A weekly wrap-up from Silicon Valley on what’s making the news in fintech, banking, and disruptive trends
Venture capital funding is flowing back to fintech startups
What it is: According to a new report from research firm CBInsight and KPMG, global funding for fintech startups picked back up in the first quarter of 2016. Venture capital firms invested $4.9 billion last quarter into startups looking to disrupt the financial services industry. The report speculates that this could be a great year for fintech investments. The $4.9 billion invested in the first quarter is 96% higher than the $2.5 billion in the same quarter last year.
Why it is important: After the Lending Club scandal, many viewed fintech as the next tech bubble poised to crash. After dealing with falling stocks and controversy, a renewed vote of confidence from VCs is welcome news for the fintech community. Support for continued financial innovation is a signal to industry watchers that fintech is not going away anytime soon.
Will fintech help or hurt traditional advisors?
What it is: Fintech platforms raised more than $19 billion last year, according to a March report from KPMG and CBInsights. That’s $7 billion more than 2014. Many of those resources have been directed at wealth management. And therein lies the problem. For the financial advisor industry at large, many question whether fintech will prove to be a boon to their businesses or yet another rival.
Why it is important: To be expected, there are several opposing opinions on the future of fintech startups. On one hand there is SigFig CEO and founder Mike Sha, who said, the growing realization of how tech can serve clients better has resulted in an unprecedented number of partnerships between financial institutions and fintech companies. On the other hand, Michael Krol, CFO and chief service officer at Waldron Private Wealth, said, “Though there is an abundance of private investor capital flowing into the tech fad of this decade, many will not prove to have sustainable business models or long-term viability. However, for the firms that survive, the financial industry will be theirs to up-end… The challenge for advisors is trying to segregate the ultimate winners from the also-rans.”
Goldman Sachs: Blockchain Tech Could Save Capital Markets $6 Billion a Year
What it is: A new report from Goldman Sachs Investment Research projects that the implementation of blockchain technology could streamline the clearing and settlement of cash securities, saving capital markets $2bn in the US and $6bn globally on an annual basis.
The figures are supported by breakdowns of the specific market areas where Goldman Sachs sees the technology as valuable, as it projects up to $900m could be saved in reduced personnel and $700m could be saved from IT systems improvements. The report indicated that this projection is further limited to cash securities – specifically, equities, repo and leveraged loans – and that the savings could be greater.
Why it is important: The researchers voiced their belief that the blockchain is ideally suited for Internet of Things (IoT) transactions, reducing fraud and corruption, increasing transparency, and efficiency in transactions involving multiple parties.
Additionally, the report argued that four significant challenges would need to be overcome in order for blockchain technology to enable cost savings and revenue opportunities. These included standards, commercial conflicts and business process differences, privacy and speed and performance.
JPMorgan Chase: CEO Dimon Advocates Expansion into Fintech
What it is: JPMorgan Chase CEO Jamie Dimon has once again advocated the fintech business. In an interview with Recode this week, Mr. Dimon asserted that technological advancement might pose a risk to traditional financial services firms but the way out is to devise a strategy to cope with the looming threat of technology disruption.
Why it is important: JPMorgan Chase, under the leadership of Jamie Dimon, has expanded technology integration in its existing business infrastructure. Dimon views financial technologies as an asset and opportunity to evolve the company towards an innovative culture. During their annual shareholder meeting held earlier this month, Dimon said: “We’re focused on other exciting investments and innovative initiatives including digital banking, payments, Big Data, segmentation, electronic trading and the IB and the JPMorgan Chase Institute.”
The Foolish Fantasies of Fintech/Bank Partnerships
What it is: If a bank partners with a startup, can the real economic impact on the bank even be measured? At best, the economic impact over the next two to three years would be minimal even if a bank were to partner with 10 startups. It could be five to 10 years before any meaningful impact emerges.
If a bank truly wants to partner with a startup that means they would need to have tight integration, not just technologically, but with their business processes, including marketing, sales, and customer service.
Most fintech startups are offering features that are little more than add-ons to existing products or solutions. One startup is only going to apply to a small percentage of the customer base, which means that the profit potential from anyone partnership is very small.
Why it is important: In order for banks to truly capitalize on (i.e., monetize) the fintech explosion, they need to move away from the idea of ‘partnering’ and develop platforms that easily allow a large number of fintech startups to plug in. In this context, “a platform is a plug-and-play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other and create and exchange value,” says Plaformed.info.
Partnerships require far too much effort, and can only be done with a limited number of companies. Platforms, on the other hand, enable a much greater level of scale.
Visa’s CEO just threatened to go after PayPal ‘in ways that people have never seen before’
What it is: PayPal has long been both a friend and a foe to credit card companies. But to Visa CEO Charlie Scharf, it’s either one or the other. At a tech conference hosted by JPMorgan Chase this week, Scharf said he wants PayPal to stop urging its users to fund their PayPal accounts with their bank accounts (the arrangement is more profitable for PayPal, but a problem for card companies like Visa).
Why it is important: “[Visa] would love to figure out a different model… where it’s consumer choice first whether or not disintermediating. If we can figure that out with [PayPal], great. We’ll think of them more as a partner…The other door is where we go full steam and compete with them in ways that people have never seen before. Because you’ve never seen us go target PayPal in the marketplace in any meaningful way,” said Scharf. As fintech companies look for ways to partner with financial services and banking companies, an open disagreement and competition between Visa and PayPal would set back the movement towards camaraderie.