EXCLUSIVE: "To Boldly Grow..." - Babar Khan, Mastercard in 'The Fintech Magazine'

Mastercard’s investment strategy has reshaped the company in a remarkably short time. Babar Khan, responsible for Partnerships and M&A for Product & Engineering, shares what it learned along the way The financial services industry has never shied away from investing inorganically on the much-desired path to business growth. There have been waves of financial consolidation over the decades, and, given their comfort zone with financial engineering, banks have always been at ease with riding those waves. While the deployment of investment as a growth strategy continues to be a key ingredient, the recipe for it has evolved as financial services shape shifted dramatically over the last two decades. It feels like an opportune time to reflect on the ‘invest-to-grow’ journey these strategies have trodden, the learnings from a tumultuous time, and the role they will continue to play in the future.

THE JOURNEY

When I started 20 years ago, we were indoctrinated into the mantra of shareholder value maximisation – drive growth at all levels: top line, bottom line, share price. For years, the inorganic investment strategy for growth was buying similar businesses – cards, branches, loan portfolios – rationalising back offices (hardly ever successful), and consolidating technology platforms (even less successful) to squeeze out earnings. But incumbency and size led to complacency and, sometimes, customer neglect. The period leading up to the financial crisis of 2008 was not a banner period for innovation of financial services. If you were a bank lucky enough to flaunt a fortress balance sheet post-2008, this was a busy time for your investment team. In a world of regulator-enforced balance-sheet shrinkage and strategic retrenchment, assets were cheap and plenty. The post-crisis investment strategy for growth during those first few years for strong incumbents was buying assets on the cheap, leveraging purchase accounting and pruning expenses. Investing for innovation stayed on the back burner. This meant that the rethinking of financial services was driven by a rising generation of entrepreneurs in what we now call fintechs, rather than the incumbents themselves. As the impact of the crisis started to recede, the more progressive incumbent executives started to realise the danger posed by these challengers. These executives started to view their investment teams not as financial engineers, but as Sherpas steering the bank’s growth by streamlining the innovation agenda through buying, partnering or investing in the new kids on the block. Investing for capability was the new focus, as banks fought to stay relevant to the customer in this new world of smartphones and Cloud technology. There were challenges in getting banks to make that pivot. The different risk/reward profile of these types of investments, the long-term ramp of revenue realisation, and the onerous capital impact of investing in technology, required paradigm shifts that too many executives were unwilling to make. Over time, however, the importance of focussing your investment dollars on generating an external innovation pipeline became impossible to ignore. Nowhere in financial services was this more imperative than payments, the area that was witnessing the fastest rate of innovation.

THE MASTERCARD WAY

When you have the strong position and the technical capability of an incumbent, there can be an institutional bias to building solutions internally. It requires vision to recognise that the world of innovation is too diffused, the pace of innovation too rapid, and the talent around technology too global for an incumbent to create a comprehensive set of best-in-class services. This is even more true in companies that see themselves as platform businesses and aspire to compete across multiple use cases.

"A strategy-driven investment team will be pivotal… to expand the horizons of the company, bringing fresh ideas from outside, and being the conduit of ideas between the business and the world around them"

That recognition was central to using the investment team to build Mastercard into a leading technology company beyond simply cards or payments. Driven by a strategy that recognised a future where choice, flexibility and value for the customer was the North Star, there was a mandate to help diversify the DNA away from cards. These transformative strands included other payment flows (real-time, business-to-business, account-to-account, peer-to-peer), and services (cyber, loyalty, identity). In some cases, Mastercard was able to expand these solutions within-house resources. In others, there was a willingness to identify existing gaps and then augment the product portfolio inorganically – always with the goal of providing value and choice to customers through best-in-class products and services. There are now multiple billion-dollar, non-card businesses, including cyber, account-to-account and open banking, within Mastercard that did not exist a few years ago. Open banking is an excellent example of Mastercard recognising the synergy of our existing businesses with the emerging account-to-account, tech-first world. There were organic investments made to build and scale the capabilities that were closest to our DNA. Investment then focussed on startups complementing our open banking platform to create a compelling value proposition for this emerging ecosystem. With the business case proven and ready to mature, major acquisitions like Finicity in the US and Aiia in Europe were undertaken to engineer the scale, connectivity and expertise for a nonpareil experience.

THINGS WE LEARNED ALONG THE WAY

Investing is easy. Successful investing is hard. Most investments underperform expectations, but there are principles that can move the odds in your favour:

• Clarity The most impactful investmentsfor incumbents have been the ones  underpinned by a crystal-clear business strategy. If the business cannot explain the why of an investment, the how and how much does not matter.
• Capital discipline The investment team is the custodian of the firm’s capital. There is an opportunity cost associated with each investment – it is a dollar that could have been used for building a product or marketing a service. The bias to make-do with something cannot overtake the need to do the right thing.
• Courage Some of the best investments are the ones you walk away from. Every investment is a drain on organisational bandwidth, and a bad (or overpriced) one can cause irreparable damage. Pricing discipline is an undervalued skill.
• Calculable In a world that is transforming so rapidly, you must live with some of your investments not panning out. But the best investment teams learn as much from these as their wins and take these learnings to inform future investments
• Commitment There needs to be an organisational commitment at all levels to make investments, and to make investments work. Making an investment is just the start of the journey. Retaining talent, staying focussed on business goals, and realising value is the real work. And that will not happen until there is commitment from all levels.
• Credibility The investment team needs to build a track record of making the right investments to influence the organisation’s leadership in the future. And it needs to demonstrate to potential targets that they are a partner of choice. A well-regarded investment team is an invaluable ambassador for the firm.

THE FUTURE

The industry has come a long way since I stepped into this space and banking is almost unrecognisable from back then. The transformation has been brought on by macro tsunamis of digital, mobile and Cloud, ridden by multiple generations of outstanding entrepreneurs and innovators. This influx of startups has disrupted the traditional business models and reset customer expectations. While the progress has been clearly visible, it is also obvious that we are still in the infancy of the innovation potential in financial services. Digitally native generations reared on tech-led experiences will demand more of their financial services providers than legacy infrastructure and traditional business models can deliver. Investments can be a critical ordnance for a business competing in that future and drive valuable contributions by adding capability and revenues. That this is now accepted as table stakes for successful organisations is obvious by looking at the ubiquity of venture arms and investment teams of all mature financial institutions. It's also catching on among smaller firms and even in early-stage companies. The presence of strategic investors in venture funding rounds has been on a steady increase as both sides see the value in partnerships. While the cliché used to be whether the incumbent can find innovation before the disruptor finds scale, now both sides are getting comfortable with the mindset that the incumbent can find innovation and the disruptor can find scale together. In a more interconnected, API-driven world these trends will burgeon. The need for a strategy-driven investment team within organisations will be pivotal. They will continue to expand the horizons of the company, bringing fresh ideas from outside, and being the conduit of ideas between the business and the world around them. As the father of modern investing Ben Graham said: “The best way to measure your investing success is not by whether you’re beating the market but by whetheryou’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.” The plans and disciplines have fallen into place over the last decade. It's now time to deliver the future.

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This article was published in The Fintech Magazine Issue 25, Page 105-106