The largest U.S. banks are among the biggest buyers of technology in the world. Where the JPMorgan Chases and Bank of Americas are looking to buy solutions in a category, there’s a solid market for startups and incumbents.
Maria Gotsch, CEO of the Partnership Fund for New York City, and David Treat, senior managing director at Accenture, work with 44 large banks and insurance companies every year as they select and mentor a group of fintech startups in the Fintech Innovation Lab. Banks involved in the lab include Ally Financial, BofA, Capital One Financial, Citigroup, Goldman Sachs, JPMorgan, KeyCorp, Morgan Stanley, U.S. Bancorp, USAA and Wells Fargo. At all the banks, senior tech leaders spend protracted periods of time with the startup teams, often in the banks’ facilities.
Each year, before the next cohort of fintechs apply to join the 12-week accelerator (applications for the 2022 session became available Tuesday), Gotsch and Treat spend time with bank executives to determine the types of fintechs they would most like to see in the lab and ultimately, if all goes well, have their banks sign contracts with. This year, the bankers are said to be most interested in technology in these areas:
Blockchain/distributed ledger: A popular category this year is distributed-ledger technology, which is commonly referred to as “blockchain” even though most distributed ledgers wouldn’t meet a purist’s definition of blockchain. Such ledgers could be essential tools for handling all kinds of digital assets.
“There’s been a huge movement around cryptocurrencies as an asset class, and all of the banks are needing to wrestle with if, how and when will they get involved with it as an asset class,” Treat said. “It has taken some time to get regulatory governance, control and comfort around how to safely work with what is obviously a highly volatile asset class.”
The Bank for International Settlements published a report in August 2020 that found that 80% of the world’s central banks are in the process of researching or developing a central bank digital currency.
“Once that’s available, you’re talking about modernizing the core payments, cash management and security settlement constructs of how financial infrastructure works,” Treat said. “The banks are all wrestling with what does that mean for the products that I have, what does that mean for how I work with my counterparts in a business flow, and what does it mean for the core infrastructure of the entire financial financial industry? There are some deeply important strategic choices that are getting made and work is underway right now.”
The innovation lab has hosted distributed-ledger startups in the past. One of the lab’s alumni is Digital Asset Holdings, a 2015 participant that went on to create a blockchain settlement system for the Australian Stock Exchange that is expected to go live in April 2022. The company is also working with exchanges in Hong Kong and Europe.
Cybersecurity: Security technology is also on big banks’ wish lists.
“They are constantly under threat from a cyber perspective because of who they are,” Gotsch said. “It is just the nature of being a bank, where the money is, that they know they must remain at the absolute cutting edge, because the attackers are continuously improving their attacks.”
The large banks all have vast cybersecurity infrastructures in place, she acknowledged.
“It’s never a question of, somebody’s going to show up with a tool and we’re going to rip out our full existing security infrastructure and replace it with something from an early-stage company. That’s not what they’re looking for,” she said. They are looking for new tools that can be additive or that can replace some dated technology, she said.
They are also looking for cyber resiliency, Gotsch said. “How do you come back from an attack quickly? How do you minimize it? How do you compartmentalize it? There’s a focus on those kinds of tools.” Cybersecurity also overlaps with data privacy, she said. The increasing use of alternate data sources to fight fraud, for instance, calls for technology that protects personally identifiable information.
Alternative data: Big banks and insurance companies have strong interest in tools that help manage and govern data, especially as they continue to draw on alternative data sources for online lending, identity verification and other priorities.
And they are still seeking that elusive 360-degree view of the customer, both retail and institutional, which is created by bringing data from different application silos together, Gotsch said.
Future of work: The pandemic accelerated remote work and the use of collaboration platforms like Microsoft Teams and Zoom, according to Treat.
Now the big banks are looking for what’s next, whether that’s higher-quality immersive experiences or truly digitally native experiences for employees, he said.
Gotsch said she sees banks seeking technology to better manage people, work and productivity.
“This is a really interesting time for companies to come forward with interesting ideas, because people don’t have a fixed view of what the tool should be doing and how it should work, because it’s so new and everybody’s trying to figure it out,” she said. “There’s the capacity in this space for earlier stage companies to set standards around what are best practices in managing a remote workforce and engaging employees that don’t see each other in person.”
Environmental sustainability: Almost every bank partner mentioned the need for sustainability last year and this year, Gotsch said. They’re looking for data tools in this area, such as tracking tools, pricing tools and validation tools that might help a bank meet climate-change goals in its own energy use, in its investments or in its loan portfolio. Insurance companies in the program are finding climate change is bringing risk to physical assets.
“Alternate data tools that can provide additional information on the underwriting and actions for helping price risk climate risk in a better way are also very top of mind for the insurance side,” Gotsch said.
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