Financial tech eyes active 2018
Analysts say web giants could move boldly into banking
For the financial technology industry, 2017 will be defined as the year that the threat of tech giants grew stronger, artificial intelligence cemented its importance and some startups applied to become banks.
What to look for in 2018? Maybe more mergers and acquisitions, initial public offerings and deeper forays by Amazon.com and Facebook. Here’s a wrap from industry experts.
Payments
All eyes are on the part of the ecosystem that helps retailers process card transactions.
Incumbents such as First Data Corp., Vantiv Inc. and JPMorgan Chase’s merchant services unit have long focused on winning business from large retailers, neglecting to spend a lot of time on the growing e-commerce sector. That has made room for startups such as Stripe and Adyen, which have garnered high valuations for doing just that. What will be the next way that consumers make purchases and what will the incumbents do to catch up? Matt Harris, Bain Capital Ventures: “SoftBank buys 20 percent of Stripe for $3 billion. PayPal continues to push itself down the path of being the leading financial services company for millennials and the mass market.” Dion Lisle, Capgemini:
“‘Alexa, buy this’ or ‘Siri, I need an Uber, pay for it with my AmEx.’ Payments are going to be activated by that voice because that’s a great security method.”
Lending
For investors in online lending, 2017 was the year of the shakeout.
The companies that didn’t pay enough attention to underwriting were burned by losses, while longtime leaders such as LendingClub Corp. and CAN Capital Inc. struggled with operational troubles and securing sufficient capital. Banks have finally gotten their act together, and that means online lenders will increasingly have to compete against these large financial institutions. Dan Ciporin, Canaan Partners: “Scale is increasingly a competitive moat, with established players like LendingClub and SoFi now competing much more with bank offerings.” Spencer Lazar, General Catalyst Partners: “Potential changes to the Consumer Financial Protection Bureau (CFPB) under the Trump Administration will likely turn back the clock on Obama-era regulations on non-bank lenders. This will be a boon to startup lenders, making it far easier to dole out capital. The fear is that rates could potentially become predatory.”
Tech giants
Retailers such as Walmart have long wanted in on banking, and regulators might finally be on their side. That could open the door to a Bank of Amazon or a Facebook Financial. If these technology giants did decide to move into finance, they would have a few major advantages over the banks: better data, a superior user experience and immense
customer loyalty. Andy Weissman, Union Square Ventures: “Some combination of Amazon, Google, Facebook, Apple, etc. will move deeper into online financing of small businesses.” Jeff Richards, GGV
Capital: “Facebook has rolled out payments via Messenger to compete with Square Cash and Venmo, but hasn’t been super aggressive on this front. A ramped-up effort in e-commerce could tie into an increased focus on payments.”
M&A
The maturing sector could see some combinations in areas such as lending, payments, personal financial managers and more. Tyler Sosin, Menlo
Ventures: “Stripe and Adyen will merge, forming a $20 billion plus enterprisevalue business and APIdriven merchant processor.” Sean Park, Anthemis
Group: “We think 20182019 might be the sweet spot for this since it’s part of a maturing ecosystem. In consumer finance, personal financial management and consumer lending, both could see a lot of combinations.”
Investing
The past 12 months have seen new hybrid versions of investing, pairing humans with the technology backing robo-advisers. Large banks are making moves, with Morgan Stanley and JPMorgan each announcing robo-adviser versions as
a way to attract younger generations and create better user experiences. Kyle Lui, DCM Ventures: “Digital advice assets under management is estimated to hit $1 trillion by 2020. Traditional banks are waking up to this trend and viewing digital and roboadvisory products as a core part of their consumer growth strategy within asset management.” Alois Pirker, Aite
Group: “For startups in wealth management, it’s getting tough to differentiate yourself. I think you increasingly get beat with your own weapons since big firms can do this in greater varieties and have clients on board already.”
Funding
Venture capital-backed fintech companies raised $4 billion in the third quarter, according to CB Insights. If the year’s current run rate holds steady in the last quarter, global fintech investment dollars and deal activity could hit records. And if that pans out, which areas should be seeing the most funding? Alex Rampell, Andreessen Horowitz: “The first phase of fintech was ‘unbundling’ banks — taking one of the features of a mega-bank, and doing it better. The next phase is rebundling — adding other services, and cross-selling products. Venture capital will flow to successful startups moving into their second act of rebundling.”
Charles Birnbaum, Bessemer Venture Partners: “Valuations in the alternative-lending space were overly optimistic in our opinion over the prior five years, but we do feel that the pendulum has likely swung back too far in the other direction following the recent pullback,” leaving the sector ripe for potential funding or M&A.