Startups Woo Wall Street Banks in Tech Arms Race
In Washington, it took three years for entrepreneur Tim Estes to convince the government to take his digital data-mining program seriously. In New York City’s financial industry, Estes needed just one meeting.
At the start of a 12-week entrepreneurship mentoring program called the New York FinTech Innovation Lab, Estes was invited to explain his software to executives from Bank of America Corp., UBS AG (UBSN), Morgan Stanley and other top banks. Three of the companies that saw the pitch -- Goldman Sachs Group Inc. (GS), Credit Suisse Group AG (CSGN) and JPMorgan Chase & Co. (JPM) -- were assigned to give him advice to help him tailor his services to the needs of the industry.
As banks rush to improve their technology, they’re giving startups top-level access via the FinTech program, which on July 18 wrapped its second year. The banks get a first look at how entrepreneurs like Estes are developing software for everything from trading to research to customer relations, and the companies have a chance to forge relationships and make sales that might have taken years to develop.
“It’s an arms race right now across Wall Street” to improve data analysis, said Steve Randich, chief information officer for Citigroup Inc. (C)’s institutional clients group. Even amid that competition, “we’re all trying to solve the same problems, and collaboration is good for the industry.”
The FinTech lab is run by the New York City Investment Fund, the economic-development arm of the Partnership for New York City, and Accenture Plc. (ACN) The backers expect some of the startups -- which each get $25,000 and office space for the duration of the program -- to succeed and hire workers in the city. That could help steer to New York some of the $173.3 billion that research firm Celent expects banks worldwide to spend on information technology in 2012.
Out of about 70 applicants, six were chosen for the program. American Express Co. (AXP) Chief Executive Officer Ken Chenault and Capital One Financial Corp. Chief Technology Officer Monique Shivanandan were among the executives who met with the entrepreneurs.
“The first year, banks came not knowing what to expect,” said Bob Gach, managing director for Accenture’s capital markets business. “This year they all came more demanding, in a good way, more serious about solving the technology issues that will affect their business.”
Gach said that since New York is home to many of the biggest customers for financial technology, the city has the potential to lead the industry. So far, though, it hasn’t: Roughly $72 million in venture capital went to financial technology startups in New York last year, less than half of what similar companies in Silicon Valley attracted, according to the National Venture Capital Association.
“The support of the ecosystem in New York has only happened in the last couple years, with the FinTech lab,” said Steve Sparkes, chief information officer for technology and information risk at Morgan Stanley. “Selling to Wall Street is one of the hardest things for any new company to do” because of regulatory hurdles and security issues.
During the program, entrepreneurs get a deep look at how banks might use their technology. This saves the fledgling companies time in creating new products while making them more attractive business partners.
“The banks have not only participated in our development process, they have driven it,” said Adam Sodowick, chief executive officer of True Office, a 1-year-old company that makes mobile games intended to complement compliance training.
As part of FinTech, True Office was invited to set up a table in the Citigroup lobby. Don Callahan, the bank’s chief administrative officer, stopped by, and after tinkering with the app for a few minutes he left his business card and some kind words. The benefits of the FinTech program have “even exceeded my optimistic expectations,” said Sodowick, who has gotten his app into the hands of employees at Citigroup, Morgan Stanley (MS) and Barclays Plc. (BARC)
Estes, whose 55-employee company is called Digital Reasoning Systems Inc., worked for years to convince the U.S. government to buy his program, which is now used to sift through documents in search of information that could help fight terrorism. Estes says banks might use the technology to ferret out employees who are writing things that hurt the company’s reputation, or to scan e-mails received from customers to discover whether they’re dissatisfied or might be interested in new services.
Sometimes it isn’t immediately clear how a company’s products might benefit the finance industry, and that’s where the mentoring comes in. Nigel Faulkner, CIO for investment banking at Credit Suisse, remembers hearing an early pitch from EidoSearch, which sells a program that can evaluate market trends to help make predictions and understand correlations. After 20 minutes, they didn’t make it clear what their product could do, Faulkner said.
He and other Credit Suisse executives coached EidoSearch on what banks wanted to hear: a message focused on return on investment, not technology.
By the end of the FinTech program, EidoSearch co-founder David Kedmey knew exactly what to say -- that he already had mutual funds and hedge funds as customers; that his technology could help predict the volatility of indexes based on past performance; and that it searches for similar events in a way Internet-radio service Pandora Media Inc. finds music a user might like.
Among Kedmey’s mentors was Nick Toro, head of architecture governance and control at Credit Suisse. Toro said that whether or not his bank ends up buying Kedmey’s program, it’s worth his time to meet with the entrepreneurs and give them the access they need to understand the market.
“There’s always potential that they’re the next competitive differentiator,” Toro said. “FinTech is just a microcosm of the push for technology in New York.”
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