Corporate VC: Appetite for disruption

Assembly Payments was an early mover in the payments space, launching its plug-in technology for online marketplaces in 2014. Reinventure – an Australia-based VC firm that is aligned with Westpac but operates independently of the bank – provided seed funding the same year. The opportunity set was so nascent that Westpac probably wouldn't have made the investment of its own volition.

"We thought the growth in e-commerce would lead to a need for payment capabilities like escrow services, which were not that common at the time," says Danny Gilligan, a managing partner at Reinventure. "The company then pivoted and changed over a number of years, and ultimately became two very discrete markets, neither of which was predictable when we made the investment."

Four years and three funding rounds later, the business case was proven, and the bank made a direct investment. Westpac even moved its own payments team into Assembly, tasking the start-up with integrating its point-of-sale (POS) software with the bank's merchant terminals.

Last year, the business was split in two, with Westpac retaining its interest in the core banking payments technology assets, which were rebranded as mx51. Now a white-label payment-as-a-service (PaaS) platform that integrates software with POS systems – much like Square – the company closed a $25 million funding round in May. Mastercard was among the participants.

Meanwhile, the online payments assets retained the Assembly name and received a substantial investment from SC Ventures, the VC unit of Standard Chartered. It is now positioned as a digital platform that manages transactions across multiple payment types, and as of April, entered the cross-border payments space with the acquisition of CurrencyFair.

For Reinventure, the investment is a vindication of its model. In making its pitch to Westpac, the VC firm noted that banks, with their predilection for strong business case planning and short paybacks and their low tolerance of poor outcomes, were unsuited to building long-term portfolios characterized by emerging business models, high foul rates, and the possibility of a couple of home runs.

Yet Assembly's subsequent journey offers a glimpse of the corporate venture capital ecosystem within financial services, where start-ups often have multiple touchpoints with strategic players – as vendors, portfolio companies, and acquisition targets. As technology disrupts the industry across front-end user engagement, back-end servicing, and the various layers that are getting peeled off in between, these relationships will only become more complex.

Modes of engagement

Reinventure was a pioneer in Australia, but now all four of the country's major banks have investment programs of one kind of another. Their Hong Kong and Singapore-based peers are no different, while in recent years, there has been a burst of activity across Southeast Asia's emerging markets involving banks, telecom providers, and platform technology companies. Fintech sits high on the agenda.

Captive investment, though still relatively nascent, has a mixed track record in Asia. Corporate parents have been known to shutter VC units if their core business comes under pressure or they don't see tangible near-term results. At the same time, investment mandates and parental oversight can be restrictive, while compensation structures are not geared towards retaining talent.

Outsourcing is one solution. This could be a fund-of-one structure like Reinventure, where the manager raises standalone funds but Westpac supplies almost all the capital, a separate account that invests alongside a fund, or a completely outsourced program. Fintech specialist Apis Partners has experience with the latter two options, for a bank and an insurer, respectively. Udayan Goyal, a managing partner with the firm, adds that outsourcing also addresses adverse selection issues.

"Often, an underlying company is trying to disrupt the person who is putting the money in, so there are tensions, and maybe adverse selection," he says. "If a start-up wants to do business with 10 insurance companies, it doesn't want to be seen as taking money from one of them because the other nine could sever ties. If there is an intermediary like us, they are more comfortable."

Even if there is some element of outsourcing, it may coexist with an array of internal programs that support companies at different stages of their development and work towards various corporate objectives. Accelerators, digital garages, and innovation hubs have proliferated in recent years on the seed investment side, often complemented by venture funds and strategic investment and partnership units targeting the growth phases. Meanwhile, venture building units develop technologies in-house.

"Telkom has a concept of build, buy, and borrow. There is a software house that does the building, and we do the buy and borrow," says Donald Wihardja, CEO of MDI Ventures, the VC arm of state-controlled Telkom Indonesia. "We look at start-ups, preferably those we have seen from the inside, and we escort them through the process of working with the government. The government gets revenue and cost savings through digital enhancement, and we generate revenue through capital gains."

Telkom's interest in fintech is direct and indirect. It established LinkAja last year in collaboration with 10 other state-owned enterprises, including four banks. The goal is to create a default national e-wallet by combining Telkom's existing TCash offering with those of the banks. MDI will invest in the ecosystem that builds around this as well as back start-ups in other verticals that leverage fintech.

Telkom already has an incubator, and MDI has closed one fund for Series A rounds and another for Series B and beyond in the past couple of years. These are generalist vehicles that focus on fintech alongside technology-enabled healthcare, logistics, commerce, and travel plays. However, the firm is also raising a fintech-focused seed-stage fund. This is a collaborative effort with sector specialist Finch Capital.

The embedded approach

Aldi Adrian Hartanto, a partner with the new fund, known as Arise, notes that much of the low-hanging fruit in terms of consumer-facing platforms – across payments, e-wallets, lending, and business financing – has been harvested. He is more interested in the financial infrastructure that makes these platforms work.

"Every industry has financial services, so we look at it as an enabler, which has to connect to different platforms," Hartanto explains. "How do you serve this segment and solve this pain point? By building businesses on top of them. It's not B2C or B2B, but B2B2C or B2B2B – you are enabling multiple transactions through APIs [application programming interfaces]."

This is also a focal point for SC Ventures, albeit through its venture building unit. Nexus was developed as a white label banking-as-a-service (BaaS) solution for e-commerce marketplaces that don't want to build their own infrastructure. By plugging Nexus into these platforms, Standard Chartered effectively acquires more banking clients. Indonesia's Bukalapak and Sociolla were the first to be onboarded.

"Bukalapak said, ‘We are happy to provide our network and client base, but can you bring the capacity, technical capability, and the licensing regime to the fore to allow us to implement and execute at speed,'" says Gakim Solomons of SC Ventures. "We run open platform, so there is no disintermediation or disaggregation. We will work with anyone, provided the business model makes sense. Nexus works with smaller banks that don't have the capability to develop our capacity, as well as e-commerce platforms."

BaaS is one of six themes pursued by the venture building unit, alongside digital banking, health, wealth, and lifestyle (responsible for Hong Kong digital bank Mox, among other things); small and medium-sized enterprise and supply chain finance (it launched a B2B marketplace and supply chain financing platform in India); environment, social and governance (ESG) screening; and digital assets.

The sixth is online digital payments, where Assembly stands out as an example of SC Ventures acquiring a capability and pursuing a roll-up strategy, rather than developing it from scratch.

There are two more workstreams: an accelerator, which includes Fintech Bridge, a platform that connects bank divisions with a community of start-ups that can offer solutions to problems as requested; and an investment program, which is currently deploying a $100 million fund aimed at integrating technologies and capabilities into the bank. There have been 12 investments to date.

To qualify, companies must be partners or vendors of the bank, so SC Ventures can prove a use case. The portfolio mix reflects where the bank is spending its procurement dollars. In the first year, there was a focus on artificial intelligence and risk management tools as part of efforts to improve transaction monitoring and know-your-customer (KYC) systems. In year two, authentication, network management, and security came to the fore – key areas for an organization working remotely.

Loyal customers

Securing a bank as a customer is a powerful endorsement of a start-up's product offering. Although they are notoriously slow to move – trusting a company with a limited operational history and perhaps only a partially proven business model is a big ask – banks are sticky customers.

"Banks are sitting on legacy infrastructure, and they are looking for partners to help them move faster and compete with innovators who are building systems from the bottom-up. If you can find businesses that solve problems, particularly on the infrastructure side, and enable banks to serve their customers better, they are going to love you," says Louis Casey, a principal in KKR's growth-stage technology team.

"And once you win that first blue-chip customer, it generates new customer flow. When one bank uses a product, it can create a referral flow and other banks start doing the same."

The opportunity set is broad. At one end of the spectrum are KYC processes that involve a relatively low level of technological complexity, but there are inherent inefficiencies to keeping it inside the bank. At the other end is back-end infrastructure for a range of different payment trails and services.

"It's a combination of the app helping the consumer and the regulated bank. These entities need to talk to each other through APIs, so there is an entire infrastructure being developed to make sure front-end apps communicate with regulated banks and regulated insurance companies," says Tilman Ehrbeck, a managing partner at early-stage fintech specialist Flourish Ventures. "If you are a retail broker app like Robinhood, there's a lot you need to do, dozens of functions that must be performed."

With a suite of 600 APIs that enable financial institutions and other entities to build payments initiatives, Episode Six claims a place among the more sophisticated operators. Over 100 plug-ins, each with multiple extensions, allow a high degree of configuration on a single code base. The goal is to remove barriers associated with legacy technology, such as having multiple versions of the same software tailored for different clients.

The company, which is based in the US, found a shortcut to the acceptance issue by purposefully targeting two large accounts in Asia: HSBC's PayMe small payments platform in Hong Kong and a neo-bank established by Japan Airlines. Having proved the robustness of its technology backbone, Episode Six progressed to a wider rollout. It now serves more than three million end-users, and HSBC and Japan Airlines are responsible for less than 20% of accounts. HSBC went on to invest in the business.

Banks represent the largest addressable market – such is the burden of their legacy platforms with software built on decades-old coding languages – but there is demand from modern technology platforms of all kinds. Investors expect these players to become big consumers of fintech in Asia.

"A lot of unbundling has happened in the financial services industry: everything has been converted into APIs and boxes. Fintech start-ups have emerged in each area, and now the fintechs themselves are unbundling. Across different geographies, there is an unbundling of the industry or a re-bundling of the fintechs," says Amit Anand, founding partner at Jungle Ventures. "Fintechs have become so large, they are facing the same kinds of issues as existing institutions, so they will buy new fintech."

Front-end to back-end

This unbundling process – elsewhere described as an unpeeling of certain internal capabilities from banks into independent service layers – still has some way to go. Moreover, it typically only applies to processes like KYC that are cost centers for banks rather than points of differentiation.

Separate battles are being fought in front-end engagement and distribution and in back-end servicing, where banks believe they can offer real value-add. They are likely to invest more in these areas and might be keener on retaining ownership, which has implications for relationships with start-ups as well as for the roles played by different corporate investment programs. On the back end, several Asia-based groups are pushing into blockchain, but opinion is divided as to how this will turn out.

SC Ventures has made strategic investments in digital asset custody solutions, and it expects to launch a fund dedicated to digital assets. The venture building team is also working to ensure the bank has the tools and infrastructure to take advantage of any changes driven by blockchain, in the prime brokerage and financial markets space, as well as in the retail space.

SCB10X was established two years ago by Siam Commercial Bank and tasked with exploring a broad range of investment opportunities. It soon homed in on blockchain and decentralized finance. Interests span blockchain infrastructure and business models that parallel traditional financial services such as blockchain-based wealth management platforms.

"Taking deposits and making loans is what banks do, it's our bread and butter," Mukaya Panich, chief venture and investment officer at SCB10X, says of the wealth management platforms. "We need to understand how it is done with digital assets because we probably want to do this one day. And we see clear product-market fit – users want to hold digital assets for the long term, but they also want some cash flow, and they can't get that if there is no platform."

Reinventure was quick to act, participating in a Series C round for cryptocurrency exchange Coinbase in 2015. The company listed on NASDAQ in April and currently has a market capitalization of $54.5 billion. Reinventure exited with a 120x return and proceeds of approximately A$550 million. The proceeds came from its first fund, which had a corpus of A$50 million.

Nevertheless, Westpac was reluctant to make the investment, and Gilligan is skeptical about banks ever getting an appetite for blockchain in its true disruptive form, citing widespread misperceptions concerning the risks. Investments in the space currently being made by banks do not meet Reinventure's standard criteria for decentralized infrastructure.

"It is not true crypto," Gilligan says. "It is blockchain where they maintain control, but the entire point of these new crypto economies is they are not controlled. For a number of these new protocols, they are dissolving corporations and moving to decentralized autonomous organizations. These technologies are built by communities, not leaders, and that is too foreign a notion for corporates with traditional control structures to get their heads around."

This philosophical divide will have implications for Reinventure's fourth fund, where the plan is to deploy at least half the corpus in crypto and decentralized finance-related businesses. In Funds I through III, Westpac accounted for 99% of the commitments. In Fund IV, for which Reninventure is targeting A$150-250 million, the bank will have a minority interest.

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• Topics
• Southeast Asia
• Australasia
• Greater China
• Technology
• Financials
• Early-stage
• Asia
• Fintech
• Reinventure Group
• Standard Chartered
• corporate venture capital
• MDI Ventures
• Finch Capital
• KKR