Personally, I don’t know what all the hype is about … there’s always been a lot going on in FinTech and this is the 5th major wave I’ve seen. The great news is people have always found ways to innovate in financial services. Credit card processing has been around forever by now, and the space is still innovating. You just have to look in the right places, and that’s not always the flash in the pan that looks great on paper early on. I can’t tell you the hundreds of times I’ve seen a PE firm make 3x their money on deals no one has heard of. But, the end game is there is no end game … things will always evolve in a manner in which, hopefully, all these deconstructed applications / businesses get sewn together / integrated so we can live in a world where each and everything we do can be perfected and integrated across a common platform. Open integrations, artificial intelligence, data aggregation, unified reporting, and analytics are what excite me as the next waves of FinTech innovation. This will all take a significant amount of time to become integrated and perfected. All of this ultimately amounts to a ton of wash, rinse repeat cycles … with each cycle taking a step forward in the evolution of financial services.
Steve McLaughlin is a FinTech Banker, Entrepreneur, Investor and Managing Partner of FT Partners. Steve was formerly a senior investment banker in Goldman Sachs & Co.'s Financial Technology Group and Financial Institutions Group in New York and San Francisco. His focus is on helping the leading companies across the broad financial technology / fintech ecosystem raise private equity and debt capital, execute initial public offerings (IPOs) and conduct stellar M&A transactions.
The bottom line is, I think that everyone wins who is innovative. Non-innovative VCs, incumbents, and startups will suffer dramatically – and the truly innovative ones will be rewarded for taking risks and moving ahead of the curve, or in sometimes behind the curve to de-risk strategically. In the VC / PE world, that is expected broadly, but it is a weeding out process on an individual and firm by firm basis. At large FIs, I’m seeing some go by the wayside in asset management due to lack of innovation, some in banking due to size / scale and ability to invest having a very hard time despite good intentions (smaller thrifts / banks are just too susceptible and likely to be consolidated).
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I would consider the current state of the FinTech space to be both disruptive and deconstructive. It is an extremely tricky space in which to succeed for a variety of reasons. Any firm that I’ve seen try to do too many things as a FinTech player simply fails at it and fails hard. Banks, insurance companies, asset managers and large-scale FinTech providers all do many things, and not often do them all well. The “financial supermarket” dream of Citi, where you’d get all your financial products from one firm never truly worked. So, along came the disruptors and, by their nature, the deconstructors to pick one niche at a time in which to concentrate and succeed. That said, I don’t see deconstruction as a bad thing, as it is a necessary step in enhancing the financial services space.
The issue and opportunity, however, is the next several waves to come. We are going to witness consolidation of the smaller innovators in certain sectors, like we are seeing in wealth management. We advised Blackrock on its acquisition of FutureAdvisor, as part of a move to arm advisors with similar tech to Betterment and Wealthfront. FinTech startups are often going after a niche product or a niche segment of the population – in many cases its Millennials, as they are earlier adopters.
The deconstructors, oddly enough, are also the disruptors. The thing is this, you can’t disrupt existing financial services / financial functions in a short period of time. Three of the more successful companies, PayPal, Stripe and Square, targeted spaces that were largely “new” … micro-businesses or mobile apps. Square’s attempt to go larger and process payments for a large existing retailer with complex needs – Starbucks – didn’t work out as planned, for example. And, you’ll notice that today, there is still no legitimate / large “internet bank,” when at one point everyone thought internet banks would be huge. The big banks were quickly armed with online banking and then all 9,000 banks / credit unions followed suit fast enough that (other than maybe ING Direct) no real online banks survived after hundreds of attempts.
So the lessons for FinTech innovators I see are: (1) pick a niche, do it well and do it fast, (2) pick the right time to sell, particularly because I’ve seen many businesses sell way too early. I can name a number of examples where great firms just took some time to truly blossom. They were progressing along well, but eventually really hit their stride and became huge -- GreenSky, Mercury Payment Systems, AvidXchange, SquareTrade, Yapstone, Ellie Mae … all are now worth many billions or will be shortly in some cases … and most started a decade or more ago, and were bootstrapped or close to it; and (3) raise money before you need it – you will need a lot more than you think most likely and you can never plan for easy access to capital.
I’d also strongly encourage the B2B players (the “arms-dealers”) to see where the innovators are taking advantage of a vulnerability … and go help the big guys disrupt the small guys. I find it interesting that in banking, the arms-dealers / online banking providers made a killing (S1, CheckFree, Digital Insight) and there are no stand-alone internet banks – while at the same time, the B2C players in the brokerage space struck it rich (Ameritrade, E*Trade, Schwab, Scottrade), while there were no real winners as arms-dealers. For online lending, that space has yet to see a huge winner outside of GreenSky, currently valued close to $4 billion and still growing quickly. So, lots of deconstruction and disruption, but lots and lots of room for winners.