Sberbank Is Investing In The Future Of Banking

An interview about Sberbank Ventures with Mircea Mihaescu.
(Translated from Russian. Original version at http://futurebanking.ru/post/2407)
Sberbank Ventures Fund
When was Sberbank Ventures Fund founded ? How big is the fund and what is the purpose of its foundation ?
The Fund was founded a year ago (in 2012). We started investing in the summer of 2013. The 1st investment was made in June. The investment team has Sberbank employees, including me, and independent professionals.
From Troika Dialog ?
No, it has nothing to do with Troika.
To illustrate the philosophy of the fund I want to draw a diagram.  One axis is to indicate time, the other axis indicates the degree of the bank IT Strategy certainty.  Our strategy has a five year horizon.  Looking at 2014 we can see that the strategy certainty is on a high level.  But IT landscape changes rapidly. The farther we go, the more unclear it becomes, and the level of certainty, of clarity, declines with time. That is why we are so interested in the start-ups which may have an impact on banking technologies in the near future. Some of these companies are interested now in attracting investments.  The idea is the following: we provide them with money for their growth, we provide them with a reference account from a deployment in the bank. Sberbank as an investor is a good reference for any start-up. And we have a possibility to keep track and influence their technology development.  Everybody wins.
Selection criteria and requirements for start-ups. What are the criteria to choose a start-up ?
There’re two categories of start-ups.  The 1stcategory startups are those which develop technologies potentially useful for the banks. However only some of those startups will have a significant influence on the whole industry. As investors we are interested in this 2nd  category. We invest in those who we think will change the situation on the market, will trigger significant disruption.    
For example, not long ago we announced our investing in the Finnish company Walkbase that develops the technology allowing to determine the indoor position of a person using a mobile phone. They also offer analytical tools to analyse the behaviour of people indoors — shopping malls, airports. The company has launched pilot projects in Great Britain and Russia. Soon we will also launch a pilot project with them. We think this technology will have a big impact as it will allow the creation of new financial products combining the transaction dat that all banks have with the history of the location of individuals performing those transactions.
As a venture fund we analysed over 100 companies and invested only in 4 of them.  
And still, what are your formal requirements to startups ? Who can ask for your financing ?
Our requirements can be found here. Interested companies can apply directly from our web page.
What are your internal selection criteria ?
First of all, as I have already mentioned, the technology that a startup is developing should have a potential to influence the financial services industry in a significant way.
Secondly, it should be in line with our strategy. We also consider situations when the technology opens new “white space” – new business models, create its own “blue ocean” in financial services. Create something that hasn’t been done yet by other banks. 
Third, potential financial results of a startup should be excellent. How can one predict that a company will have excellent results in the future? We look at their business model, target market and team. The methods of potential assessment have been described many times in different books and articles. On the basis of these methods you can make an assessment – if it will be $10 million, $100 million or $1 billion company. It’s clear for us that a company with a potential of billion dollars will have a significant influence on the financial industry on the whole.
At what stage of the investment attraction can you invest in a start-up ? Do you make seed investments ?
We invest only in startups at the stages A and B. We are not business angels and we do not make seed investments. The minimum investment amount we are ready to consider is $ 1 million. The investments we have already made are from $3 million to $5 million. The companies we are ready to invest in should already have a product.
It should be a product, not a prototype ?
It can be a prototype, but one that is already being used by customers, not just a model for demonstrations. For example, we invested in Sequent, a company from California, that works in the mobile payments area — NFC, TSM. Sequent has early clients like Citibank, Bank of America etc. The company has been generating revenue for a year already.
In Russian there’s such a word like “проект” (project). It’s not the same as English “project”. Russian “project” is closer to the meaning of the word “initiative”.  Many companies coming to us say they will work on their “project” if we give them millions of dollars. And we say sorry, but we do not invest in the early stage.  
On the other hand we do not invest in the later stage either. We’ve talked to several companies which need $50 million and more for an IPO. But it’s not our profile.
The investment practice
You said you can invest from $1 million to $10 million dollars
Yes, that’s right.
On what terms do you make a capital investment ?
We enter only as a minority. We are not interested in having more than 49% of shares in a company.  Sberbank is not interested in managing startups.
You invest money in startups. Anything else ? Expertise, consulting ?
No. We do not and will not do that. The company should already be successful to have a chance to get our investments. This is one of our criteria – candidates should be successful without Sberbank.
Do the start-ups you invest in have any guarantee that their developments will be used in Sberbank ?
There’re no such guarantees.  And we have ongoing discussions about it with candidates. Yes, their technologies are likely to be implemented in Sberbank but there’s also a chance that a technology of their competitors can be implemented if competitors offer a better product in the future — it is all about execution.  
We try to predict the future and help our startups be successful. In a traditional venture fund up to 90% of investments are unsuccessful. In the bank we must ensure that 100% of our projects are successful. This is the difference between a venture fund and a bank. That’s why we’ve built a separate structure for venture investments. 
Do you sign with your startups any exclusive agreements on the right to use their technologies ?
No. I think that would be a mistake. The time when everyone was trying to develop their own private technologies within a bank and have benefits through it is over. Now everything is copied fast.
Partly this is the reason we do not believe that new technology companies will be able to compete successfully with banks. Potentially some large banks will lag behind in using this or that technology. But banks as an industry are likely to be able to use most of these new technologies promptly.  
Do you believe in Google-bank or Facebook-bank ?
I personally do not believe in them.
Investment areas
Right now there’s some confusion: banks are calling themselves IT companies, IT companies are getting bank licenses…  
It’s not easy to be a bank.  We’ve seen many attempts to create “banks of the future”. A year passes, then another year, and these companies are still trying to understand how to become a bank. 
When talking to bankers and people from other industries I ask the following question now: what is a bank ? What is its key competence? It seems there’s something that is hard to copy, and it’s not a technology.  
IT systems can be copied. It’s hard to copy a risk management competence, anti-fraud competence It’s hard to organise work in the regulatory legal field. It’s also necessary to build trust relationship with clients and it takes some time. Maybe some companies will be able to become banks, in this case they have to learn to do what banks do.
What technology spheres are you interested in investing ?     
We are following closely mobile smartphone developments, the influence of mobile on financial services. Here I mean not only mobile banking but everything that came up owing to new features of mobile devices. It’s geolocation, including indoor geolocation, it’s customised services which can be offered depending on your location. It’s the possibility to use a mobile device as a payment terminal.  
Technologies in the field of Big Data are also very important. I personally think that today we are on the verge of Big Data revolution. In several years we’ll stop talking about Big Data as something special, just like today nobody talks about the need to use computers in business. Big Data application will become a matter-of-course. We will collect a lot of data, analyse it and do business on the basis of this knowledge.   
Today we are only at the beginning of this road. Therefore we qualify many companies offering solutions in the sphere of data analytics as well as the services based on such analytics. For example, it’s very important when offering a client the “next best offer” when we can offer that very product a client needs most likely.
The third direction is cyber security technologies. There’s a constant arms race in this field. Cyber-attacks on the banks will continue, they will become more sophisticated. So we need more advanced protection technologies.      
And what do you think about NFC ? Will it be the key technology for payment acceptance in future? Or will be there anything else ?  
I think that depending on a country the situation will be different.  I do not agree with those who think that NFC technology has already “died”. Maybe too much was expected from the technology at the very beginning. But NFC has one serious advantage, it is security. We’ve seen many start-ups convincing us there’s no need in NFC, that you, for example, can just take a picture of your card with a mobile phone.  
All this is not secure. Security device in a mobile phone is an analogue of security device in your card. NFC is a secure protocol unlike bluetooth, for example. So I think that the world, country after a country, will go on moving in this direction.
Fintech startups in Russia
You named one startup from Finland and another startup from USA. Do you have Russian startups in your portfolio ?
Our door is always open for Russian start-ups, we are always ready to discuss projects with them. We haven’t invested in any of them yet but there are two projects we’ve been working with for some time already and we are close to doing that.  
You know, in Russia I often come across with the “projects” I mentioned above when a company itself, its team doesn’t exist yet. There’s only an idea and wish to receive investment. For such projects there are accelerators, incubators, business angels. We do not deal with them.  
Now we are supporting Innotribe – an international financial services startup contest held under the aegis of SWIFT. Owing to our role in the contest we have access to thousands of startups all over the world – from New Zealand to Singapore, from Dubai to Budapest. Out of these thousands of projects the number of Russian projects is less than 10. Russian financial services startup field is just starting to develop. The fact that Sberbank is working in this sphere lets us hope the industry will continue to develop and grow.
What is the reason that there’re relatively few fintech start-ups in Russia ?
I’d like to point out several factors here. First, there should be people who want to start new companies and know how to do it. People with experience and expertise in the domain of their startups.  It’s unlikely you will meet many people in Russia who are ready to leave banks in order to start their own business. Probably Russian banks pay too much their employees.  
The second reason can be applied to fintech startups and the entire venture industry as a whole – there’re few serial entrepreneurs in Russia. Third, the capital supply for seed stage is very limited in the Russian market. Incubators/ accelerators/ seed funds are not too interested in investing in fintech startups. They are following the market and invest in genetic testing, online games, helmets with GPS and other popular trends.
The results of R&D;, the first pilots
Sberbank Ventures Fund was founded not long ago and R&D; unit has already existed for some time. What is your assessment – how many things have been done? Have you succeeded in implementing new ideas, new technologies in the bank ?
People often ask me why Sberbank is realising new ideas so slowly… You should understand, it’s a huge bank! 
Taking into account the size of the bank I would wonder how it is possible to realise anything at all !
Yes, it can be rather difficult. For example, two years ago we launched several very successful pilots. It took two years to implement these pilots in the whole bank: one year for development, one year for testing. And only now they are implemented. 
What do you mean by pilots? What kind of projects ?
There’re 4 stages of implementing innovations.  The 1ststage is collecting data, communicating with developers. On the 2nd  stage a technology is placed in innovation laboratory. On the 3rd stage a technology is integrated with a part of bank systems and tested on a limited number of users. And on the 4thstage a technology is already tested and integrated and hundred thousands of users start using it. This is what I call a pilot.  
If I understand you correctly – implementation period is about two years ?
All depends on a technology. We may say that right now the average period is 6 months. It all depends on how deep integration with bank systems should be.  The fastest implementation lasted 2 months. But it was an absolutely new function which required little or no integration. 
What technologies has your division implemented as pilots in Sberbank ?
We have two types of projects. In the 1st case the whole development is carried out in the bank by our team.  In the 2ndone we take a technology of some startup and integrate it with the bank. If to speak about internal pilots, I can give you the following example. You know, our bank receives a great number of requests and complaints from customers. Mostly they are not complaints but customers’ questions regarding various services. Thousands members of our customer support service team answer these questions. The support service used to give answers as the questions were received without any systematisation. We wrote an algorithm based on artificial intelligence that allows analysing the texts of customers’ questions. This algorithm allows clustering questions and dividing them into groups very quickly. And we found out interesting things. For example, a year ago when we were in a process of implementing the algorithm we got to know that a large number of questions were related to using one-time password. People just had no experience in using such passwords and didn’t understand what they had to do.  Its just one of the examples of realised pilots
Another example is about NFC technology application. We had several pilots, we tested different technologies. One of such technologies was based on stickers which are sticked on mobile phones. We studied the possibility of integration with the bank, scalability of the technology and user’s experience. And decided not to use this technology. You may say it was just waste of money. But in fact we’ve saved money and resources of the bank as we made sure this technology is not working properly while testing on a small scale. So the bank didn’t have to spend hundreds of million rubles on the full realisation of the project to understand in the end that the technology is not working.   
Now we are launching a new NFC project for thousands of users with application of another technology, in partnership with Samsung. What we are going to use here is called embedded security element. The modulewill be integrated directly into the phone.   
The 3rdexample is related to Big Data. You probably know that there’s a technology named Hadoop, a  database technology invented by Google and developed by a large community of developers. In partnership with the company Cloudera from USA specialising in this field we have developed our technology allowing to collect and analyse millions of transactions.  It allows detecting patterns in a great number of transactions made by the bank clients. Both internal and external developers took part in this pilot.  
We met last year. In your opinion, what are the most interesting things that have happened in Fintech industry since then ?
It’s a complicated question. First, the number of Fintech companies, projects, developments has increased.  Look how many companies took part at the latest Finovate conference. I can’t say I’ve seen any fundamentally new technology since last year. But let’s define the meaning of the phrase “fundamentally new”. Sometimes we read about some new scientific development in the press and we say : “Wow! It’s an absolutely new idea!” But for a researcher who has been working on this subject for 15 years there’s nothing new. It’s difficult to find and show me something absolutely new in fintech sphere. There’s such a saying : “The future is already here – it’s just not very evenly distributed”.
What we can see clearly is PFM sphere becoming more mature…
Haven’t too many PFM solutions appeared recently ? Half of the nominees at the latest Finovate are PFM solutions…
And the solutions are more mature including those from Russia. We are also doing a pilot in this sphere.
The number of companies developing Big Data technology is growing though we can’t see it happening in Russia. There’re few companies doing it here.
In mobile sphere we can see that mobile banking is becoming a mandatory option for banks.
Speaking about mobile only banks such as Rocketbank and Instabank in Russia or Moven and Simple in USA, – I know many people in these companies since long ago. And now they understand that they need to become banks in the full sense of the word, and the costs here will be different. An attractive user interface can be copied easily by others. An interface is not a consistent business-model.

A year ago we discussed with you the way social networks will affect banks. But I haven’t seen it happening for a year.  We haven’t seen the model of how it may work. Social networks remain an important communication platform for banks but not a place where bank products can be sold. Social networks are also turning into a source of important information about current and potential clients of banks. Social scoring is only at its beginning, a lot of issues need to be solved including those related to regulation.