Investors: Get Access to VC-backed Deals
Investments into FinTech startups recently quadrupled, growing from just over $3 billion in 2013 to over $12 billion in 2014. And consider alongside that another trend showing that crowdfunding will surpass VC in 2016 as a funding source–given that crowdfunding itself is a segment of the FinTech market.
The growth of capital being invested in FinTech startups underlies how technology and the Internet are radically changing the nature of money and financial services. From the ways that people save, to how they spend, to the tools they use to invest their money – all of these are changing more rapidly today than ever before.
The entrepreneurs of FinTech are giving money a major face-lift, one larger than the departure of Alexander Hamilton from the $10 bill. And over the next few years we’ll continue to see our money go from paper and plastic to zeros and ones of computer code. It’s not just possible, but likely that in one generation from now, most consumers and investors won’t handle physical money, checks or cards at all.
Some may find this hard to believe, but remember that even Thomas Watson of IBM said at one time that the world would never need more than five computers, at most.
As money becomes increasingly stored as digital data and moves with us on our mobile devices, it will flow fluidly, and at a far lower cost from person to person; from consumer to vendor; and from investor to business.
As this happens, the traditional revenue streams big banks and brokers have enjoyed monopolistic control over will be challenged — money transfer fees, account management fees, trading fees and more — as the banking technology they have charged us to use is rebuilt and improved by FinTech entrepreneurs and simply downloaded to our phones.
To better understand where your financial life is headed, and what that means for you and the startups and investors driving innovation in these new markets, let’s first look at the recent events that brought us here.
If It Ain’t Broke… But What If It Is?
The financial crisis of 2008-2009 was a major inflection point surrounding the level of trust consumers held with brand-name financial institutions. This crisis, and how big banks responded to it, helped open the door for smaller companies to serve businesses and consumers who may not have trusted “startups” in the financial services and technology sector with their money.
As an example, the response of commercial banks in the 2008 financial crisis, and the practices that they undertook leading up to it, created massive opportunities for FinTech entrepreneurs to challenge them. The banks then severely limited home, small business and subprime loans, which translated to paltry interest rates for savings accounts.
That prompted entrepreneurs like Gary Zimmerman to start Max My Interest, which allocates cash to e-bank accounts intelligently to produce a higher interest rate on your cash. Alternative lending channels like Prosper and Lending Club were able to take root and begin taking real market share in loan origination. And it started eroding the paradigm of using one bank for all your services, something banks rely upon to drive profits and maintain their competitive advantage.
Without the financial crisis (and the role that big banks played in creating it) FinTech companies would be less likely to pose such a threat to the status quo of these big banks.
But because of their progress and disruption, the idea of simply limiting our choices as businesses or consumers to working with one big bank in each of the three buckets of “checking,” “savings,” and “investment” has become antiquated, and often times means receiving inferior services at less favorable terms. Thousands of new FinTech startups are innovating on both price and service.
Exponential Growth of FinTech Venture Funding
The match has been lit, and FinTech is undergoing explosive growth. The number of investments and acquisitions is increasing year-over-year at an incredible rate.
And because the way we pay for things, invest, and manage money is something that touches our lives daily, the mass interest in FinTech has leaped dramatically. According to iQ Media, the number of mentions for Fintech on social media grew 4x from 2013 to 2014, and will probably double again in 2015.
Despite all this, incumbents like Wells Fargo and JPMorgan aren’t on the verge of mass extinction. More accurately, they’re on the verge of mass adaptation.
For example, Betterment and Wealthfront, two of the better known robo-advisors, took half a decade to accumulate about $2 billion in assets. Old guard firms Vanguard and Schwab noticed their growth, launched their own robo-advisors earlier this year, and now manage over $20 billion after just a few months. Because of their massive scale, they can match or undercut on price and they can offer a wider array of services that people are not used to.
Citibank, watching Bitcoin ownership grow, is developing its own cryptocurrency, Citicoins. And companies like Visa and Mastercard are using their weight to dictate what type of new, high-tech point-of-purchase systems retailers will use (and when they’ll deploy them) in a successful bid to preserve their share-of-wallet.
Whether the change comes from a startup, incumbent, or a partnership of the two, the areas that I see being re-shaped the most are Payments, Deposits and Lending, Capital Raising and Investing, and Cryptocurrencies via the blockchain. Below is a snapshot of the key drivers creating change within each area. In subsequent posts, I’ll be covering each of these sub-industries in more detail, so stay tuned.
Your point-of-purchase will increasingly shift from an “e-commerce site” to just about everywhere online. Take Facebook’s rollout of “buy” buttons as an example. Like the sweater your friend is wearing? Click on it, pick your size, and buy it now. And since your friend tagged it as Polo, maybe they’ll get a nice little commission. Can’t afford the sweater? Companies like CUneXus will pre-approve you for point-of-purchase loans, with the money coming from credit unions who want to originate more loans and compete with the Big Banks. Deposit money with Facebook or your internet/cellular provider, and you can say bye-bye to your Bank of America Visa debit card. Imagine that.
Deposits and Lending
The paradigm of consumers pooling their cash at banks, and earning interest when banks lend their money to borrowers, is undergoing massive disruption. Alternative lending platforms have lower cost structures due to 1) being virtual versus brick-and-mortar and 2) using more technology than manpower to determine creditworthiness. Which means they can pass these savings to depositors in the form of higher interest rates, even for loans with equal risk. Which is why they’ve made significant inroads in the subprime market, and are moving closer to the traditional banks’ bread-and-butter, prime lending.
Fundraising and Investing
As co-founder and CEO of Crowdfunder.com, I’ve seen the enormous growth of equity crowdfunding, as well as rewards-based crowdfunding, and can safely say that direct investing into so-called alternative investments is poised to expand exponentially as it moves online.
Emerging FinTech companies are giving investors unprecedented access to almost every asset class under the sun. Uprise and Patch of Land let anyone invest in real estate deals for as little as $5,000; DarcMatter gives retail investors access to hedge funds and venture funds; and companies like Wealthforge are building the infrastructure for e-investing to be as ubiquitous as e-commerce.
Cryptocurrency and Blockchain
As the face of modern cryptocurrency, Bitcoin has been the most visible FinTech phenomena of the last decade. And for good reason — the growth in Bitcoin value and its acceptance into the mainstream of payments has been astronomical. But the technology underlying it, the block chain, might be what drives the most profound, system-wide change of any nascent financial technology. The distributed and completely transparent nature of the block chain has the potential to transform how exchanges — from stock markets to the awarding, buying and selling of patents — work. And that’s not years from now, but right now; the NASDAQ has already chosen the block chain to underpin its new private share-trading market, a huge endorsement of its reliability and maturity.