Israeli Bank to Groom Startups in Bid to Grab High-Tech Edge

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To make sure it stays relevant in a sclerotic industry destined for a shakeup, Bank Leumi plans to help launch a six-month accelerator program for financial technology startups this fall.

The Israeli bank is seeking to groom up to six young companies in its home country that aspire to improve the customer experience in areas like personal finance management (PFM), security and payments. Companies chosen will spend five months in Israel and one month in the U.S., where they'll get money, work space, and access to mentors who will help them develop their ideas.

The news comes on the heels of Citigroup (C) announcing in July its plans to start an accelerator program in Israel.

Banks are warming to the idea of hosting startup programs to get access to entrepreneurs' ideas, mold them into what they need, and potentially buy their products once commercialized. Another motivation is to get recognized as having innovation street cred. Young companies, in turn, get the connections — and insider knowledge — they require to turn their dreams into realities quicker.

Bank Leumi's move also underscores a growing trend among financial institutions worldwide to move more quickly with their IT efforts. Banks, infamously sluggish when it comes to technological upgrades, are acknowledging the need to scout out for innovation from outside their organizations and are actively courting developers. In recent months, opening up APIs, hosting coding competitions, and crowdsourcing mobile app ideas are among the strategies banks have tried to solicit fresh thinking.

"The banking world is on the edge of a new era, and we think many services and products the banking industry is selling to customers will be completely different in a short time," says Nir Inbar, business development manager in the high tech sector of the commercial banking division at Bank Leumi. "The banking sector was somehow left behind in terms of disruptive technology when looking at other industries."

Regulations, a protracted process for buying technology, and tight budgets are among the reasons for the industry's glacial pace of change.

"In order to be relevant, not just number one, you need to get innovation in-house from brilliant minds … working on fintech," says Inbar. "It's very hard to do innovation in house. Big companies need to go out and fetch these outside companies and accelerate their programs. … The financial world needs big changes in order to adjust to the Internet and the way people think about financial products as commodities."

Bank Leumi partnered with Elevator, an Israeli firm that creates accelerator programs and invests in startups, on the forthcoming Fintech Innovation Hub, which requires participants to spend 30 days in New York, which, along with London, is widely viewed as one of the main cities where fintech handshakes happen. "It's important to be where the ecosystem is and make the right connections," says Inbar. The bank values the resources devoted to the accelerator program at $200,000 to $250,000 per participant.

Bank Leumi, which recently launched an innovation department, says the hub is just the beginning of innovation initiatives it plans to undertake.

"The atmosphere in Bank Leumi has changed," says Iris Rapoport, deputy head of commercial banking division at Bank Leumi. "We are more open to doing innovation."

The emerging accelerator programs from Citi and Bank Leumi also show how Israel has become a hotbed for fintech companies.

"A lot of young people in Israel are interested in technology and are applying it towards solving real world problems," says David Sosna, co-founder and chief executive officer of Israeli startup Personetics, in an email. "I'm not surprised Bank of Leumi and even Citi have opened accelerator labs in Israel. … Accelerator programs are a real win-win. They foster the entrepreneurial spirit in both the start-ups and the established institutions."

There are earlier examples of financial-specific accelerators. The FinTech Innovation Lab, run by the Partnership Fund for New York City and Accenture, offers fintech startups connections to a consortium of big banks.

"There is no doubt this concept is catching on and it's a feasible way for the financial services industry to spark innovation and forward thinking in a commoditized industry," says Bryan Clagett, the chief marketing officer at the PFM startup Geezeo, in an email.

True Office, a startup that creates mobile games to train employees about compliance, is a FinTech Innovation Lab graduate and a poster boy for how accelerators can serve young companies well. True Office has scored a distribution deal with Thomas Reuters and landed Cristobal Conde, former CEO of Sungard, as part of its team, among other achievements, since its 2012 participation.

Access to CIOs, learning the minutiae of navigating banks' procurement departments and getting immediate feedback are among the benefits that sped up its path to commercializing a product by an estimated 24 months, says Adam Sodowick, founder and chief executive of True Office.

Even so, Sodowick urges aspiring fintech companies to choose their programs and products prudently. "Unless you are solving a business need, you will waste your time in an accelerator," Sodowick says.

Likewise, participating in a bank's innovation lab could be a misstep. "It can be the kiss of death," Sodowick says. "You always need to have a business sponsor within the bank. …You better solve a business problem and work with a budget holder. That's how things happen."

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