Last year saw a record volume of venture capital investments – the highest peak since 2000. Venture capital has been highly active in almost every industry, and banks are no exception. A Citigroup venture capital fund, Citi Ventures, headquartered in Palo Alto in the heart of Silicon Valley, recently unveiled its investment strategy.
The fund’s main goal is to “foster innovation and acquire new products.” It is their faith in innovation that has enabled Citibank, part of Citigroup, to increase its number of loyal customers during years of crisis.
Deborah Hopkins, who hails from industrial Detroit, is the chief innovation officer for the company.
Investment Strategy
In a rare turn of events for Silicon Valley, the amount of capital that the fund manages has not been disclosed. Presumably, fund managers do not want to give regulators any opportunity to analyze the balance sheet of the parent bank. Not too long ago, Citigroup had to sell a private equity fund worth $4.3 billion to comply with a legislative act that came out of the 2007-2008 financial crisis. But this restructuring did not affect its venture capital division.
As with many other large multinational corporations, Citigroup is betting on the development of new technologies around client services. Collaboration with innovative Silicon Valley startups is underway. The focus is not on multibillion-dollar project returns but on meeting the demands of customers. This has been labeled the era of the Chief Executive Customer. The central motto of the company is “everything for the customer.” From user-friendly interfaces, to security systems that protect against a rapidly growing number of cyberattacks attempting to steal customers’ sensitive data.
The investment policy of the fund is based on one central principle – to not scare off SPVs. The fund does not need to control companies or have exclusive cooperation with them. The main goal is to gain access to innovation: New products, systems for risk management and analyzing customer behaviors, as well as any business processes configured differently than those of competitors.
Innovation Helps Banks
Banks today compete with a multitude of online systems and peer-to-peer credit platforms (credit without the use of a financial intermediary) with very attractive rates of investment. Smartphone apps are replacing banks. They don’t have lines, lunch breaks, or weekends. Today’s customers want a single click and 24/7 service, whether it is from a real or artificial person.
Knowing present-day customer demands has also determined the management structure of the fund. Vanessa Colella, who was previously responsible for marketing at Citibank, is the head of global investments. In her words, Citibank has not had the most outstanding customer service. The slow-moving bank has had to address this situation through innovation. For example, mileage points affixed to credit cards – one of the most long-lived innovations of its time – attracted and retained millions of customers from around the world.
Understanding The Customer
Many corporations have long known that customers do not always make the most economical choices; rather, they choose what is most convenient and of highest quality. In the banking sector, an attractive but often variable deposit rate does not guarantee an increase in customer retention time. Even more, such an expenditure for attracting customers does not always pay off.
Even so, there are less-expensive means of growing a base of loyal customers than high payouts on deposits or low interests on credit. For example, involving clients in the management of personal finances through applications designed for that purpose can help strengthen loyalty to the bank’s services and even guard against panic in crisis years. A payment application that can approve credit limits for customers standing in front of a cashier at a store, but who have forgotten their purse at home, might also prove very useful.
Every week, startups in innovation centers present their products to the financial industry. New ideas are born every day, and no one can predict what will drive competition in the world banking system in just a few months. That is why it is not just Citigroup that has its venture capital arm in world innovation centers: HSBC, American Express, BBVA, Santander, Sberbank and other financial organizations are also grappling to access new technologies.
In this highly competitive, mature market, a costly battle is taking place to attract and retain customers. A corporate venture fund of a few tens of millions of dollars not only attracts customers with smaller marketing budgets but can increase business resilience during times of crisis.
Published By: Andrew Ponomar (CEO of Enter Capital)