In an unusual display of shared purpose combined with local boosterism, ten of the biggest companies competing in the New York financial services marketplace have announced their participation in a program to support and stimulate technological innovation in their businesses.
The effort, dubbed FinTech Innovation Lab, aims to raise New York City’s profile as a technology development hub, especially in comparison with hotbeds such as California’s Silicon Valley, and with a particular focus on financial industry applications. Entrepreneurs should be drawn to the innovation lab because the banks’ chief information officers – the consortium includes Citigroup, Goldman Sachs Group and JPMorgan Chase as well as Credit Suisse, Deutsche Bank and UBS – are their “dream client set,” says Chris Wearing, managing partner and head of the North American capital markets practice of consulting firm Accenture and a key organizer of the program.
Administered by Accenture and the New York City Investment Fund, an economic development agency led by buyout titan Henry Kravis, the FinTech lab will invite proposals from entrepreneurs who have made demonstrable, early-stage software advances in such areas as mobile banking and payments, data and analytics, risk management and security.
After the first application deadline of January 31, 2011, the proposals will be screened and evaluated by the banks’ senior technology executives. A half dozen winners will get initial grants of $25,000, as well as workspace and access not only to their prospective customers at the banks, but also to additional funding from venture capital firms that have signed on as participants in the lab program: Contour Venture Partners, New York City Investment Fund/NYC Seed, Polaris Venture Partners, Rho Ventures, RRE Ventures, Village Ventures and Warburg Pincus.
The timetable for winning entries calls for a twelve-week “lab experience” starting in May, during which the winning entrepreneurs will set up shop in New York, honing their innovations while interacting with a widening circle of financial institution and technology industry leaders as well as financing sources. The 2011 cycle of the planned annual program will culminate with presentations on an “investor day,” scheduled for July 22. If the entrepreneurs go on to raise further funds, the original $25,000 will convert into equity. The venture-firm participants will be able to invest as a group in the next round of financing, up to 40 percent control.
Accenture’s Wearing points out that in addition to the venture firms formally listed as FinTech lab supporters, many more organizations active in the financial community are members of the not-for-profit Partnership for New York City, the parent organization of the New York City Investment Fund. Thus, Wearing says, “doors can be opened” to such financial technology powerhouses in the Partnership membership as Bloomberg, SunGard Data Services and Thomson Reuters.
What’s more, the New York City Investment Fund is co-chaired by heads of high-powered firms that have significant financial and technology industry connections: Russell Carson, general partner of Welsh, Carson, Anderson & Stowe; and Richard Cashin, managing partner of One Equity Partners. The latter is an arm of JPMorgan Chase, and Cashin is a member of the bank’s executive committee.
Commenting in the lab’s press announcement, Fred Wilson, a New York City Investment Fund board member and managing general partner of Union Square Ventures, said, “For entrepreneurs targeting the financial services sector, this program is a unique opportunity to get access and feedback from potential users and funders. This type of market input is invaluable.”
Government on Board
Representing New York City and the administration of Mayor Michael Bloomberg, Deputy Mayor for Economic Development Robert Steel, a former Wachovia CEO and Goldman Sachs vice chairman, said, “The FinTech Innovation Lab will capitalize on two of our city’s economic strengths: our standing as a global center for financial services and our position as a place for entrepreneurship and technological innovation. The Bloomberg administration is committed to further cultivating New York City’s innovative environment, particularly in high-growth areas, and the unique FinTech initiative will complement and build on our efforts to attract and support new ventures.”
Other officials noted the impact on the local economy of the globally important New York financial center: The city’s financial industry employment approaches half a million, according to Partnership for New York City CEO Kathryn Wilde. Research firm Celent estimates that 25,000 of the U.S. financial services industry’s 233,000 technology workers are New York-based.
“All of the major international financial institutions have a presence here, and each year these firms make significant investments in information technology, which represents only a fraction of the potential FinTech market,” noted Wylde.
Guy Chiarello, chief information officer at JPMorgan Chase, said, “By leveraging the city’s enormous resources in financial services, we think that the innovation lab will help bring growth and innovation to the financial technology sector here in New York.”
Wearing says that although economic growth and development would be an objective of any business development initiative, particularly in view of the recent global downturn, the FinTech Innovation Lab was motivated more by business concerns. He points to “the enormous demand for technology” at financial firms and their executives’ continual scramble to run their operations efficiently, address new risk management and regulatory requirements and battle for “wallet share” against competitors, all the while trying to keep pace with the latest systems advances.
The lab program came together after slightly less than a year of organizing, says Wearing. The biggest challenge was creating a “forum” that did not previously exist for getting the chief information officers of the banks together. “Once the CIOs are together, it becomes compelling,” he says. “They are helping the city, and at the same time their corporations get access to technologies faster and quicker.”
The ten participants are: Bank of America, Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street Corp. and UBS.
Other Models
The consortium approach, with a public-private partnership aspect, has a precedent in New York. The city’s Economic Development Corp has launched or promoted “business incubators,” including one for digital media. Several organizations “graduated” this summer from a facility set up in July 2009 at 160 Varick Street; one was iTB Holdings, which had developed a fixed-income brokerage platform and raised a seven-figure sum of investment capital as of July.
This approach contrasts with the way Wall Street technology innovations, many of them Internet-based, were financed and spun off during the high-tech boom of the late 1990s. They tended to be “intrapreneurial” – initiated within individual firms – though they often evolved into joint ventures.
Among those earlier New York start-ups was credit derivatives brokerage Creditex Group, founded by former Deutsche Bank traders in 1999. They went off on their own, attracting backing from a consortium of dealer firms, and in 2008 IntercontinentalExchange of Atlanta acquired Creditex for $513 million.
Rival fixed-income trading platforms Tradeweb, a brainchild of Credit Suisse First Boston traders and technology innovators, and MarketAxess, which emerged from JPMorgan’s internal incubator LabMorgan, also grew into significant capital markets entities. MarketAxess, established in 2000 with JPMorgan, Chase Manhattan (before those two companies merged) and Bear Stearns as its owners, went public in 2004 and today has a market valuation exceeding $600 million.
TradeWeb began handling its first products, U.S. Treasury securities, in 1998, as a joint venture of First Boston, Goldman, Lehman Brothers and Salomon Brothers. Thomson bought them out for $535 million in 2004. Tradeweb returned to consortium ownership in 2007, with Thomson Reuters remaining as a majority shareholder.
A variation on strategic consortium-backed venture investing, without geographical-centricity, is FTV Capital, a San Francisco-based firm with more than $1 billion under management. Its limited partners are more than 40 financial institutions around the world that benefit from insights into, and early access to, technologies in development at portfolio companies. One of FTV’s more noteworthy exits was the March 2010 initial public offering of Silicon Valley-based Financial Engines, which was co-founded in 1996 by Nobel Prize-winning economist William Sharpe to develop online financial advisory products, and which is currently valued at $700 million.
Six of the New York FinTech banks – BofA, Citi, Credit Suisse, Deutsche, Goldman and JPMorgan – are FTV Capital partners.
