established that they only planned to make investments where they were confident of a long‐term partnering relationship with the fintech. Their intention was then to understand the incremental benefit of pairing the commercial partnering relationship with strategic equity investment.
One of their pathfinder projects in this space was their relationship with Thought Machine.
Since 2017, Lloyds had been completing extensive testing and proofs of concept with Thought Machine's Vault capability, a cloud‐native next generation banking platform. They anticipated that the new technology could enable Lloyds to provide customers with more tailored products, as well as enable faster development cycles and further digital banking improvements. In this scenario they found that there were sufficient benefits in making a strategic investment in Thought Machine above and beyond their contractual agreement. For example:
Accelerating outcomes. It would help to fund the development of the core product, enabling swifter product delivery into Lloyds.
Demonstrating organisational commitment. It would signal an enhanced level of organisation commitment to the partnership, supporting deeper collaboration.
Financial upside. Whilst not the primary driver, they believed that Thought Machine was well aligned to future industry technology trends and that their partnership would support the company's growth. The investment allowed them to participate in this future valuation upside.
As a result, the Group's Corporate Development team began to engage on a potential equity investment. In recent years, the team has conducted a number of sizeable acquisitions or disposals of large loan portfolios. Therefore, the consideration of this opportunity provided a very new set of challenges. The team had to adapt in terms of:
Valuation method. Future revenue growth was a much more significant component on the valuation model versus the typical balance sheet approach.
Due diligence. Technical due diligence and IP are significant parts of the process relative to the traditional credit review.
Risk analysis. They had to identify and accept a different blend of risks given the relative age of the company and the stage of product development.
Working closely with the team at Thought Machine, the team adapted to this new type of transaction and Lloyds invested £11 million for a c.10% stake in 2018 as part of the company's Series A round.
Results
The RICE innovation working groups are now all mobilised and are generating a more robust pipeline of opportunities. Since late 2018, when the new structured approach to fintech partnering was introduced, the Group has identified c.2,000 fintechs against 130 specified business needs. A further c.50 opportunities are currently in the engage phase.
Over the course of eight quarterly CVPs, 70 material opportunities have been presented. This has resulted in nine live partnerships and three equity investments. In addition to those that have been supported via CVP, four others have been originated.
Their ability to measure this aggregate pipeline including the performance by stage is itself the result of the successful deployment of their fintech tooling. Moreover, their ability to highlight the challenges of third‐party experimentation both quantitatively and qualitatively has increased the collective will to make improvements to their journey.
Perhaps most promisingly, the two thematic opportunity clusters that have emerged have begun to influence strategic planning. They began the activity aiming to respond to the strategic demands of the business areas but now that there is greater visibility of the opportunities that can be opened up through investing, some areas are re‐calibrating. For example, they are considering the way they implement and maintain technologies or what business models they might pursue in the future.
Learnings
‘Even when you're in “recovery mode” as business, you still have to think about innovation. The problem is that we react faster to threats than we do to opportunities.’
Juan Gomez Reino, Group Chief Technology Officer
Key to the success that the approach is now delivering is having the general principles of when and why they should partner at the heart of the process. By ensuring that all colleagues have a strong understanding of this rationale, they have been able to focus their efforts on higher potential spaces at an earlier stage of the pipeline. Coupling this clear purpose with pathfinder projects helps to translate the intention into action. More specifically, these projects will typically need to have a lot of executive sponsorship in order to carve out new organisational pathways that, once formed, will allow others to follow under more typical levels of sponsorship.
They divided their pipeline into four key stages based on the underlying activity required to take an opportunity from idea through to execution. This staged profile allowed them to create more targeted actions and to identify the ratio of opportunities moving from one stage to another. However, what they also came to realise is that the overall pipeline was only ever as efficient as the weakest link. They needed to spread and synchronise their improvement efforts across the pipeline. Perhaps most notably, having a robust early pipeline connected to a less mature execution capability can lead to disengagement and frustration. Developing the pipeline stages in‐sync helps to maintain balanced progress.
Organisations often develop dominant approaches to innovation and change delivery. Much like creating any new habit, their shift to partnering has required a shift in mindset, culture and capabilities. As well as being very clear on the strategic rationale for the change, they have also used a rolling agenda of communications to continue to reinforce the objectives and progress. These communications have targeted different audiences: from all colleagues through to more senior decision‐makers. Having the CVP representatives available to support the visibility and mandate of the fintech partnering agenda has also been crucial to driving the required change.
What's Next
Whilst they have enhanced their partnering capabilities over the past two years, there is still a lot more that they need to do to get close to their target state.
As described, the largest constraint on their pipeline remains at the ‘engage’ stage. Their in‐flight technology plans are expected to support greater partnering activity by reducing the cost and complexity of integration. However, they need to do more still on the non‐technical side of third party engagements, especially to keep pace with the changing technology capabilities. They will approach this utilising systems thinking to articulate the journey and then working with stakeholders and policy‐owners to simplify or right‐size where relevant.
Furthermore, they will continue to assess their broader approach retrospectively. Whilst they now have several live partnerships and investments and they believe they have executed them in the right way, they will ultimately measure their success based on their customer and organisational benefits.
Chapter 2 BBVA: Invest through a corporate venture fund
Case: Propel Ventures
Executive Summary
In February 2016, the new $250 million US fund Propel was officially launched as a fintech venture capital firm. The fund replaced BBVA Ventures, which was originally founded in 2012 to provide funding and expertise to promising technology companies disrupting the financial services industry. In establishing Propel as an independent entity, BBVA did something no other financial services company had done prior to this. BBVA considered that was its best option was to be seen as attractive as other non‐corporate investors for the