Merchant Vs. Bank Incubators: Who’s Got the Edge?

Technology is enabling more and more startups to take ideas and bring them to market. For many, however, funding is a major issue in trying to get their products or services off the ground.

Both merchants and financial institutions see many such companies as playing potentially vital roles, either through their innovations or through the cerebral vitality that lead to their creation. And they’re willing to invest in such companies to see how their initiatives progress and, potentially, fill holes in internal needs.

Such “incubators,” as they are often called, have deep pockets. @WalmartLabs, for example, has the resources of one of the world’s largest retailers, while another, BBVA Ventures, is led by a multinational banking group providing financial services in over 30 countries and to 50 million customers globally. Each has their respective goals based on their targeted needs and growth ambitions.

Walmart’s ambitions

@WalmartLabs, for example, is helping accelerate Walmart’s effort to meet the omnichannel needs of its customers, regardless of whether they are shopping in a store, or browsing the retailer’s website on a PC or with a mobile device. Its strategy is to invest in and acquire startups that could help accomplish that goal.

The incubator originally was called Kosmix, which formed in 2005. @WalmartLabs acquired the company for a reported $300 million and turned it into a research division in 2011. PYMNTS.com in August 2012 did a podcast interview with Vice President of Products Ravi Raj, who provided an in-depth look at one of Walmart’s newest eCommerce plays and insights as to what the new platform might mean for the future of Walmart’s eCommerce operations.

@WalmartLabs has acquired some 15 startups, initially Vudo in February 2010 and most recently this past July Luvocracy. Walmart shut down that company’s operations and absorbed its 16 full-time employees into its Labs environment. Luvocracy, a social shopping application, essentially allowed users to both check out what their friends, loved ones and enemies (insofar as one has friended his enemies on social media) are buying, and then purchase it for themselves.

Companies such as Vudo and Luvocracy help to build products that integrate the online and in-store shopping experiences of its customers. Walmart Labs’ teams design, prototype and build technology-fueled products that “bridge the gap between what’s next and what’s best.”

In July 2013, for example, Walmart Labs acquired Torbit, a website acceleration firm. “With Torbit’s site-optimization technology, we will be able to optimize our website experience no matter where our customers are shopping–be it on a desktop, tablet or mobile phone,” the company wrote in a blog post.

In another example, Walmart Labs in June 2013 acquired data analytics startup Inkiru to accelerate its analytics capabilities. Its platform reportedly combines data analytics, a decision engine and predictive intelligence to form an “active learning system” that claims to help reduce fraud and improve customer targeting.

A bank’s ‘incubator’ goals

Although @WalmartLabs is focused on building its omnichannel capabilities, BBVA Ventures has a different set of goals. It formed in January 2013 to invest in startups committed to new business models, incubators and venture capital funds as it explores strategic opportunities that can support the bank’s innovation agenda.

Unlike @WalmartLabs, which has focused on acquisitions, BBVA Ventures has focused its attention on startup investments, starting initially with an investment in the 500 Startups fund and most recently in SumUp, where it joined with American Express and Groupon as chief investors.

A Silicon Valley venture fund called 500 Startups is designed to boost new digital projects. BBVA said its goal in investing in the fund was to “gather intelligence on developments in technology and new business models in areas that are strategic for the bank such as mobility, eCommerce and customer behavior analysis.” The 500 Startups fund accelerates innovative projects by supporting companies in their initial development stage, including some developing new business models in financial services such as Simple, inDinero, PeerTransfer or WePay.

SumUp, a German startup, launched in 2011. It operates in 11 countries in Europe, offering services for processing credit card payments through mobile devices. The firm’s technology meets all the legal European requirements, such as accepting card payments via EMV chip cards, and it is compatible with all major forms of credit card payments, including Visa, MasterCard and American Express, BBVA said at the time of the investment.

Innovation strategy

The investment, BBVA said, aligned with its innovation strategy and put the bank “in a strong position to lead new payment technologies geared toward businesses.” It represented the first BBVA Ventures investment in Europe and, with it, BBVA said it proved “itself one of the few financial institutions in the world with a venture capital fund dedicated to investments in innovative and financial services startups.”

As SumUp expands its business to Latin America, the bank said, it will be able to draw on BBVA’s experience in the banking business and its international presence.

In a reorganization at BBVA in March this year, the bank’s digital banking unit its combine internal developments such as Wizzo with the startup investments involving BBVA Ventures and the acquisition of innovative companies such as Simple.

@WalmartLabs and BBVA Ventures represent but a few of the various investment “incubators” developed by both merchants and financial institutions. They give such entities huge advantages by getting on the inside of some of the more innovative startups seeking to stake a claim in the market with their products and services.

Does that mean that smaller competitors without the ability to fund an incubator are out of luck? Not really since not every innovator gets an invitation to become a part of an incubator – and there are lots of innovators. But it does imply that they’ll have to sharpen their strategies to compete in a market where technology in particular is evolving at an ever-quickening pace.

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