Mariano Belinky knows the world of fintech, or financial technology, inside out.
Belinky is the managing partner of Santander InnoVentures, the Spanish bank’s $US100 million (£66 million) fintech venture capital fund.
InnoVentures was launched last July to help Santander take advantage of the wave of innovative fintech startups that have sprung up since the financial crisis.
Since launch, the fund has seen an insane 820 pitches from companies, Belinky told Business Insider. InnoVentures has a team of just 7.
The fund has made just 5 investments (when we met Belinky was wearing a black t-shirt that just had the word ‘No.’ on it).
The investments cover everything from one of Belinky’s favourite areas blockchain technology (Ripple) to payments (iZettle). Belinky this week announced a challenge to find the best startups using distributed ledger technologies like blockchain in financial services, carrying a $US15,000 (£9,900) prize.
BI caught up with Belinky to find out what he finds hot in fintech right now, how he sees blockchain and distributed ledger technology evolving, what he looks for in a company, and whether he thinks we’re in a tech bubble. Check out the edited highlights of our chat below.
Business Insider: What excites you in the fintech market at the moment?
Mariano Belinky: There’s so much hype at the moment about blockchain but the curve went up so quickly. [The blockchain is the software that underpins blockchain, using a distributed open network to replace a trusted middleman in transactions by using the scrutiny and trust of the crowd instead].
We went from this time last year where people wouldn’t even talk about it [the blockchain] and it was bitcoin, to an acceptance by institutions that the underlying technology looks good and is incredibly powerful.
From then on we saw pretty much every bank announcing something around blockchain, some of them investing. R3 came about. If you ask me, I think the actual technology is probably 3 to 5 years out. Are we going to keep investing around this space all the time? No, we need to broaden the space.
BI: So is Ripple your bet on the blockchain?
MB: Keep in mind, InnoVentures is mainly a strategic fund. There’s no such thing as, “This is our bet”. This is more an opportunity to develop a primary technology that we think will be critical for clients and the bank. My sense is that we’re going to start seeing big building blocks and then smaller components that we’ll need as well.
We’re starting to see some initial big blocks — we have less than a dozen contenders for that. As you go use case by use case there’s even less — payments, the contender is Ripple [San Francisco-based Ripple uses distributed ledger technology, another word for blockchain, for mainstream payments]. If we were going to solve US securities, I would be looking at a different set of candidates.
Let’s talk about about payments for a sec. If we assume that the big building block for us is Ripple, then there are other blocks that have to come in such as how do we create the gateway, how do we verify certain aspects of identity, compliance, monitoring and reporting for the regulator. There are a number of things that have to come into place before we say, hey, we are ready.
We’re seeing really good companies jump into that space. I think that’s where this push will take us — starting to focus on the smaller blocks.
Maybe for the applications that the bank sees as a priority, we may end up investing in other large building blocks. I don’t think there’s a winner takes all type situation. I think we’ll see groups of banks working on specific use cases with one leading technology provider.
This is a very long way of saying: I don’t think we’re done with distributed ledger investments, but I think it will be a combination of other use cases on one side and the smaller blocks that will help us build what we want to build for our clients.
BI: Kabbage, another of your investments, is another client facing investment in a different space, are there any more investments like that you’re looking at?
MB: In our investment verticals, I would say 4 of them our client facing. We do payments — Ripple, iZettle, MyCheck. Lending — Kabbage. In big data we focus more on technology plays, end to end attacking a problem.
I’m not investing in an AI [artificial intellegence] company just because it’s cool or incredibly advanced. What ends up happening most of the time with those companies is they take all of your data, don’t have a lot of sector expertise, and end up giving you a lot of leads or client opportunities that, unless you have a good action oriented plan, you can’t really execute on.
I’m not investing in an AI company just because it’s cool or incredibly advanced
Remember Glengarry Glen Ross [a 1992 film about New York real estate salesmen] when he hands over the stack of leads? My sense with some of the big data companies is it’s just this very cool way of generating stacks of leads. You need a way to actually get to the client.
There are companies that actually talk about client engagement and, by the way, we do it with machine learning. They actually solve the thing end to end. They’re much more powerful. Within AI, we try to focus on ideas and companies that are very client focuses.
For wealth advisory, it’s the same thing. [We’re] very client focused with things like roboadvisory, offering that type of service to groups that wouldn’t normally get it.
BI: I’ve come across roboadvisory but I haven’t looked at it deeply — what’s going on there?
MB: Up until a few years ago, you had to be a client of a certain size to get the kind of investment opportunity that Betterment or Wealthfront present to you these days [these sorts of businesses offer automated investment advice and investment plans, rather than traditional client-based money management]. It’s a word that’s overused, but I think it is democratising investment.
I think at the rate that some of the big players are getting into the space, like BlackRock buying FutureAdvisors not long ago, these will become table stakes. Everyone who manages money in a certain segment will offer this type of service.
The question is will the companies that offer this type of service remain stand alone or just be acquired by the big banks. That’s something I haven’t figured out.
BI: You’re in an interesting position as you’re a strategic fund and have said before you’re not that focused on exits. Do you think we’re in a tech bubble?
MB: I don’t know if we’re in a bubble. I’ve seen enough compelling arguments on both sides of the topic. We are seeing very frothy valuations, there’s a lot of money going into companies at all stages. It’s a supply, demand issue — if there’s capital there, valuations will go up.
We are not in the game of pursuing unicorns
The question is, is it sustainable? That’s why I don’t like talking about unicorns as an end game. Our view is you have to build a sustainable company. Most of financial services are not 2 year plays or 5 year plays. If you’re looking for a quick exit, this is not the space. If you’re looking to build a company over time then you’ve got a shot.
I found it super interesting that First Data just went for its IPO. I was looking at the history, it was created by banks about, what, 40 years ago? And it is a unicorn! Probably the oldest unicorn in financial services.
Look at Visa — Visa was created in the 1950s right, by banks. Again, probably one of the largest fintech companies you can think off. Swift is another example. That’s the type of sustainable value that we as banks look at. We are not in the game of pursuing unicorns and getting into unicorns and IPOing.
BI: In terms of the companies you’re seeing, are the business models good?
MB: It’s a bit of everything, right. In lending you have very smart people doing very smart things. I absolutely love Kabbage and their approach to risk management and origination.
[But] there are a lot of copy and paste approaches where you hear things like, I’m going to use the same model to attack 7 different countries. If you spend some time in risk you realise that’s not a smart thing to do. We try to focus on the ones where you see the long play and have a sense that they’re doing the right thing.
BI: So are you ever put off if a business comes in and says ‘we’re going to be growing 50% a year for the next 5 years’?
MB: In some cases you can, right? How quickly did Apple Pay go from 0 to 100? There is definitely an acceleration. That hockey stick of growth looks more and more like a stick. Someone is able to capture 7 million customers in a week and I don’t know how they do it.
Can they sustain that rate? Probably not. But if you come to me and say you want to grow 50% a year over the next 5 years and the numbers make sense — why not? Will you grow at that rate forever? Of course not.
BI: Kabbage and Ripple are in the US, iZettle is in Sweden. Of that 820 you’ve looked at, what’s the geographic distribution?
MB: I would say there’s more risk taking and fresher ideas coming out of the US, but it’s a distribution. If you look at our portfolio, we’ve got 3 US companies, 1 Swedish company and 1 Israeli company. I wouldn’t be surprised if over time we move towards 40% US, 60% rest of the world.
But I think we’re going to for a while still see the most risk-taking ideas coming out of the States. It has to do with culture, availability of capital, talent — there’s a number of factors.
BI: Have you got any interest in Asia?
MB: We ask 3 questions when we invest: will this help our clients; can we actually help this company; and can Santander actually learn something in the process.
Our mandate is global, we can invest anywhere. But am I able to help a company out in Singapore? I don’t have a bank there, I don’t have a presence there, I don’t have clients I can bring them. It’s much harder.
Can I help a company here or in Spain or in LatAm? Absolutely. That mutual value proposition is much clearer in the geographies where we are present. Perhaps the only place we look at where we don’t have a presence is Israel because of the talent pool, the quality of execution, and the fact that companies there are ready to go global.
BI: Payments business have been huge, lending has been big, this year is all about the blockchain — what’s the next big thing?
MB: I can tell you the things I’m excited about. I think we’re going to see a lot more come out of the lending space — 2.0 you can call it. New products, new ways of serving segments. Moving from B2C [business to consumer] to B2B [business to business]. Larger clients.
I’m excited about the next wave of what will come on top of the basic blockchain — smart contracts, blockchain compliance, blockchain monitoring.
Look at where data players like Google and Facebook are versus what the bank knows about you — the gap is huge
I think there will be a next wave of not big data, but smart data. Knowing more about the customers by using big data. If you look at where data players like Google and Facebook are versus what the bank knows about you — the gap is huge. There’s a huge opportunity there to better understand and predict the customer needs.
Neobanks are making waves. Everything from Fidor, which is a full service bank, to Moven, which is more of a front end focused on financial health, that’s an area that’s just going to explode. Just in the UK we’ve got 5 to 10 new banks waiting to come online.
I’m dying to see what their value proposition is. A lot of these guys are already creating a lot of attention and they haven’t even launched yet. That’s an area where the UK is way ahead of the US.
BI: My feeling is they will get early adopters and then struggle to get beyond that, and established players like Santander will copy their best features.
MB: There’s a basic premise that I agree with you — just user experience doesn’t give you the 10x factor that Peter Thiel talks about.
Where I think a lot of these banks fail to get traction is a lot of them are single product offerings. They have the prepaid card with a very nice app on top but then when I want the savings product or the mortgage or the car loan… no one’s looking at all of my needs.
I think there’s a tremendous opportunity for banks to work with these guys. It’s true that we could copy a chunk of that but if no one has been successful at this it’s because these guys do have something we banks don’t. It’s definitely an area where interesting things could happen.
BI: Have you got investments lined up?
MB: We have a handful of things we’re looking at, a few might close before the end of the year. We’ve got a good pace, a good start. We’ve done 5 investments over 6 or 7 months.
We’re probably going to start focusing the model on how we help the portfolio companies before we go crazy and do another 10. Of course we’ll keep on doing it [investing] but we’re going to spend a lot more time with the portfolio clients.
BI: Is there anything you can say about the investments you’re looking at now — what kind of areas they’re in?
MB: They are all over the map I just described — the blockchain space, credit, there’s a lot of stuff in big data, bits of pieces in things like insurance, compliance. It’s really all over. As we get a bit more recognition, the breadth and opportunity and risk-taking of stuff we’re seeing is really increasing. We’re seeing a lot of exciting stuff.
BI: How much of the $US100 million have you got left?
MB: We’ve deployed about a third so far.
BI: How is the fund structured?
MB: We’re a subsidiary of Santander, fully-owned. We have a commitment from the bank for $US100 million. We don’t have to spend it all. I think the expectation is once we’re close to spending it all they will be a discussion of whether this is a successful model and do we want to keep on going. My hope is we turn into an ever-green field — we get an allocation every year or every other year.
BI: Are management happy with how it’s going so far?
MB: I think it’s pretty positive, I think people are happy. Management are excited.
Something our chairman did really well is instill this idea that we are a challenger bank. We want to be a top 3 bank in every geography we are in and in those we’re not we have to take that challenger mentality. There’s a lot of appetite to do things with the fund — to work with the companies, to find new opportunities are really challenge the old way of doing things.
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