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Jun 29, 2018

Podcast Summary:

MKB Fintechlab in Budapest, Hungary discusses banks vs. fintechs and tradition versus innovation. It’s a narrative we’ve been hearing far too much, from far too many sources. How do these two organizations, which at face value seem so disparate, find a balance? It starts with looking at the needs of the consumer.

During this episode, we’ll hear how fintechs are positively disrupting the banking industry and providing new ways for financial institutions to connect to their consumers, while making a bank’s job easier through automation. 



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Amy Lombardo:                00:00                     

Banks vs. Fintechs, tradition vs. innovation, it's a narrative we've been hearing far too much of. So how did these two organizations, which at face value seem so disparate, find a balance? It starts with looking at the needs of the consumer.


During this episode, we'll hear how Fintechs are positively disrupting the banking industry and providing new ways for financial institutions to connect to their consumers while still making a banks job easier through automation. When banks, service providers, and fintech innovations come together, they can find a holistic approach to the consumer journey and manage the end to end in a more insightful, valuable way. I'm Amy Lombardo, and this Commerce Now.

Devon Watson:                 00:45                    

I'm Devon Watson, Chief Marketing Officer at Diebold Nixdorf. This is an episode I've been looking forward to for several weeks. Let me give you a quick background on why I'm so geeked out. So prior to joining Diebold Nixdorf, I spent my career at Venture Capital as an early team member of two start-ups. So I know firsthand all the ups and downs and adventures of building a venture from the ground up. In the Fintech space, I think this is even more difficult than other domains. But the opportunities I think are absolutely huge. So if you're curious to hear the rest of the backstory you can check out the Serial Entrepreneur podcast I did with J.P. Nichols several months ago.


So the quick backstory, several weeks out, I looked at my travel schedule and noticed I'd be in the backyard of one of the interesting Fintech accelerators that had caught my eye a few times. I reached out, cold called the managing director and he graciously answered my introduction and agreed to do this show. Without further ado I'm on site here with János Pereczes, managing director of the MKB Fintechlab in Budapest, Hungary. János, welcome to the show.

János Pereczes:                02:05                    

Hi everyone. Thank you for opportunity of joining.

Devon Watson:                 02:08                    

Absolutely. Couldn't be happier to be here. Budapest is a beautiful city and looks like there's a lot going on in the Fintech space. Maybe you could start off just giving us a background to yourself and how you came to be director of this Fintech lab?

János Pereczes:                02:23                    

Okay. Yeah, actually I agree because I actually think Budapest is one of the greatest places in the Earth so anyone who hasn't been here should just come and join us. Once again my name is János Pereczes and I'm leading MKB Fintechlab, which is the innovation lab and startup accelerator of MKB bank.


My story before joining MKB Fintechlab is that, straight out of the university, after graduating with a finance major, I joined the venture capital. I was working for a firm where we managed both early stage, later stage, and turnaround funds as well, and I just fell in love with the space. I fell in love with investments, and working with, motivating, and inspiriting entrepreneurs.  And I fell in love with early stage investments where risk is high, but returns can be really high as well.


And I also fell in love with Fintech because of my finance background, because I think that there is still so much friction in the financial life of people. Like, if you look at me, I'm here in my mid-twenties, and I'm not the biggest saver in the earth. I could be saving, but the level of finance literature and the level of access to finances is not the easiest, I think globally. I fell in love with Fintech. I started a Fintech meetup series with one of my best friends in Budapest, it became a couple of thousand people community and then I get an opportunity to join MKB bank two years ago.


I became an executive assistant to the CEO and was working with the CEO to have him oversee digitalization projects inside the bank. The bank started to become, from a traditional bank, into a digital bank. It started the course system replacement, we launched a new loan application, we launched online identification services, and the bank was going through digitalization but we realized that we can't do everything ourselves and we don't know everything ourselves. So we decided to open ourselves up to the Fintech space, we decided to do something in the Fintech space and decided to create a gate between the technology start-up world and the bank. And this became, MKB Fintech Lab one year ago.

Devon Watson:                 04:24                    

Gotcha. So it's interesting you mentioned both the innovation in financial technology, the payments ecosystem itself but you also hit on something that I think is really important which is the education that goes along with it. We've got this interesting dichotomy right now where access to financial services is higher than it's ever been but financial intelligence, or financial acumen, is measuring the lowest it ever has in recent years when you look at many, many developed countries. So is financial literacy and financial education something that you guys look at for the lab?

János Pereczes:                05:02                    

It's part of the lab, but I wouldn't say it's the main thesis of the lab. But we believe education is key to actually scale products up in the Fintech space. Because obviously as a bank as well we launched so many cool features and so many cool opportunities for the clients but sometimes the clients don't understand it. It's really hard to reach those clients because they don't understand it and in order for us to be successful in the future as a bank we have to educate our clients, educate the whole economy basically.

Devon Watson:                 05:34                    

Got it. Interesting. So maybe tell us a little bit about some of the start-ups you've been working with over the past year and some of the success you've seen so far.

János Pereczes:                05:45                    

Maybe before getting into the start-ups themselves I would start what are the three pillars of what we do here in Budapest. So as the innovation lab has set up extra of the bank, we do three things. First is we build innovative community around the bank, so we run regular challenges, regular developer hackathons, regular meet-ups for people that are interested in developing financial solutions and are interested in helping us validate financial ideas.


The second thing we do is we invest in and accelerate startups. So we run a mentorship program every year, we select up to ten startups into these programs and we have been working with 40 amazing companies from six countries in the whole sea region. Because our target is not just Budapest but actually the countries next to Hungary.


And the third thing we do is we create partnership opportunities for the startups and for the bank. So what we do is we constantly work with the bank and helping the bank identify the frictions in the customer journeys and for the frictions we have what's called for startups inside the startups we invested in and inside the whole Fintech ecosystem. And one of the, maybe the company that I would highlight from the previous batches is a company called Fintech Blocks. It's Budapest based Fintech startup that's developing an innovation platform for banks through which they can more easily connect to Fintech startups. So the problem they solve is that A, they solve your PSD2 compliant problem by opening up the relevant APIs for the Fintech ecosystem and B, when you deal out the right APIs you can easily connect to startups in a plug and play mode and not in like 12-18 months that usually happens.

Devon Watson:                 07:28                    

Got it. So drilling down on PSD2 for just a second, from purely from an innovation perspective PSD2 is in my mind kind of like a shot of adrenaline directly into the heart of the startup ecosystem. It's kind of forcing the opening of banks, the collaboration there. Do you see that being a big driving force for innovation in your community?

János Pereczes:                07:56                    

I see PSD2 as part of a bigger trend. And I think the bigger trend is open data, big data and data sharing. Because what you see in other investors as well and what happened to a couple of other industries, is that all the huge players at some point started to open up the data sources in order to innovate with outside companies, in order to enhance the level of services they provide to the customers. And I think PSD2 is part of this trend. I think the regulators realized that open data and open banking is the future for the banking services, and so now they say to our European banks, "Guys you have to open up those couple of APIs so that other players can innovate with you."


And I think it's not a destructing force actually but an opportunity for banks to embrace it and collaborate with the right startups in the right way.

Devon Watson:                 08:48                    

Got it. And as you were getting off the ground with this lab, what did you find that just didn't work out?

János Pereczes:                08:57                    

That's actually one of the hardest questions to talk about. So the-

Devon Watson:                 08:59                    

In the entire portfolio if you will.

János Pereczes:                09:03                    

Maybe I would highlight one or two key learnings we had. The first is that even if you think you know what the bank behind you needs, even if you know what the Fintech provides, making partnership a reality is really hard. Because the cultural differences, the speed differences, the infrastructure differences are huge between a Fintech startup and the mid-level bank of Hungary.


I think we overcame this after the first year and the second year, by appointing a partnership lead inside our team as well. So we became project managers between the startup firm and between the bank and we could use these differences, but it's still really hard.


And the second thing I would say is that what we realized from the first batch is that the most important criteria in early stages is talent. So you can't overcome this. You can't go next to it, because how we select startups is based on a score card. In the first year, the score card consisted of five categories based on we've decided who to invest in. And it was team, product, direction, market, and relevance to MKB's partnership. And in the first year relevance to MKB's partnership was too important to the score card, but what we realized is that you have to put the emphasis on team in early stage and if a team is talented, it will find a way to create direction, to create a partnership, but if it's just a product fit, it's not enough. You have to have real talented people in the startup.

Devon Watson:                 10:34                    

In most races it comes down to the jockeying. Right? If you can't steer the horse, no matter how good a horse it is, you're not going to get to the end of the race before anybody else. You started to mention the fit with MKB, maybe drill down a little bit on that and talk about how this fits in with the MKB strategy and how you're helping the bank directly.

János Pereczes:                10:56                    

I think we're helping the bank directly in three ways. The first is more on the HR and culture side. I think by launching MKB Fintech lab, by working with innovative young talented people in startups, we help the bank create a new culture. It's not just us, it's the top management that embraces new ways of working, being faster, being more agile, making more structure. Where I think we're helping MKB become a better bank in a cultural way.


The second thing we help the bank with is actually startup investments. The bank has a strategy to become the number one investment bank amongst universal banks in Hungary and a key pillar of this strategy is including venture capital part of the bank. And by learning how to work with startups, by learning how to work with fast growing startups inside Fintech lab, we help the bank's venture capital arm become better.


And the third thing is, is obviously the partnerships. So when the bank wants to develop a new service, when it wants to develop something inside, now it has the option to go through the startup firm. And select startups, select the partner from the startup firm. And usually when you work with startups it's not just cheaper, but actually usually you get access to better technology. And usually you get access to better talent and better speed.

Devon Watson:                 12:20                    

Got it. And when you work with startups, are they exclusively local or are you expanding the realm of what you look at to perhaps import things that are working in other regions?

János Pereczes:                12:31                    

In terms of investments, our thesis is to invest into startups from Central Eastern European regions. We believe that the level of technical talent here is just enormous and amazing. And we believe that there is a valuation gap between the western world and here and this is a good opportunity to invest because usually valuations are better.


But when we scout for partners on the partnership track, we look locally, so we are in constant talks with our partners in Singapore, in New York, London, so we have a really good overview of the global attractions and global transitions.

Devon Watson:                 13:08                    

So looking at how Fintech is evolving both globally, and then here locally, what do you see as some of the most interesting areas in the space? There's a lot of ground to cover in Fintech, everything from authentication, and identity, to use of data and personalization, what areas are you staring directly at and looking for opportunities in?

János Pereczes:                13:30                    

I would highlight three areas.


The first is obvious because every is trying to get into blockchain. We're also evaluating the potential uses of blockchain. To be honest, it's not easy. We are a bank based in Hungary, Budapest and we don't have any branches outside of Hungary, so we are a mid-sized bank even in Hungary. Globally we are a small bank and so far economics haven't made sense, but we believe that blockchain has the power to change financial services, but we also believe there has to be business value behind. And we haven't found the right team to go into blockchain.


The second thing is automation. We believe that a lot of things inside the banks work in ways it shouldn't work. So a lot of manual work, a lot of work without added value. And we believe that this part of the banking sector will be automated in the next five to ten years. So we look for startups that help banks become better organizations and faster organizations.


And the third one is obviously big data and AI and the combination of these two because we believe that the sales of financial services as of today are not personalized and not optimized enough, and we believe if you have a better understanding of the customer's data and have a better understanding of other customer's data you can make more personalized offerings to the clients, which will make them happier and which will make us a more profitable company.

Devon Watson:                 14:57                    

And for listeners that want to learn more about what you guys are doing, where can they find more about you guys online, follow what you're doing, or get in touch?

János Pereczes:                15:06                    

I would obviously follow us on Facebook, LinkedIn, and Instagram. We constantly share our lives and share our thoughts on these platforms, but also if someone is around in the region we have regular meetup series in Budapest. We have a yearly so-called Fintech academy every fall in Budapest and this is where we gather the best presenters and best talents here in Budapest. It's a couple of hundred people and we get together and talk about the most important trends, the most important challenges of Fintech. So I believe that there are ways to find us, and if anybody's interested, please reach out.

Devon Watson:                 15:41                    

Fantastic. Well János, this has been absolutely interesting. I've learned a lot, the lab you have here down in downtown Budapest is very cool and I really appreciate you having me here at the MKB Fintech Lab and for sharing your insights with our listeners.

János Pereczes:                15:57                    

Thank you. Thank you for having us join and good luck for the remaining of the podcasts.

Devon Watson:                 16:01                    

Thank you. Alright, favorite this channel for more interviews on these and other topics impacting the world of commerce, from banking to retail, and all the payments and Fintech in between. See you next.