Investing in excellence

Timothy Karpoff, Group Head of Strategy and Corporate Development at Barclays, talks about the characteristics that the bank looks for when investing in new businesses

As a large, mature company, when you invest in fast-growth companies, what characteristics are you looking for?

Tim Karpoff (TK): I think the most important thing is going to be strategic adjacency. That is to say that the company one is looking at is provides something that is going to advance the underlying strategy of Barclays – something that fits with the broader set of services we already provide, or something that our customers or clients are definitely going to need.

The next point is exploring whether the partnership is going to deliver something better than a bespoke solution that we could create internally.

Our survey found that the fast-growing companies were very collaborative. Is this a factor that you look for when you are investing?

TK: Absolutely. When you’re going to partner with someone, you want to make sure that there’s not only the strategic fit, but that cultures are complementary as well. We’re obviously a fairly large institution, but there are ways of working that we value. And the manner in which a fast-growing company or start-up conducts itself, and how it gets things done, is important when you’re considering whether that’s somebody with whom you want to establish what you hope to be a longer-term partnership. The companies we interviewed were very much focused on technology. 

What do you see as the major transformations that are going to occur in the industry over the coming years?

TK: I think that you will see differences between what the customer experience is, and then what the middle and back office of financial services looks like. So, on the front end, I think that the march towards digital as the primary interface that customers and clients use will continue and will only accelerate.

At Barclays, our mobile app is an extremely effective channel for engaging with our customers. And I think that this phenomenon will only get turbo-charged as open banking gets more and more ingrained into the culture, such that individuals are going to want their entire financial position available through one portal. And this requires an integrated application that can aggregate all of that information into a digestible format for the customer and client. So I think that that will be, from the customer’s perspective, the biggest trend that we’ll see here in the UK. The back and middle office is going to be less immediately apparent to the customer, but no less important over the long term.

And from my perspective, the march towards automation in the back and middle office will continue. And that not only will mean cost reduction and lower cost to serve for the biggest institutions, but it will also mean a delivery of improved products and services for customers and clients. This is due to the fact that propositions will be based on larger, more accessible data sets, which are then powered with 21st-century analytics such as artificial intelligence and machine learning. This should allow companies to deliver better-priced propositions and also to deliver propositions at moments that otherwise wouldn’t be the first interaction between a financial services provider and a customer. For example, companies will have the predictive capability to understand when a customer is going to need a car loan before the customer goes shopping for an automobile. I don’t think it will be immediately apparent to the customer, but over time people will just take it as normal.

How do you effectively integrate fast-growing companies?

TK: Often you’re looking at a stake rather than full integration, but you will still be working with that company and taking its service, so understanding how best to integrate that service into your offering is critical.

I feel the most important thing is setting out the rules of the road and establishing clear principles on how you are going to work together in a way that serves to align the incentives between partners. And a well-designed partnership agreement upfront – which, quite frankly, can be challenging to negotiate – serves everybody better in the long run. Punting these types of issues only leads to pain later.

What are the challenges of allying with or investing in a fast-growing company?

TK: If their business strategy and our needs over the foreseeable future are not well aligned, then that sends up a red flag. For example, if the company is really focused on sales and market share in the very near future and we’re really focused on continued development of the product, that’s a red flag. Because their priorities and our priorities are different, you will eventually get to a divergence which is going to be difficult to reconcile.

And what are the major risks facing fast-growing businesses in the financial services sector at the moment?

TK: In the last few years, the macro environment has been quite conducive to the development of start-ups and fast-growing companies. Money’s been cheap and life has been relatively calm.

But we’re entering a time where it’s possible that the macro environment will become more volatile. The cost of funds will rise and that is a different operating environment. And I think that will be challenging, both from a funding perspective and from the risk appetite perspective of potential clients and customers of start-ups and fast-growing companies.