“Silicon Valley is Coming”
The Financial Services space has long been one of the most complex industries to operate in, as regulation and security concerns have insulated traditional incumbents from disruption and protected many high margin lines of business. Now, with technology enabling new entrants by helping them build – both products and customer bases – more quickly and securely, the traditional market participants are being attacked from all angles as specialist startups look to beat big banks and other longstanding institutions in their most profitable areas. In other words, as CB Insights has put it, FinTech startups are in the process of unbundling what we traditionally know to be a bank.
In March, Goldman Sachs – themselves a large player in the venture market as an investor in both FinTech and non FinTech startups – estimated that $4.7 trillion (yes, with a ’T’) in revenue for traditional financial services are at risk of being displaced by new tech-enabled competitors. That huge opportunity helps explain the boom in FinTech venture capital investment in recent periods. A report from Accenture earlier this year noted that global FinTech investment has tripled since 2008 to nearly $3 billion…and the growth isn’t slowing down. New technologies, shifting customer behavior and regulatory changes mean that the market could reach $8 billion by 2018.
Based on the the way things currently operate in the financial sector, bulge bracket banks and huge asset managers need all the help they can get. It’s a little-known but terrifying secret that all the big banks still manage their financial activity with manually created Excel spreadsheets that employees email and fax around the world every day. Without 1980s technology, operated by hand, the financial system as we know it would stop operating!
The word disruption is overused in the startup world, but the work that many new entrants are doing – building cloud-based infrastructure that is faster, more secure, and more efficient that last century tools, for example – is playing a large role in upending one of the largest industries in the world.
“First generation online financial services companies … traditional banks, asset managers, and payments companies are all working to adapt to these behavioral, demographic, and technologic realities,” the report said. “We expect partnerships, acquisitions, and competition will be key to the way the vertical develops.” – Goldman Sachs Report
To their credit, the traditional players have taken notice, competing with and investing in some of the top companies encroaching on their lucrative territory. Many – like Citi and BBVA along with GS – have launched investment arms, adding to the massive wave of FinTech funding and creating what could become a very active M&A market for venture backed FinTech companies.
As Jamie Dimon recently told shareholders, “Silicon Valley is coming. “There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.
He is certainly correct as there are hundreds (actually, thousands) of companies are working feverishly to bring Financial Services into the 20th century. FinTech companies and the innovation they bring aren’t just coming, however, they’re already here. And they’re here to stay.
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This post was featured in the May 31, 2015 edition of the SEEDCHANGE Digest. To subscribe to receive similar insights, along with the weeks top tools and links for early stage investors, you can subscribe here.