Teaming up to stay up-to-speed on new technologies
Interview with Wim de Waele, CEO of Eggsplore
Statements reported by Marion Dupire, Vlerick Centre for Financial Services
The purpose of Eggsplore is to build a European ecosystem for organizations dealing with the impact of digital technology on the financial system. Can you tell us a bit more on the context of the creation of Eggsplore. Why and how was it created?
“Eggsplore is the result of reflexion with Jurgen Ingels, the co-founder of Eggsplore. Jurgen founded the company Clear2Pay which was recently sold to an American company, and I was until September the CEO of iMinds, a software research institute also highly focused on collaborative innovation. The discussions that we had were essentially on the fact that the technology landscape has changed considerably over the last decade. In general, not just in the financial services market, we have seen the emergence of platform companies with ecosystems of application developers and complementary partners.
These platforms have moved to different markets. There used to be a time when technology was the domain of the Chief Information Officer, a typically internally focused function to optimize the productivity of organizations. That was 20 years ago. With the internet revolution digital technology became much more consumer-focused and started changing business models with disrupting digital technologies, as we call it now. This happened in some sectors much more quickly than in others. The sectors which were disrupted quickly are the ‘virtual’ sectors. Media is the most obvious example where the impact of digital technology was huge.
Now, why was the financial services sector not hit faster? After all it is also a virtual industry. The reason why the financial sector was not disrupted so quickly is because of heavy regulation. Another reason is that banks and financial institutions are powerful, they are close to the customer and to a certain extent people trust these organizations – except maybe in times of financial crisis. As a result they do not move quickly. But overall we can expect that digital disruption will have a huge impact on the financial sector over the next decade. Because of the “being-connected” phenomenon, digital disruption will also affect a number of physical sectors. New business models will emerge.
With Jurgen we were looking at this phenomenon. The days are over when Jurgen was creating Clear2Pay, a typical software company selling software to banks. What you see now is that we need platforms that are open, that enable other solution providers to connect, and that offer solutions to the end-customer. Technology is evolving so quickly that on your own you are always catching up. You have to unleash the power of open innovation and ecosystems to remain up-to-date and offer to the customers what they want. This is another mega-trend called consumerization of ICT. We all know the frustration of having the latest high tech products for personal use, while your corporate IT environment is using a system that is 5 to 10 years behind. Digital strategy of corporations need to move from an internally-focused IT to a platform strategy.
That is how, with Jurgen, we saw technology evolve. Then the logical step for us was to -1- start an investment fund that invests in complementary solution providers (SmartFin), -2- build an ecosystem of organizations that allows to build a network (Eggsplore) and -3- build a software company helping banks transform themselves into digital platforms (The Glue).”
From your point of view, why is it relevant for a financial institution to team up with a third party to innovate? Why could these innovations only come from outside a bank or an insurance company?
“There is a generic phenomenon for large corporations.
The first problem is the P&L structure of companies. If you are taking risks in terms of development of new solutions, especially disruptive innovation, you need a lot of money upfront. The assessment of potential return on investment does not lead corporations toward risky venture capital investment. Those are big bets, taking a lot of money upfront, while only 2 out of 10 ventures actually succeed. In the P&L structure of a company, especially when the margins are being squeezed, it is very hard to apply that kind of methodology. It is not because people are more stupid, less adventurous or are all bureaucrats. The issue is that the system works against them and it is extremely hard with a classical P&L structure to take those kinds of risks. The venture capital model, of investing and waiting for your returns for 5 to 10 years, is external to large corporations. What they can do is to take some kind of incubator, corporate venture fund, where they take corporate innovations off the P&L and build a relationship with the ventures they fund.
Another driver is speed and agility. We all know large organizations. If you set up a meeting with a bank around a particular topic the room quickly fills itself, if you set up a meeting with a start-up there are just 2 people. Speed of decision is something that you can achieve by external innovation.”
From your experience can you speak about successful examples of financial institutions making use external innovation?
“There are different kinds of external innovation.
One is the partnership strategy whereby a firm teams up with a third party to quickly reach a new market. A good example is the one of ING and Kabbage. Kabbage is a FinTech company giving automated loans to SMEs. Based on officially available data and information on the internet, an engine assesses in a couple of minutes whether an SME is qualified for a loan. In the US, Kabbage goes to the market directly, but outside the US, because of regulatory issues, they team up with banks.
Another example is BNP Paribas Fortis teaming up with the crowdfunding platform MyMicroInvest. These are typical examples of banks quickly reaching some parts of the market via external partnerships rather than doing it all themselves.
A second type of external innovation is internal use of technology. I have a generic software background and I have been working with large manufacturing corporations. Every manufacturing corporation has a standardized SAP or Oracle system, but banks still have a lot of in-house systems. There are commercial software components that they use but there is relatively little outsourcing of their whole IT infrastructure. Of course the business of banks is quite complex and specific and that is one reason. But a lot of their IT effort is dedicated to maintaining their existing system, which leaves them with relatively little means to build internal know-how on new technologies. Talented people in big data technology and unstructured data treatments will typically move to start-ups, to Google or to Facebook to master their skills. So if banks want to deploy these technologies for internal use they need to team up with suppliers. A good example in the portfolio of SmartFin is the work that NGData did for WellsFargo. It is about big data technologies being used for a more granular and accurate profiling of customers with 360° data. Big data is a field that a lot of people talk about but relatively few really have the deep technical know-how.”
What are the keys for such collaborations to be successful?
“In the case of the partnership structure, the key is that the product should be treated as if it was internal. It should not be introduced on the market because it is trendy and nice-to-have. The risk if you do that is that it is such a marginal part in your total revenue that it becomes neglected both by the management and by the sales force. If the sales force is not properly rewarded for selling those products, they never take off. So it is more a commercial than a technology risk. There has to be proper incentives to make sure the partnership will be a success. Otherwise both parties are disappointed, they end up going on the market independently and start competing with each other. It really happens a lot in those kinds of partnerships.
With respect to external innovation for internal technology, the key success factor is treating your suppliers as real partners instead of playing the procurement game. The corporation should get rid of the not-invented-here syndrome and really look at its suppliers as an extension of itself. Typically these technologies are hard to implement, processes have to be changed, a lot of data has to be gathered, so it is really important to treat new technology suppliers as partners sharing both risks and benefits.”
Coming from a scientific background, what is your personal motivation for moving to the financial industry?
“My original background is related to artificial intelligence but I am also a macro-economist by training. Economics is a field in which I have always been interested, and financial services are an important part of that. The reason why I think that now financial services are an interesting challenge is the whole issue of data analytics. Artificial intelligence is now a mature domain, it has made a complete come-back after having disappeared on the radar screen. Because of big data combined with algorithmic improvements, you now see artificial intelligence really coming back to the surface. In the financial sector, a lot of the white collar functions will be automated in the future. The question of how this will actually happen is intellectually quite interesting.”
Financial institutions now need to adapt to major regulatory and technological changes, do you have comments with respect to the regulatory part?
“What we really need to look at is the interplay between technology and regulation. Right now we have a largely unregulated internet technology. Technology players can do pretty much what they want. On the other hand the financial services sector is heavily regulated, and probably over-regulated as a reaction to the financial crisis. Technology and financial players will now be competing.
Payments is a first area in which technology players are moving in. When someone pays with a credit card on PayPal, it could be somebody else’s card, they don’t even check. And on the banking side, there is a heavy security process to do a transfer. That happens in the same country. So regulators should do more than looking at the narrow slice of the banking industry when regulating this area. They have to think cross-sectors and make sure the different players can fight the competitive battle with the same arms. I think it is not the case right now.”
What would be your number one advice to financial institutions in the current context?
“Financial institutions, as all companies within the same sector, have a tradition over a hundred years of looking at each others as competitors. I feel this very strongly when I try to bring several banks around the table. As a result they have a very hard time to move into this ecosystem collaborative environment where they might be doing things together that go beyond market infrastructures. In the day-to-day pressure it is easy to forget that the real threats are also external to the sector. They can be allies on certain things, they have a common goal of making sure that they are up-to-speed on new technologies. So if there is one thing I would encourage financial institutions to do is to start thinking outside of the boundaries, outside the old patterns of competitive behaviour, and realise that sometimes they can build win-win relationships with their competitors and with technology companies. That is a cultural change for many.”