Part 1 of 2
This past week was a bit tough; I had to apply some deep reflection about my views on South African banking. It was the first time a peer at work had told me to not be so harsh on bankers, that banks’ were not ‘arteries’ congested by fatty transactional services. I could see both the irony and the humour in his explanation however; he had challenged me to write about how a bank could compete with Fintech.
So here is something I have been thinking about!
The difference between a good and bad meal is whether it is at an ambient temperature. Off course, taste or flavour will matter however; no self-respecting human being is going to say a meal is enjoyable, especially when it’s cold. I apologise in advance to anyone that is a fan of ‘cold soup’. This analogy about a hot vs. cold meal is very much the ambient temperature of the Fintech Africa space today. My view is, if Fintech Africa is simmering at the right temperature, why not eat while it’s hot?
My thinking is aligned as follows; if bankers are concerned about not dining at the Fintech table, why not join them? For sake of clarity, a South African bank should not become a Fintech. I am suggesting that the bankers partake in the same process that will allow them to dine at the Fintech table?
Let’s look at my last statement in both accounting and entrepreneurial terms.
The accounting equation is:
Assets = Owners Equity + Liabilities
Seeing that acronym rather differently, I would suggest:
Accelerators = Outrageous Entrepreneurs + Lifetime value
This equation has either got you thinking or just plain confused. So, let’s break down the equation into three individual parts.
Accelerators have become an umbrella term for any program providing a service structure of mentorship, networking opportunities and access to funding. The challenge, however, is to understand their distinctive characteristics and profiles geared towards reinforcing business start-ups. Accelerators are organisations that aim to accelerate successful venture creation by providing specific incubation services, focused on education and mentoring, during an intensive program of limited duration. Although the accelerator model includes intangible services, such as mentoring and networking, it has a number of other specific features that sets it apart from existing incubation models.
Firstly, they are not primarily designed to provide physical resources or office support services over a long period of time. Secondly, they typically offer pre-seed investment, usually in exchange for equity. Thirdly, they are less focused on venture capitalists as a next step of finance, but are more closely connected to business angels and small-scale individual investors. One of the reasons for this difference is that their focus is on early-stage tech start-ups for which the costs of experimentation have dropped significantly in the last decade, rather than capital-intensive start-ups, such as technology-oriented spin-offs from universities. Fourth, the accelerator model places emphasis on business development and aims to develop start-ups into investment ready businesses by offering intensive mentoring sessions and networking opportunities, alongside a supportive peer-to-peer environment and entrepreneurial culture. Fifth, the accelerator model concerns time- limited support (on average 3–6 months), focused on intense interaction, monitoring and education to enable rapid progress, although some provide continued networking support beyond the program as well.
A new generation incubation model, introduced in Europe in the last five years, is that of the seed accelerator program. The company essentially provides the venture capital to seed the concept, and has the option of integrating it into the organisation or nurturing it into a new business if it works out. It’s a low-risk way of testing tomorrow’s ideas.
South African Banks should start to embrace the concept of accelerators as a means of keeping pace with the speed of change and innovation in a globalised economy. Enabling an accelerator model is a way for banks to fast track the development of fresh ideas or companies that could make a real impact to the economy.
There have always been go-getters in companies who try to move the needle forward and push the status quo. Never before has there been such a push by creative entrepreneurs to take ownership of their own corner of a company. The rise of the entrepreneur is driven in part by a restless, younger workforce eager to make a real impact with their careers.
Essentially, to be entrepreneurial within the confines of a big organisation, you need to be willing take risks, sell your concepts and see opportunities where others cannot.
Many of today’s most promising graduates and young professionals want to run their own businesses. The Deloitte Millennial Survey released in January 2014 found that 70% of millennials see themselves working independently at some point rather than being employed within a traditional organisational structure. A big reason for that is that millennials want things companies aren’t currently giving them: autonomy, creativity, and meaning. The report may be 3 years old however; I don’t believe much has changed in millennials wanting independence, ownership and opportunity.
I am told all South African banks have an innovation program for ideas. It is the type of scheme that allows staff to find innovative ways to improve the bank or build new revenue streams. Honestly, I think the approach sounds awesome; we are giving staff an opportunity to learn about new things, play creatively with ideas, test assumptions, execute change, deliver results and indirectly, improve shareholder value. There is off course the prize money that goes with some of these winning ideas. My critique with the approach is that the winnings are once off whereas the idea continues to bring in revenue. I am told that the winnings are split with many people who partook in the execution process, meaning the actual value of the idea is much less than the individual thought it would be.
In light of these comments, it is important to ask a few core questions.
How many new technology entrepreneurs are working within banking halls?
Has the bank surveyed the creativity, ambitions or feelings of their IT staff?
Are any IT staff freelancing their skills to the market?
How many IT staff is considering\have considered becoming a tech entrepreneur?
What entrepreneurial actions is the IT staff likely to consider in the next 24 months?
Which IT staff would consider bootstrapping a tech idea to test assumptions and opportunity?
Let us consider applying this view on entrepreneurship and ideas somewhat differently. Let us assume South African banks allowed permanent staff to have ‘Meeting Free Mondays’, an option where staff can work uninterrupted for 8 straight hours and for 1 hour a week, be given the opportunity to work on their own entrepreneurial ideas. Let us also assume that not all staff in the bank would apply themselves judiciously in this option and some may choose to go home early. In order to ensure fairness for both parties, the bank may allow permanent staff to formally apply to partake in this program. Thereafter, once we believe we have a sense of fairness; permanent staff that has been accepted onto the program may test some of their entrepreneurial assumptions through conceptual models, design thinking practices or management networking.
I am confident that a few bankers reading this article would have already said to themselves ‘that this is a ridiculous notion’. Sure, I would accept criticism that people are employed to work, that banking halls are not the place to find good entrepreneurs and if people wanted their own business, they shouldn’t be working in a bank. Agreed, yet we need to understand there are potential benefits to reviewing this opportunity and we should never discount ideas just because they are radical.
Accelerators may enable new entrepreneurs to add value to the market, of which could boost transactional banking usage.
Accelerators may create a new ecosystem that the bank can tap into, once the entrepreneur has achieved traction with his\her company.
Accelerators may bring a new wave of technology success within the Fintech space, making way for mergers or acquisitions that are meant to improve the bank.
IT staff that have successfully started a company via the Accelerator program may enable positive attrition, where new staff can be brought in for their vacancies.
IT staff that have created a product\service for the market may choose to sell the IP to the bank.
Banks may choose to appoint founders as CEOs’ of new businesses, post acquisition of the IP of a new product\service, thereby guaranteeing continuity in building the innovation for the market.
Banks would be building a healthy culture of entrepreneurship within its IT teams, thereby promoting an outward focused view of the business.
The program could fail dismally.
Thought: The success of the Accelerator is highly dependent on the character of people selected to run the program.
The program may attract the wrong staff with limited entrepreneurship skills.
Thought: The selection process of choosing staff to partake in the program should be rigorous (wait for part two of this write up).
The staff doesn’t buy into the program.
Thought: The values and sense of trust within the organisation needs to be critically reviewed.
In light of the benefits\risks stipulated above, the question we should be asking ourselves is, can the founder of our next African Fintech unicorn be working at a bank?
Mathematically I am told, the chance of winning the national lottery is 14 000 000: 1. I think we may have better odds of finding the founder of the next African unicorn at one of banks.
Accelerators may open the door for new options that emphasize a deeply pragmatic approach to innovation, by mixing entrepreneurs and corporations. It is the model that can be used by the organisation or mechanism to deliver incubation services to start-up companies and create or capture value from them.
The essence of the word ‘create or capture value’ is of deep interest. Every bank in South Africa creates products\services or evolves them in order to retain its clients. These products\services are utilised by the early adopters (as per the innovation diffusion theory) and thereafter, the bank focuses its effort on cross platform marketing to boost the adoption\usage of the products\services so as to capture value.
Now, let us take this view and apply to a diagram,
Traditional banking is made up of four segments, i.e. transact, credit, insure and invest. If we work on the assumption that a product\service created in any of these segments cost 1x, then the principle is it costs the bank as much as 4x to have a client adopt a product\service in one of the alternate segments.
Now, if we apply the same view to accelerator program managed by the bank, the entrepreneur would have 3-9 months to execute his\her innovation. During this period, the bank will apply the same principle of promoting a segment at 1x but, instead of promoting one at a time, the entrepreneur is subject to all segment facilities in one session. This would mean, the bank would have spent 1x instead of 4x to promote all segments of traditional banking in order to give the entrepreneur traction.
The counter argument is also true, in that the entrepreneur doesn’t have to buy into all segments in his\her first proposal however, the option to bolt on a segment need into his\her current portfolio should merely be a finger tip away and the bank would have only spent 1x in tabling the banking segment opportunities. More importantly, an entrepreneur incubated by the bank should have detailed customer analytics that track company performance so that when specific growth levels are reached, the entrepreneur should be reminded via a digital platform about a segment option that could improve his\her business. The added benefit to focusing on whether such a model could work is that the entrepreneur is likely to employ staff at some stage and build relationships with suppliers for business continuity, all of which is productive to the bank, as long as the bank\entrepreneur relationship is open or transparent, the bank is liable to avail itself to another 1x selling opportunity.
The lifetime value of this approach not only builds our social system, communities would also be better off to a point where entrepreneurs are giving back to others that can also add value to society. A South African bank could build brand value beyond our current nominal terms, where social value would make the brand an iconic symbol of hope and positivity for the future. The bank would not only be creating value for itself or the shareholders, it would be stimulating value for greater society where people are actually better off.
An interesting thought to this approach is that banks would not only be serving society, they would also be creating a new wave of clients to supplement its transactional banking business. I assume this approach would cost far less than poaching business clients that belong to other banks’ where the cost of migration is dependent on what the client is willing to pay in fees, usually less than his\her current charge and subsequently less than the current fee on offer from the poaching bank.
According to the SAVCA 2015 Venture Capital survey, South African venture capital investors have continued to demonstrate an appetite for early-stage transactions because seed funding is not typical amongst South African investors in the venture capital asset class. The largest number of deals came from ICT-type sectors that include software (26%), e-commerce (10%), electronics (4%) and media/entertainment (7%), together accounting for almost half of all deals reported. This is similar to the previous survey period (2009 to 2012) and mirrors global venture capital investment activity. The magnitude of high-growth business activity in the ICT sector is even more significant, especially so for policy makers, as many deals categorised by respondents as coming from other sectors (e.g. financial services, and business and consumer services) are also driven by new technologies involving ICT.
This view taken off the SAVCA 2015 Venture Capital survey suggests seed funding is rarely available in the South African market for would be Fintech entrepreneurs. Should one be interested in starting a Fintech, the entrepreneur would have to bootstrap the start-up until the revenue cycle takes effect. There is a pressing need for access to seed capital where entrepreneurs with innovative\disruptive ideas can apply for it however, with public institutions being the only avenue of hope, the entrepreneur may be better off looking for funds via his\her family network.
As per CB Insights, the top three reasons why start-ups fail are listed below. If a South African bank were to consider having its own incubator of which is run like a venture capitalist entity, two out of the three reasons would become void, i.e. ‘running out of cash’ and ‘not the right team’. The latter point may be subject to scrutiny in that how would bank accelerator improve the odds of an entrepreneur having the right team. It is a very political question in light of the industry I work in however, if one were to ask a senior executive who has been in his\her role for 7 years or more, are you open to a new challenge? The answer would not be very surprising.
Notes to consider:
There are lots of things that can be done in South African banks but simply aren’t considered because nobody has the time or resources. The approach tabled above is very much ‘left field’ however, the option to be different, do things differently or try something new rarely fails, unless there is poor execution. I have met many entrepreneurs that are looking for an opportunity, not those that are looking for finance to open a quick service restaurant, but the individuals who have ideas, want to build a company and make a difference to society. Interestingly, we also have a number of graduates looking to get into Fintech however; the aspect on where to get started is what’s holding them back.
A really cool aspect in having an accelerator hosted by a bank is that if executive management were impressed by the Fintech product\service created in house, they would be in a position to negotiate with the founder and either buy an equity stake in the company or buy the ownership of the Fintech. This approach not only serves the interest of the founder, in that he\she can sell the IP at an appropriate value, the bank is also in an advanced position where the product\service created within the structure of the accelerator could potentially change the way the game is played in transactional banking. In some strange way, it is like fighting fire with fire or dining at the Fintech table, whichever you prefer.
To my peer who asked that I not be so critical, here is something I would like of you to ponder over. I am expecting you to say ‘we are a bank, we don’t do stuff like this’ and I am fine with that view, as long as we agree that one of the purposes of a business is to create a client who creates clients. Alternatively, you may ask me, how would a bank achieve something like this? My response is, wait for part 2 of this write up.
Altringer, B. (2013, November 19). A new model for innovation in big companies. Harvard Business Review. Retrieved from https://hbr.org/2013/11/a-new-model-for-innovation-in-big-companies
Deeb, G. (2015, March 19). Big companies that embrace intrapreneurship will thrive. Retrieved from https://www.entrepreneur.com/article/243884
Jensen, E. (2017). 4 essential building blocks of intrapreneurship for corporate innovation. Rocket Space. Retrieved from http://www.rocketspace.com/corporate-innovation/4-essential-building-blocks-of-intrapreneurship-for-corporate-innovation
Karvounis, N. (2012, October 31). The intrapreneurs playbook. Retrieved from https://www.fastcompany.com/3002459/intrapreneurs-playbook
KRUEGER, A. (2015, May 18). The rise of the intrapreneur. Fast Company. Retrieved from https://www.fastcompany.com/3046231/the-rise-of-the-intrapreneur
MOCHIKO, T. (2016, May 5). Innovation: sharing goes both ways. Financial Mail. Retrieved from https://www.businesslive.co.za/fm/fm-fox/2016-05-05-innovation-sharing-goes-both-ways/
Pauwels, C., Clarysse, B., Wright, M., & Hove, J. Van. (2016). Understanding a new generation incubation model: the accelerator. Technovation, 51, 13–24. https://doi.org/10.1016/j.technovation.2015.09.003
SAVCA 2015 venture capital survey. (2015). Southern African Venture Capital and Private Equity Association, pp. 1–26. Retrieved from http://www.savca.co.za/wp-content/uploads/2015/10/SAVCA-2015-VC-Survey-Low-res.pdf
SMITH, L. L. (2015, January 23). Why everyone is still talking about intrapreneurship. SME South Africa. Retrieved from http://www.smesouthafrica.co.za/Why-everyone-is-STILL-talking-about-intrapreneurship/
Williams, D. (2013, October 30). The 4 essential traits of intrapreneurs. Forbes. Retrieved from https://www.forbes.com/sites/davidkwilliams/2013/10/30/the-4-essential-traits-of-intrapreneurs/#12cecb5151da
ZIADY, H. (2017, May 4). The founder led company dilemma. Financial Mail. Retrieved from https://www.businesslive.co.za/fm/features/2017-05-04-the-founder-led-company-dilemma/