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Potemkin Bank: How Big Finance Pretends to Innovate
Unfortunately, "innovation" is becoming a buzzword.

September 25, 2011
Also published on Quora

My company, Think Computer Corporation, recently participated in a startup competition sponsored by SWIFT, a global banking organization that essentially coordinates most interbank wire transfers. We entered our FaceCash mobile payment system and ended up a finalist. SWIFT's members are largely European banks, but American and Asian banks as well, from ABN AMRO to J.P. Morgan Chase to Russia's Vnesheconombank (a name you can trust!). Some are more recognizable than others, and some presently more on the verge of collapse than others, but all have a long history of being rather conservative when it comes to new technology.

A few years ago, SWIFT decided to remedy this problem by starting an initiative called "Innotribe," and that is where the idea for a startup competition took hold. My personal view is that such competitions are unquestionably a good thing, as they provide a decent funding mechanism apart from venture capital and angel investing. They can also serve to break the herd mentality of the MBAs who dominate those fields and pile onto buzzword businesses. ("Social media," anyone?)

According to the organizers, this year's Innotribe competition netted approximately 200 entries, of which 10 were selected as finalists for two $50,000 cash prizes. The criteria for participation were set out on the Innotribe Challenge Details page:

The Challenge is open to innovative technology start-ups and technology-enabled financial services companies less than 3 years old and working in areas like payments, securities, trading, social media tools, big data/data analytics, security, identity, b2b or b2b2c mobile, small business apps & services &/or IT infrastructure. Eligible applicants will be able to clearly explain why banks or other organizations in the financial industry are ideal customers or partners. Consulting and outsourcing firms are not eligible.

After each finalist gave a presentation, the contest's winners were recently announced at SWIFT's annual Sibos convention in Toronto, Canada. Sibos is a large conference with a large exhibition floor featuring large banks that have large budgets. Having been to other financial conferences, it's easy to tell where the big money is, and when it comes to lavish spending, Sibos puts everything else to shame. If the fleets of limousines don't clue you in, the metal detectors and X-ray scanners might. These people have a lot of money.

Once inside, it's clear that the banks use their booths to flaunt their egos to their neighboring banks: most booths are just empty space with flat screens scattered throughout, as though a hundred decent-sized bank branch lobbies fell out of the sky and into the convention center. Such expansiveness isn't cheap, however: between conference fees, multiple stories (Meet on the first floor of the booth? How quaint!), materials, electricity, audio-visual equipment (You only have four 52" touchscreens?), hired temporary staff, international movers, and union labor, a booth could easily cost a bank six or perhaps seven figures to build, show off for four days, and then tear down. Plus, there's the expense of food: while Citi was offering waffles and custom-made crepes and omelets to those with meetings in its booth, Bank of America was being slightly less stingy, offering croissants to anyone who wanted them. Deutche Bank was kind enough to let me take a bottle of orange juice.

No conference would be complete without its own glossy daily newspaper, magazine, and private television station. Fortunately, myriad print publications and Sibos TV were on hand with professional recording and editing equipment, as well as the requisite standard-issue female anchors, to make the CEOs and executive vice presidents of the world's major banks, as well as select conference speakers, feel that much more important. (Some of the coverage is available on the conference web site.)

Despite a price tag of $3,000 per head for roughly 8,000 bankers and government officials who attended (for conference revenue of approximately $24 million), the ten finalist companies in the Innotribe competition flew in at their own expense, and were given conference passes that did not qualify for lunch, let alone the $200 per head conference party (not to be confused with the private functions sponsored by each bank). To be fair, SWIFT did offer to reimburse expenses for two nights at a hotel, and while the conference web site did provide potentially valuable contact information for all attendees through the MySibos portal, as a proportion of the total bankers in attendance, no more than 50 (likely fewer) were invited to judge for the Innotribe Challenge, making it, in essence, a sideshow within a sideshow. The larger sideshow was Innotribe itself, which offered a variety of poorly-researched, touchy-feely conference sessions about banking (compete with kindergarten-style thought bubbles encouraging participants to "Have fun!"), such as "Banks for a Better World: Inspiration Session." Not to mention the troupe of roving South African-style drummers, whose (obviously quite loud) community-building antics eventually so endangered the career prospects of one of the Innotribe organizers that they were asked to pack up and leave.

Regardless of the overwhelming embarrassment I felt watching a room full of nominal banking professionals act like elementary school students with bongo drums while the Dow Jones Industrial average was down more than 400 points due to the European financial crisis, I was excited to hear the results of the competition, as I thought FaceCash actually had a chance of winning. In the end, the winners turned out to be two of the other finalists.

Obviously not everyone can win everything all the time. Something bothered me about the ultimate decision, however: both of the winning companies had already raised rounds of financing totaling eight and nine million dollars each. Handing over another $50,000 to each of these established, well-funded companies, startups or not, seemed rather pointless if fostering innovation was really the goal of the competition.

In the process of looking up how much money each company had raised, however, I stumbled upon another interesting fact: both companies were founded prior to 2008, making them older than three years. Per the eligibility criteria for the challenge, they should not have been allowed to compete at all.

One could argue, I suppose, that this reasoning also applies to Think. The company is technically 13 years old, as I first incorporated it in 1998 to provide IT consulting services as a freshman in high school—services that according to the Challenge rules would have disqualified Think completely. FaceCash didn't exist until 2009, however. Our FaceCash trademark application was filed on May 15, 2009, we began working full-time on FaceCash in September, 2009 (the date I put on our application to enter FaceCash into the competition), and our press release launching FaceCash was issued May 27, 2010. The company re-incorporated in 2010 in Delaware as by then it was focusing exclusively on payments and financial services. All of this happened within the past three years.

In contrast, the winners of the competition were founded in 2006 and 2007 to work on their current products (not different ones), each raised rounds of financing in 2007 in excess of one million dollars, and yet both claimed to be founded in 2010 on their written applications. The organizer of the Challenge, when asked, wrote that he "personally reviewed each application" and "was fully aware of the 'age' of both" of the winning companies. He also stated that prior to pivoting, the companies had been "failures," and so "they did win fairly and I stand behind that decision completely." Apparently the minor changes in each company's business model over the years meant that they weren't actually as old as their founding documents state, and that such pivoting simply added to the impressiveness of their respective cases.

I have no way of knowing whether FaceCash was next in line to win or not, but either way, such reasoning is highly questionable. Publicly available articles about each company confirm that any pivoting was minor and hardly necessary to consider the prior business model a success. Per the written eligibility criteria, whether or not any given company went through a change in design, management, business model, or some other factor is irrelevant so long as the company was "working in areas like payments, securities, trading, social media tools, big data/data analytics, security, identity, b2b or b2b2c mobile, small business apps & services &/or IT infrastructure." Both companies were clearly working in these areas throughout their four- and five-year-long histories. Every startup has its ups and downs, as is the nature of entrepreneurship, but the eligibility rules said three years, period, presumably to level the playing field.

Furthermore, every other rule seemed strictly enforced: timing was monitored down to the second (except for questions from the judges, which were only two minutes instead of the promised three); presentations had to be in specific formats (PDF or PowerPoint only); and deadlines had to be met. To make an exception in this one particular area seems odd.

It's pathetic—though hardly unexpected—that the world's biggest banks view "innovation" as an utterly foreign concept best represented by kindergarten play-time. It's equally pathetic that a competition such as this one awarded cash to companies that already have plenty of it. What makes me angry, however, is that the rules still don't apply to the people who not long ago came close to destroying the world. They didn't in 2008, and they don't now. Moreover, the 2011 Innotribe competition will be used by SWIFT to prove that multi-billion dollar financial corporations have done their part to foster entrepreneurship and encourage innovation. Nothing could be further from the truth. Their lobbyists crush it daily, as I have documented extensively in the past.

It's a joke. To give away $100,000 at a conference whose budget is well into the eight figures, in a corrupt manner that props up the status quo, is a joke. To ask participants to pay for their own plane fare and lunch in order to enjoy the honor of being in the presence of bankers who have twice destabilized the world economy, is a joke. To reduce the crucial role of Schumpeterian growth to a staged production involving bongo drums and magic markers, is a joke.

So if you run a financial startup with a big idea, don't give up. Society needs your help. But when you're looking for funding, steer clear of the banks. Their game is a rigged one (as it long has been), and in a world of smartphones and instant secure communication, you'll be far better off letting them crayon and magic marker their way to their own obsolescence.

Besides, next year Sibos is in Osaka, Japan, and it's a long way to go for a Bank of America croissant. If you're lucky, they'll start using your checking account fees to stock them in your local branch, only a few miles away.

But probably not.

Aaron Greenspan is the CEO of Think Computer Corporation and author of Authoritas: One Student's Harvard Admissions and the Founding of the Facebook Era. He is the creator of the FaceCash mobile payment system, ThinkLink business management system, and PlainSite legal transparency project.

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