The Latest Threat To Banks
The supposedly clueless big banks are under attack.
Hundreds of financial technology (fintech for short) startups are creating services and products independent of the legacy banks.
Leading the charge are mobile point-of-sale (mPOS) startups…
(A mobile point of sale is a smartphone, tablet or dedicated wireless device that performs the functions of a cash register or electronic point-of-sale terminal.)
Square raised $150 million in the last year. Revel Systems raised $100 million in the last 12 months. And iZettle has raised $109 million in all.
They are just three of 279 startups offering similar payment solutions!
This one segment of the banking sector has attracted $1 billion worth of venture capital over the past seven years, says startup tracking company Tracxn.
Other segments getting upended range from peer-to-peer (P2P) lending to cryptocurrencies.
Global investment in the fintech sector tripled to $12.21 billion in 2014, compared to the year before.
The biggest driving force is helping millennials perform banking, investing and bill-paying tasks.
A recent survey said that 90% of millennials use online or mobile tools for everyday banking activities.
Fintech entrepreneurs are all over this.
Since 2005, 470 mobile fintech companies have been started.
Some of the big recent raises…
- NerdWallet raised $64 million from iGlobe Partners, Institutional Venture Partners, plus others. NerdWallet provides financial education and empowerment via online tools, research and experts.
- Robinhood raised $50 million from lead investor New Enterprise Associates (NEA), plus others. Robinhood has no stores or manual account management. Its tag line: “Trade stocks from your phone for free.”
- MobiKwik raised $25 million from lead investor Tree Line Asia, plus others. It’s a mobile wallet app from India that can pay bills and be used for shopping.
- Acorns raised $23 million from lead investors e.ventures and Greycroft Partners, plus others. Acorns’ app allows people to round up their daily purchases and automatically invest the change into a commission-free diversified portfolio of index funds.
- YellowPepper raised $19 million from lead investor LIV Capital, plus others. It provides mobile banking and payment solutions to financial institutions in Latin America.
Besides NEA mentioned above, the most active investors have been Sequoia Capital, Google Ventures, Andreessen Horowitz and SV Angel.
What they see is pretty obvious.
People are using their phones more and more to shop, pay bills and make their investments.
Basically, the same trends that dominate technology – big data and networking, social media and app ecosystems – also dominate the fintechs.
The banks also see this.
In a March research report, Goldman Sachs estimated that 7% of annual bank profits ($11 billion-plus) may be at risk to nonbanking entities over the next five years.
JPMorgan CEO Jamie Dimon said in a recent letter to shareholders, “There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.”
The banks are on high alert.
They’ve come up with a strategy of sorts. It’s not written down in any one place. But you can tell from their actions and words what they’re intending.
And they plan to not only survive this onslaught, but also benefit from it.
If You Can’t Beat ‘Em…
JPMorgan (JPM) says it will fight the fintech startups by making its services “as seamless and competitive as theirs.”
Goldman Sachs (GS) says it expects “partnerships, acquisitions and competition will be key.”
JPMorgan also says it will partner with these new fintech lenders “where it makes sense.”
The banks are adapting to the threat… as well as to the realization that some of the best engineering talent is being siphoned off by Silicon Valley.
As I mentioned in my last post, the six major banks have invested in 30 fintech companies since 2009, according to CB Insights. Here’s the breakdown…
Citigroup (C) has been the most active, investing in 15 financial companies (out of 26 companies in its portfolio) via its venture arm, Citi Ventures. Some of its biggest investments…
- Pindrop Security: provides anti-fraud authentication technology solutions for financial institutions’ call centers.
- Betterment: an online robo-advisor that gives personalized financial advice paired with low fees.
- InvestLab: provides a customizable trading platform to retail brokerages.
- Jumio: offers businesses ID verification and payment validation solutions for web and mobile applications.
- ReadyForZero: creates online financial software for managing personal debt and credit.
Goldman Sachs is also dipping into the fintech pool. Of its 249 investments in 202 companies, 11 are fintech. Most are either big data or payments companies.
Some of its more interesting ones…
- Circle Internet Financial: uses Bitcoin and digital currency for payments and money transfers.
- Bluefin Payments: a cloud-based provider of secure integrated payment technologies.
- Billtrust: helps companies improve their financial performance by accelerating the invoice-to-cash process.
- Kensho Technologies: combines natural language search queries, graphical user interfaces and secure cloud computing to create a new class of analytics tools for investment professionals.
- Dataminr: extracts value from social media for clients in the finance and government sectors.
- Visible Alpha: unlocks the intelligence behind analysts’ models, generating quantifiable insights into the future fundamentals of companies (it has five banking investors, including Goldman).
Let’s not forget the “competing” option banks have.
Goldman is developing a loans app that will function like a virtual bank. It plans to offer loans of a few thousand dollars to ordinary Americans and compete not only with Main Street banks but also with peer-to-peer fintech companies.
One way or the other, the supposedly clueless big banks are co-opting the fintech companies.
Compete. And if you can’t beat ‘em, join them as an investor or partner.
Then, if they emerge as serious competition, buy ‘em out. Or make a killer profit on your early investment (Square is a great example).
The banking sector is getting disrupted. And the big banks have taken action.
They will more than survive the onslaught.
They will thrive – co-opting much of the best technology one way or the other.
Mark Twain once said, “Reports of my death are much exaggerated.”
Same can be said for the banks.
Let’s not write their obituary yet.
Invest early and well,
Andrew Gordon