At Sibos 2014, finalists in the fifth Innotribe Startup Challenge will throw themselves into a sea of financial services expertise and see who can swim. Dan Barnes reports.

Financial technology start-ups are surprisingly anti-establishment. “[The banks] hate it,” says Chris Brycki, a former hedge fund and investment bank portfolio manager and founder of retail investment platform Stockspot. “I wrote a piece in an Australian paper recently about the effect of disruptive technology, criticising one bank in particular, and it put out a press release saying how good its systems are. It shows that they are worried about disruptive firms taking a piece of their pie.”

Stockspot is a finalist at this year’s Innotribe Startup Challenge, a competition that makes use of the enormous aggregation of financial technology expertise attracted by the Sibos conference. The challenge gives those experts some food for thought, and gives the competitors, a combination of start-up firms and small innovators, some exposure to the face of finance.

Growth on growth

The competition has been growing successfully over the years – Kevin Johnson, Innotribe Startup Challenge manager at the Society for Worldwide Interbank Financial Telecommunication (Swift), says year-on-year entry numbers were up about 60% in 2014 – and the standard of entries is high. The current four-stage judging process, in place since in 2012, saw 152 entries of the 280 applicants getting through the first round of vetting, which consisted of checking application details and relevance.

Those 152 applicants were then broken down into groups of 25 to 30 and assessed by a network of 500 external judges and 20 to 30 internal judges from within Swift, each of whom has an equal say in their evaluations.

A standardised model of judging is used, based on Guidewire’s G-Score system which also underpins its Innovate100! competition for start-ups, and considers the business, the team, business execution and cash flows. Any institutional bias is managed out by distributing company employees across the different judging groups, and the size of the judging panels minimises any individual bias that a judge may have.

The top-ranked 15 firms across London, Singapore and New York are ranked as semi-finalists. They are given two days of coaching to turn their 15-minute presentation into a five-minute pitch which they deliver to an audience of judges. Five from each of these heats go through to the final.

“They might start by saying ‘We want to put you out of business, Mr Banker’, but we turn that story from working against the audience to working with it,” says Mr Johnson. “With some other competitions, the entrants just give their pitch. In our challenge, we give them coaching to deliver a message that the audience can understand.”

The coaching and audience are rated by the competitors as big positives. “As a growing start-up, we believe passionately in feedback," says Daniel Abrahams, CEO of 2014 finalist CurrencyTransfer. "This whole process has introduced us to smart people from the industry, who have studied CurrencyTransfer.com closely and provided some fascinating insights. We then feed everything back to our headquarters for discussion.”

entrants to the Innotribe Startup Challenge by type

What do I get?

The audience might be forgiven for thinking that they are looking at potential redundancy packages on the stage in front of them. A technology firm that makes finance more efficient is inevitably trimming some fat off the business, and that means headcount. For example, OpenGamma, a semi-finalist in 2012, provides open-source risk management tools to remove the integration and interoperability issues that plague the financial technology world. Integration technology firms must be grinding their teeth. Likewise, Mr Brycki’s Stockspot is actively trying to help investors avoid fund management fees in order to make more effective use of their investment capital.

However, it is important to get to grips with these companies. In many cases they are not trying to add efficiency, but are instead trying to improve the quality of services that are already offered – for example, through a new model of authentication – and payment, value transfer and security are well represented, as one might expect at an event organised by a secure payment network.

Where they are delivering efficiency, they are often the future of business, and that is something the audience should address head on, says Mr Johnson.

“We are not like an in-house cultivator that wants to find technology that will work with a particular bank,” he says. “We want to find things that will really disrupt the financial industry. If you had an idea that would completely revolutionise the way that banking looked in three or four years’ time, we would be remiss not to bring this to our members. If we expose them to what is happening they can react to it. We want to spur them into action rather than scaring them into hiding from something.”

The start of the race

Initial public offerings (IPOs) for tech firms have been keenly watched in 2014, as have the incubator projects that many national and local governments are establishing to support technology start-ups, such as Berlin’s Silicon Alley and London’s Silicon Roundabout. The US has a long history of technologists taking risks based on an innovation in Silicon Valley, and has seen its small businesses given a boost by the Jumpstart Our Business Startups Act, which gives firms that have less than $1bn in annual revenues breaks from the burden of regulatory transparency requirements which public firms in the US are typically subject to, for five years after an IPO.

Analysts have been positive about the returns that tech firms can generate compared with their relatively low cost base. One innovation that has helped technology start-ups across the board is the development of virtualised memory and processing power. These cloud-based environments have enabled developers to get access to the resources needed to build and test systems without requiring an initial outlay of something as large as a data centre, which may have been a cost of doing business five or 10 years ago.

This combination of appetite and capacity means that a growing number of start-ups can achieve ‘escape velocity’ in getting off the ground, and therefore the competition to find a future success and to get investment is tougher. This is where competitions such as Innotribe help the wider community, the financial industry and the start-ups and innovators themselves. Looking at the list of semi-finalists in 2014, 32 of the 45 list previous awards and recognition among their details, with many noting previous competition wins from similar start-up challenges and from university-led competitions from the likes of Stanford and Cambridge. Getting acknowledgement from as many sources as possible is a huge advantage for the competitors.

“Awards can give you recognition, and that is useful in two ways,” says Brian Maccabba, CEO at Waratek, winner of the Best Innovator award at Sibos 2013. “There are hundreds of start-ups with lots of new ideas out there, and the question is: how do you get above the noise level, get a bit of recognition and credibility? Swift Innotribe is really good from that point of view. You get in front of significant audiences, you have to pitch at both the regional and then international level at Sibos; it forces you to present your technical concept as a competitive pitch.”

There are other reasons to seek out these events. Waratek had its business model completely turned around following its entry in the Fintech Innovation Lab, a competition which requires a lengthy review process, with mentoring provided for all of the finalists for three months by technologists at top banks. It was the experience at this competition that led Waratek to enter Innotribe (see box).

The type of feedback and experience that different events provide can be quite distinct, and firms report getting varied types of input back from them as a result.

Eugene Danilkis, co-founder and CEO of 2014 finalist Mambu, says: “We went to Finovate before and that was more a showcase of functionality; you put the product on stage and then have people ask questions. Innotribe seems more like a forum with a community.”

A growing tribe

Mambu provides an interesting counterpoint to Waratek, as it offers a cloud-based banking platform. Both firms’ offerings acknowledge the challenge of legacy systems in banking, with one firm providing a coping strategy and the other an alternative mechanism. The type of technology innovation that applicants enter has changed over time, and there is a regional bias that can affect the challenge firms try to resolve.

In 2011, payment-related and secure authentication firms made up nine of the 11 finalists, as one might expect from a Swift-led competition. Increasingly, funding platforms and loan management firms – businesses that either facilitate loan acquisition or investment funding –have entered, and value transfer systems that use tokens or crypto-currencies are also more visible. These start-ups reflect industry trends with the development of peer-to-peer lending and crowd funding as alternatives to bank lending. The crisis more generally may have driven the growth of interest in non-standard payment systems such as Bitcoin. 

The growth of technological capabilities has clearly been fundamental to the new services these firms are offering.

"We have been developing the core product and functionality. It is quite a complicated platform to develop, but Innotribe and Sibos are sort of our coming-out party," says Mr Danilkis. "We are moving from working with microfinance-based organisations in emerging markets and now we are getting our foot in the door in Europe, which comes with the product maturity."

And the wedding of this new technology with the knowledge of judges in competitions such as the Innotribe challenge is exactly what is needed to kick-start firms if they are to make the leap from start-up to effective business, says Mr Maccabba.

“I see the caterpillar to butterfly analogy," he says. "It is not that a company has some incipient potential that is unrealised, it is more that no strategy survives without contact with the real world. That contact with real-world experience jolts firms into the right direction from a commercial point of view.”

Box: A business transformed by competition

Warratek creates ‘containers’ based on the Java programming language which can be used to allow a firm’s legacy systems to run in an environment in which they will not be affected by their interaction with other systems, and are therefore protected to some extent. A large part of the banking community runs very old systems for which a crash would be disastrous, so this sort of container can be usefully applied to much legacy technology. An inherent quality of these Java Virtual Machines (JVMs) is that they check any query made to the application they contain, to verify whether or not it is safe.

One of Warratek’s mentor banks in the Fintech Innovation Lab competition ran a proof of concept around the firm’s virtualisation of Java, which required the bank’s security team to look at the system. The team realised that the ability of a JVM to check the safety of any query made to the legacy application could be applied to queries that occur during a cyber-attack which can be used to crash a system. Furthermore, the ability to change the acceptability of a query from ‘safe’ to ‘unsafe’ could allow the system to be used for security purposes to block attacks, even if they were entirely new.

These so-called ‘zero day’ attacks, in which the defender has zero days to react to a threat, are a serious problem when loopholes in computer logic are discovered because the logic is inherent to the system. An application would typically have to be taken offline in order to have the loophole closed. A JVM only requires a single line of code to be changed to bar that attacking query from affecting the underlying legacy platform, thereby creating a very successful barrier to an attack almost instantly without the application having to be taken offline.

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