FinTech Start-ups

Steve Case penned an opinion item this week in The Wall Street Journal where he noted in part that, “As the presidential candidates shift toward the general election, voters will hear divergent plans to address the problem of ‘too big to fail’ financial institutions. The real threat to Wall Street, however, doesn’t come from politicians, but from startups that are disrupting financial services at an unprecedented pace.

“Last year, investment in financial technology (FinTech) startups that aim to transform the industry rose to nearly $14 billion, according to American Banker. As they gain customers, the megabanks will lose ground. ‘Too big to fail’ also often means too clumsy to innovate. Already these institutions are finding themselves playing defense. Innovative blockchain technology—the magic behind Bitcoin—could drive further decentralization and disruption.”

Meanwhile, Andrew Ross Sorkin reported in yesterday’s New York Times that, “If you spend more than 15 minutes with any senior executive of a large bank these days, it is almost impossible not to hear the phrase ‘fintech’ uttered. It is usually spoken with a sense of optimism, but sometimes with a sense of dread.”

The Times article stated that, “The promise of all these new technologies is to fundamentally disrupt the biggest players in finance. Companies like Stripe, a payments company, hope to become replacements for PayPal and others. Lending Club wants to make getting a loan cheaper and easier. Wealthfront wants to advise you and manage your money from your phone. And, of course, Bitcoin and its many derivatives wants to be the new gold, or better yet, digital cash.

If they succeed, Wall Street as we know it may become an outpost of Palo Alto. According to a Citigroup report last week, fintech may be on the cusp of an ‘Uber moment,’ as Antony Jenkins, the former chief executive of Barclays, predicted last year. Some 800,000 people will have lost their jobs at financial services companies to some of the newly dreamed up software in a decade, the report said. ‘Roughly 60 to 70 percent of retail banking employees are doing manual-processing-driven jobs,’ the report explained. ‘If all the current manual processing can be replaced by automation, these jobs can disappear or evolve.’

“The ripple effects are enormous: Consider not just the employees but the impact on commercial real estate, for example, if banks shut their coveted branches on the corners in major cities.”

Nonetheless, yesterday’s article added that, “Others are less convinced. Wall Street denizens like the banking investor J. Christopher Flowers have declared that the fintech frenzy is simply that: hype that defies common sense and will leave a trail of failed companies in its wake.

“A third view may have the highest likelihood of coming true: The big banks, so powerful and yet so anxious about the possibility of being disrupted by the upstarts, will gobble them all up in a spate of mergers and acquisitions that puts the disrupters squarely inside the institutions they were supposed to overtake.”

Recall that The Wall Street Journal reported last month that Bank of America was “abandoning its no-deals policy and going shopping in Silicon Valley…In a push to upgrade its technology offerings, the Charlotte-based lender is dispatching a top executive out west to look at possibly scooping up promising startup companies.”

And Liz Moyer reported in yesterday’s New York Times that, “Finance is where they built their careers. Now some of banking’s former stars are pouring millions of dollars — and in some cases staking their careers — into new technologies that are shaking up everything from lending to payments to investing…[T]hey are part of a wave of investors who sank $17.8 billion into financial technology, or fintech, in the first nine months of 2015, an 88 percent increase from the same period in 2014, according to a new report by Accenture. The three top technologies were cloud, mobile and analytics, the report said.

“A separate analysis by Citigroup put total fintech investing for all of last year at $19 billion, up from $1.8 billion in 2010.”

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