largely due to technological and cultural hurdles.

“You need look at your customers and what stage they’re at,” said Andy Brown, marketing director of payments for NCR Corporation, a major ATM manufacturer. “The bigger challenge is the U.S. market. There’s not a high take up of contactless — you’ve probably got to do an educational exercise.“

The move from using a card to a mobile phone to access an ATM is seen by many industry watchers as the next step from contactless cards, or the ‘tap for cash’ capability. But since contactless cards have yet to catch on in the U.S., getting a customer to wave a smartphone to get cash at the ATM may not happen immediately.

“Customers want to do it stages,” said Brown. “When they are used to doing contactless then they can move on to next stage.”  

Other countries, including Australia, have successfully rolled out cardless ATMs accessible through NFC-capable phones, but they have made the transition from contactless cards, said Brown. So while many ATMs shipped to the U.S. are capable of doing transactions initiated by mobile wallets, it’s not a feature all banks have chosen to make live. By contrast, cardless ATMs that can be accessed by digital wallets have been out in Korea for over a year.

“It’s certainly not an overnight challenge to solve,” said Devon Watson, vp of global strategy and operations at ATM manufacturer Diebold Nixdorf. “In terms of their payment habits, consumers are a slow-moving wave.”

Apart from the user adoption curve, technological roadblocks may also hinder the move towards cardless ATMs in the U.S.

“The ecosystem overall needs to know how to digest that transaction type,” Watson said. “Banks need to enable ATMs to interact with an NFC-enabled phone, that’s one piece of it, but the other that’s probably the bigger inhibitor are the transaction networks themselves — the processors that have to be able to route and process that transaction.”

U.S. banks are nonetheless pouring money into the cardless wave. Bank of America, which currently has 8,500 ATMs that can be used with digital wallets, says its goal is to allow all of its ATMs to have this capability. Wells Fargo said it will be eventually be moving to cardless ATMs capable of being accessed with NFC-capable phones, but for now, the only way to access a Wells Fargo ATM without a card is to log into the mobile app for a temporary code. Others, including JPMorgan Chase, are cautiously going cardless, with Chase piloting a feature similar to the Wells Fargo app-activated cardless ATM.

Given these barriers, mass adoption in the U.S. is still far off. Analysts say U.S. cardless ATM trials, including a 2013 Diebold Nixdorf pilot with QR codes, show U.S. customers are interested, but widespread adoption is still years away. What’s more likely is that U.S. banks will offer it as a value-added service.

“At this point, cardless ATMs are primarily a kind of emergency rather than a regular feature — for instance, if you don’t have your card,” said Dominic Hirsch, managing director of RBR, a research and consulting firm that specializes in retail banking. “You’ll see more and more banks will market this as an additional service — it’s not critical but a nice to have.”

Citi Ventures and RRE invest $11 million in Clarity Money

The battle between personal finance apps just got a little hotter today with a major investment in upstart Clarity Money.

Citi Ventures, the venture capital arm of Citibank, and venture capital firm RRE Ventures announced an $11 million Series B funding round for Clarity Money, an artificial-intelligence powered personal finance app that launched just this year.

Led by Adam Dell, brother of Dell founder Michael Dell, the app connects to customers’ bank and credit accounts and suggests ways they can save money by helping users cancel unwanted recurring expenses. It also lets customers save for specific goals.

“The reason we made the investment is that we didn’t see any others that were able to advocate and create the value like Clarity did,” said Stuart Ellman, managing partner at RRE Ventures. RRE was an early investor in Clarity and has a number of prominent finance and technology companies in its portfolio, including Nerdwallet and OnDeck. RRE was also a seed investor in Venmo.

Clarity Money launched in January of this year and claims it has 100,000 users. But with a proliferation of personal finance apps on the market such as Mint, Digit and Quapital, investors are interested in Clarity Money because of its focus customer advocacy based on data analysis.

Dell said Clarity Money’s value derives from its ability to deliver a personal finance overview a step further with concrete, achievable steps. For Citi Ventures, the use of APIs to improve the consumer banking experience was an important factor in influencing their decision to invest in the company.

“The PFM [personal finance management app] market is crowded and building a successful consumer app comes with challenges, but we believe that Clarity’s application of machine learning and behavioral science is a unique and competitive offering,” said Luis Valdich, Managing Director at Citi Ventures.

Financial technology is a focus area for Citi Ventures, whose portfolio includes Square, Betterment, BlueVine and FastPay.

Banks’ partnerships with startups such as Clarity are becoming a key innovation channel for major brands such as Citi. Though no formal partnership arrangements are currently in place, the Citi Ventures is open to future arrangements.

“We think there will be opportunities to partner with them in the future, and we are exploring those options,” said Valdich.

While some may argue that the personal finance app market is already saturated, Ellman said that customer experience and ease of user interface are what will ultimately drive success.

“After twenty years of dot com and the web, there are no completely white spaces that I can think of,” said Ellman. “It comes down to whether you have a better product and if can you execute better than the other people in the area that you’ve chosen.”

5 ways banks are using Snapchat

Citibank Snapchat Spectacles video.
Citibank video taken with Snapchat Spectacles.

It was bad enough when your mom joined Snapchat to see what all the fuss was about. Now your bank wants to send you snaps, too.

“They feel like there’s a need to jump on Snapchat or else they’re going to get left behind,” said Mike Metzler, director of client strategy at Delmondo, a company that manages influencer campaigns and produces Snapchat branded content for prominent consumer brands, including Mastercard.

But consumers, particularly Snapchat’s largely millennial user base, have a high bar for organic content, analysts say. If the material isn’t sufficiently compelling, a user may completely shut out a brand.

“The process of adding someone on Snapchat is so cumbersome,” said Metzler. “If you’re a bank and you get someone to add you and make crappy content it’s a risk.”

Banks have been considering different uses for Snapchat, including marketing to job seekers, addressing questions from customers and generally trying to be more visible in a social media channel more heavily used by younger people. They are still trying to figure out what works best, so the approach is still cautious and experimental.

“They don’t know what they’re trying to achieve,” said Peter Wannemacher, senior analyst at Forrester. “Bank customers are not screaming out for ways to combine their financial lives and their social media lives.”

Here are five ways banks are testing Snapchat:

BNP staffers reach out to recruiters through Snapchat. Credit: Snapchat screenshot via Twitter.
Would you give them your money, though?

Recruitment
In November of last year, BNP Paribas launched Snapchat Recruitment week, where recruiters from five cities around the world gave snapshots of the company’s working culture.

American banks have also amped up their Snapchat recruiting efforts. Not long after their launch of Snapchat Spectacles, Citibank employees began shooting videos with them to offer insights of life as a Citibank worker.

“The videos provide a bird’s eye view of a day in the life at Citi, allowing recruits to follow someone as they interact with colleagues and do their job,” said Courtney Storz, head of global campus recruitment and program management at Citi.

Customer service
Dutch bank ABN Amro launched a Snapchat customer service capability (Snapchat “webcare”), a feature that’s yielded them 2000 followers since its launch a year ago. The bank posts stories to engage users who can ask questions using photos, videos, emojis and filters. Not being too serious is a lesson learned from the product’s first year, spokeswoman Brigitte Seegers told American Banker.

CIBC LGBTQ pride Snapchat filter. Photo credit: Snaphat screenshot via Twitter.
LGBTQ pride Snapchat filter from CIBC.

Aligning with a cause
Through Snapchat, banks are affiliating themselves with causes close to customers’ hearts. For example, CIBC, Canada’s fifth-largest bank, launched a Snapchat pride filter to mark LGBTQ pride festivities last summer.

In the U.S., JP Morgan Chase used Snapchat ads to mark international Women’s Day with a takeover of the international women’s day story on March 8 highlighting the firm’s female leaders.

Providing financial tips and advice
The Bank of Ireland pulled in celebrity influencers who use the Snapchat offer financial tips and advice to younger customers — a part of the bank’s FeelFree student reward program. Laura Lynch, head of youth banking at the Bank of Ireland, told the Irish Times that the bank is looking to use Snapchat “ to communicate with our student customers and share helpful tips with them on a range of topics and give them behind-the-scenes access.”

JPMCC_London
A Snapchat geofilter for JPMorgan Chase’s London Corporate Challenge.

Adding brand visibility at sponsored events
Bank of America’s Llama was used as a Snapchat lens was released last summer in conjunction with the MLB All Star Game to promote the bank’s mobile app. Meanwhile, JPMorgan Chase has used Snapchat geofilters for the Chase Corporate Challenge.

‘Both vision and data’: Why mobile phones are giving millions access to financial services

This is Ask a VC, where we quiz venture capitalists on the latest trends in the finance space.

While billions across the world have limited access to financial services, that number is quickly falling. The World Bank reported that between 2011 and 2014, 700 million people became account holders at banks and mobile money service providers. At least part of this can be attributed to technological advances that give people new ways to manage their money. It’s the kind of progress that inspires Monica Brand Engel, a partner at Quona Capital, a venture capital firm that specializes in early-stage financial technology companies in emerging markets.

Quona manages the Accion Frontier Inclusion Fund, a $141 million pool that invests in products for the underserved, including alternative credit, payments and business-to-business financial tools. Investors include Accion International, JPMorgan Chase, Mastercard, Metlife and Prudential Financial. Its portfolio includes the South Africa-based mobile payments provider Yoco, CreditMantri (the ‘Credit Karma of India’) and Konfio, a Mexican online lending platform.

For this edition of Ask a VC, we spoke to Engel about what’s driving innovation in the financial inclusion space. Answers have been edited for clarity.

How can investors tell the difference between the next big fad versus the next big thing?
Financial technology has seen a resurgence in emerging markets since the financial crisis. I wouldn’t call it a fad but a convergence of trends, including the proliferation of mobile phones in parts of the world where access was limited as well as internet connectivity. Similarly, another trend is mobility. Borders are becoming less relevant and people are seamlessly moving from country to to country, and also economic mobility is fueling an emerging middle class.

Quona supports ideas that generate an attractive return on investment and promise to change the world for the better — can you do both of these, from day one?
We expect that the portfolio companies will incur a loss for the next two or even three years. At some point in the short to medium term they will earn a profit, they’ll get acquired or go public. When the liquidity event will happen, that’s when we the investors and Quona will get our money back as a return. When we invest in them there’s a clear path to profitability.

What financial technology trend is most exciting to you right now?
That’s like saying to a mom which child do you love best! There’s so many trends out there. I’d say the proliferation of mobile phones. It means you have a digital identity for people who were previously invisible. A mobile phone in their hand that doesn’t mean just connectivity — it means you can see them. A phone number becomes like a social security number, and that’s powerful because you have an identity that can be geolocated.

Is there one that’s particularly overhyped to you or has lost your attention?
What’s overhyped is the notion that the old financial system is going to disappear. In the new world order, banks will have different roles.

There are many funds that aim to help people who can’t access financial services, in the U.S. and in the developing world. Can startups offer something different than the banks?
Startups are nimble. They can take risks that a deposit-taking institution just can’t take, particularly in product design, user experience and breadth of access. Banks are interested in the inclusionary space. For example, Mastercard is an investor in us. They’re interested in how they’re going to get new clients. They struggle because they see things through their lens and it can be a blinder sometimes, but the banks are trying to see if they can extend what they do today and want to push their boundaries.

What’s the greatest lesson you’ve learned from a failed venture?
Both vision and data are important to get to success. And just because everyone is doing it doesn’t mean you should do it.

What’s the biggest mistake that entrepreneurs make when pitching you?
Thinking that your investors want to hear that there are no problems. When you say there’s no problem, it means you’re not sure how to manage your business. I like bad news early and often.