June 30, 2017

In case you missed it, last week’s edition was an initial dive into how Amazon’s purchase of Whole Foods was a reflection of its longer-term business development strategy. By exploring ways to leverage its existing value chain, Amazon uses internal customers to help develop new core businesses.

I wanted to see if I could apply this model to banking. While the approach is rare in practice, there are a few examples of how banks have taken a similar strategy, though no examples are nearly as successful as Amazon has been (admittedly this would be true of all but a handful of companies in the last few decades in all industries).

I’ll use three different approaches to show how banks can leverage their existing value chain to create new products. The first approach, being its own first-and-best customer to support internally creating a product to sell to other banks, will be discussed today, with the following two approaches to come in part three.

Creating a product for other banks

This is the most common approach for banks, and should be for most companies who stick closest to their core competencies. In this model, the bank develops expertise in a certain area of the traditional banking value chain/experience, and then productizes their process/technology to sell to other banks.

Revisiting Porter’s generic Value Chain analysis:

Inbound logistics > Operations > Outbound logistics > Marketing/Sales > Service

Converting this to a simplified Commercial lending value chain could look something like:

Data gathered > Credit reviews/decides > Product/structure offered > Commercial Banker closes > Service/Collections

Working backwards, we can see how many of the fintech companies chose to focus on the first two links in the chain. Servicing/collections is messy and non-standard, most commercial loans are still through humans, and the product/structure hasn’t really changed much in many years. The easiest place to start is Inbound Logistics and Operations.

Not surprisingly, this is what most banks are looking for as they look to improve their Commercial lending operations – they want data gathered in a more streamlined fashion and want to decision the loan accurately and quickly. However, banks ‘don’t build technology,’ so the mindset is always to wait on traditional vendors to actually build things on their roadmap and hope it fits what the banks wants.

Live Oak Bank took a different approach. By viewing the lending function (especially Sales) as an internal customer, they could justify investing in building a better commercial loan origination platform to optimize the gathering of data and processing of data (Inbound Logistics and Operations). If nothing else, their own internal value chain would be much improved. However, they saw the opportunity across thousands of banks in the country and were able to successfully take their internal expertise and turn it into a product for other banks. This turned into nCino.

Of course, the example here diverges from Amazon’s as Live Oak eventually spun nCino off into its own company (while retaining an ownership stake), betting that it would be much more successful as an independent venture. After 5 years and 130 customers (plus an Inc. 500 fastest growing company in 2016), it looks like the bet has paid off.

Two other notable banks have followed in Live Oak’s footsteps – Umpqua Bank and Eastern Bank. Both banks have followed the path of initially incubating the idea inside of the bank to solve a bank need before spinning it off, but they differ in the product/serve they are creating.

Eastern Bank’s version is similar to nCino’s approach – build a better loan origination system and then offer to license it to other banks. Eastern Bank created a segment,  Eastern Labs, which built a small business loan tool that could approve and fund a loan to an existing customer in around 5 minutes. With a more standard product around small dollar unsecured small business loans, Eastern Labs was able to develop a process that reached deeper into the value chain, though it relies more on Marketing instead of Sales for distribution. Recently, Eastern Labs has spun off as Numerated Growth Technologies.

Umpqua’s unit is called Pivotus Ventures, which is also now independent from Umpqua aside from a minority stake. Pivotus is currently building a new personal banking communication app for Umpqua to pilot called BFF (Best Financial Friend). In addition, it operates as a technology consultant for banks, helping with technology strategy, design, and testing/iteration/building of new products in partnership with their clients.  Again, the approach was to identify Umpqua as an internal customer, develop a product to meets its internal need, and then sell that competency to other banks.

And don’t think Live Oak is just basking in the success of nCino. After tackling the loan origination side, Live Oak just spun out a joint venture with First Data to continue building something new for the deposit/digital banking experience. With a $38MM after-tax gain on the business combination, it looks like they are well on their way to creating something else that other banks may want.

Stay tuned for part 3 where I’ll cover a bank that built and sells a non-banking technology product, and how a bank could acquire its way into the value chain of a new business line like Amazon is doing with Whole Foods.