Who’s eating your lunch? It’s not fintech firms that banks should be worried about

When we discuss the changing landscape of the financial industry, we generally settle into the narrative of us versus them. Of old, stodgy financial incumbents versus the young, fintech upstarts. But Caribou Honig, founding partner of QED Investors, thinks we need to rewrite that script.

Addressing the crowd last week at the Tradestreaming Money Conference, the venture investor encouraged industry professionals to pay more attention to the positioning of technology firms like Facebook, Amazon, PayPal, and Google as they move deeper into financial services.


technology firms at Money 2020


To prove his point, Honig analyzed attendance rates at this year’s Money 20/20 conference in Las Vegas. Held in late October, this event attracts over ten thousand attendees from all over the world interested in the intersection of technology and finance. This year was no exception, but when you drill down to see who actually walked the floor of the Venetian, it turns out that the technology firms outnumbered staple brands, like Equifax, JPMorgan, Synchrony, and Bank of America.

So, why are technology firms eyeing financial services? Honig suggested four possible reasons. The first is that they operate at gigascale. Having a franchise of 1 billion consumers is table stakes for firms like Google and Facebook. Next, they really get the mobile experience. For firms like Alibaba and Amazon, the smartphone is core to their DNA and strategy. Tech companies also produce a huge data wake, providing richer, more universal data sets. These companies know a ton about their users and have the cutting edge analytics to make actionable insights. Lastly, tech firms have the right mindset to compete in today’s financial services industry.

“Technology firms have learned to ask ‘what’s possible?’ rather than respond ‘we haven’t done it that way before,” he said.

why technology firms are interested in finance

If Honig is right, then that means the industry needs to start paying more attention to the threat that technology firms represent. Incumbents should be closely studying what these firms are doing. By pointing to other industries impacted by the deflationary pressure of technology, Honigh predicts that existing revenue pools will decline as costs fall. This creative destruction creates an opportunity for the largest players.

Honig, who’s invested in high flying fintech firms like Avant, GreenSky, and Credit Karma, thinks startups represent a petri dish for experimentation and a lifeline for large banks. Incumbents should monitor the scrappy group for good ideas. It’s ultimately the pairing of the startups and incumbents, however, that can light the path forward for the industry.

“Incumbents can, and should, collaborate with the fintech startups to counter the looming threat posed by Tech Titans,” he said.


Uh oh, here comes the new competition in financial services

As if banks needed something else to worry about beyond flatlining profits, increasingly onerous regulation and being challenged by upstart fintech firms.

QED's Caribou Honig
QED’s Caribou Honig

As you survey what technology firms like Google, Facebook, and Amazon are doing, it becomes clear they’re all moving steadily into financial services. This isn’t an overnight move, but slowly and surely, these firms are developing, testing, and rolling out offerings in payments and lending.

Tradestreaming caught up with Caribou Honig, partner at early stage fintech investment firm, QED Investors, to learn a bit more about what’s behind this new competition and where he believes incumbent tech firms are headed next in financial services.

Where is the new competition coming from for financial incumbents?

I think about three categories of competition for financial incumbents.

The first group are the innovation efforts from the incumbents themselves — firms like Capital One and BBVA that have declared digital transformation a priority.

Second are the fintechs –companies in which QED and our fellow VCs invest, like Greensky and Remitly and Blooom to name a few. The fintechs certainly get the most buzz, but it takes many years before they reach the scale to have an impact on incumbents’ bottom line.

I believe the most impactful competition will come from the Tech Titans, e.g. Google, Alibaba, Amazon, Facebook, Tencent, Apple and the like.

Who’s working on what?

That’s a really big question and I can only dream of having a complete answer.  We know that payment and money transfer are front and center. Google had a bit of a false start with Google Compare, particularly as the firm targeted the insurance vertical, but it at least has a foothold in financial services with Android Pay.

We’ve also seen some of the titans enter lending to various degrees — for example, Amazon lending to merchants on its platform and of course, the launch of Tencent’s WeBank.

Why would these firms want to get into finance??

These companies need to pursue large markets where their combination of tech capability and existing assets can be transformative.  Working backwards from that, financial services is one such market.  It’s plenty big whether measured by the incumbents’ market cap, revenue, or profit pool.

In many cases, finance has gone through initial waves of transformation. Think about the move from judgmental underwriting to algorithmic underwriting 25 years ago, or the impact of the web on customer origination and servicing. But another wave is underway enabled by the smartphone and machine learning techniques.

If you’re a company with the technical chops to lead that wave, and a franchise of avid consumers topping a billion, financial services looks very attractive.

Are these new competitors better suited to serve today’s financial customers?

These new competitors do bring some distinct capabilities to the table. I like to say that the hallmarks of a tech-driven transformation are reduced friction, greater transparency, and ultimately, deflation for the benefit of customers.

The Titans entering this space are expert at optimizing the customer experience, or at least the digital customer experience, perhaps not so much the live human to human customer experience.  These firms bring data to the table that can prevent fraud, prefill an application, and underwrite people who lack traditional credit scores.

They have the benefit of not being anchored by legacy systems, where the incumbents often find themselves hamstrung maintaining multiple legacy systems when they’ve grown by acquisition.  Perhaps most importantly, tech giants have the mindset of starting with “what’s possible?” rather than “we haven’t done it that way before”.

How should incumbents prepare for these new competitors?

It starts by recognizing that something big is happening.  Yes, the entrepreneurs and challengers in this space are probably overestimating the amount of change to come in the short term.  But most incumbents are underestimating the amount of change we will see over ten years.

While there’s no silver bullet, I’d suggest collaboration with the fintech startups is the best way for an incumbent to prepare for these new competitors. Don’t be distracted by how a VC-backed startup might attack your business. Think about how a VC-backed startup — like 5th 3rd Bank’s recent investment in Greensky, or Chase’s partnership with OnDeck — might be key to counter the threat coming from Tech Titans.

Hear more from Caribou Honig at our upcoming Tradestreaming Money 2016 Conference on November 14 in New York City.

Where VCs are investing in fintech – Q2 2016 edition

q2 2016 venture capital investments in fintech

The end of the second quarter of 2016 is upon us and it’s time to review the portfolio moves of some of the top venture capital investors in fintech.

By following the money flow, we can find insight into trends and perhaps get a view into what types of companies are being financed with growth capital for the future.

We looked at 40 VCs that, in aggregate, made $1.3 billion worth of fintech investments in over the past three months, and identified a few trends that we feel are the most important.

Trend #1: Non-U.S. investments

Of the VC’s surveyed, 35% invested a total of $500M into companies outside the U.S., including Europe, Asia, South America, and the Middle East.

Portfolio companies of note include:

  • TransferWise: International transparent money transfers ($26M Series D)
  • Nubank: Digital financial services company in Brazil ($25M in debt)
  • Capital Float: Digital finance company targeting SMB’s in India $25M Series B )

Investments in foreign countries shouldn’t surprise most people; most of the world’s GDP resides outside the U.S. now. However, looking into the data, Latin America piques our interest. Most of the investments made in Latin America this quarter were in early stage firms, a sign that the startup market is gaining momentum there.

“We looked at financial services in Latin America, particularly Brazil, and saw not only the right market conditions but also a great wave of entrepreneurs emerging,” Caribou Honig, co-founder of QED Investors, wrote via email regarding his firm’s investment in Nubank.

This isn’t an indication that VC firms are going to be investing in Latin America and other emerging regions like drunken sailors. Instead, expect VCs to continue to evaluate how they can help foreign fintech companies and find market segments ready for improvement, especially in light of the competitive conditions in the US that have pushed valuations higher.

Trend #2: Investing in B2C businesses

Another trend worth acknowledging was investment in B2C fintech companies. Over 65% of VC’s invested a total of $944M in B2C fintech companies. Companies receiving investments included:

  • Circle: International online payments ($60M Series D)
  • Digit: service that checks spending habits and automatically sweeps money into savings when possible ($22.5M Series B)
  • Better Mortgage: helping consumers get better mortgages online ($30M Series A)

After a general refocusing on B2B fintech investing during early 2016, the emergence of B2C may be coming from two places. First is the millennial desire for better relationships with financial providers (an idea we touched on in a previous article about transparency). There is still room for upstart financial institutions to win over core services from an audience hungry for new options, however hard and expensive it would be to build.

As a former senior executive at Capital One, QED’s Honig has seen the power of a B2C product, through the impact Capital One had on the credit card industry.

“B2C investments are interesting because there’s the opportunity to transform entire industries, and the results can be fantastic when you’re on the side of driving that transformation,” he said.

The second, and subtler, are the years of B2B investment in fintech. The unbundling of financial services has made it easier to build a consumer financial app by mashing up APIs. With the technical hurdle lowered, it’s become cheaper and faster to build new consumer-facing financial apps. New banking startups can piggyback on existing technologies to create innovative financial solutions.

Trend #3: Investing in insurtech

The last trend worth looking at is insurance technology. Although not as significant as the previous trends, funding in insurance startups should be taken seriously. Some notable companies include:

  • Clover Health: Low cost healthcare provider ($160M Series C)
  • Jetty: Property and casualty insurance targeting millennials ($4M Seed)
  • Bright Health: Affordable health insurance plans ($80M Series A)

Insurance has been a topic of discussion for some time now, ranging from the expensive and complication of health insurance in the U.S. to waning demand for life insurance among millennials.

Issues in the insurance sector have tempted entrepreneurs to try and find holistic solutions. Early stage investors are looking for entrepreneurs who view insurance as a marketable product, not just a service.

“I’m most excited by the companies that treat marketing, product, and underwriting as flip sides of the same coin and create something new in the [insurance] market,” Honig explained.

Although we are still in the early stages of insurtech, it’s worth monitoring the progress of how and where insurance tech evolves.

Takeaways for Q2 2016 venture capital investment trends

These trends not only give us a glimpse into what may be a few years from now, but also the areas of opportunity for entrepreneurs and investors alike.

Foreign investments, especially into emerging regions like Latin America, are a good example of the geographies risk capital feels are most ready for change. Clustered investments in a geography inevitably lead to the development of a fintech ecosystem, with startups, funding sources, accelerators, universities and local financial institutions all participating.

Fintech firms building B2C models are reaping the rewards from the billions of dollars that recently flowed into B2B startups; as more investments are made in B2B infrastructure, B2C fintech companies can focus more on marketing and UX than on building out banking pipes.

Insurtech is still young, but worth following. The smart money is betting there’s an opportunity for the right companies to come in and become future leaders of the insurance industry.

Photo credit: Samantha Jade Royds via Visual Hunt / CC BY

[podcast] QED Investors’ Caribou Honig on investing in today’s early stage fintech

fintech VC, QED Investors' Caribou Honig

Our guest for this episode is Caribou Honig, a founding partner of QED Investors. QED has quietly become one of the top investors in the financial technology space — their investment portfolio includes early big successes like SoFi and Prosper and also firms like LendUp, borro, Orchard, Avant Credit, blooom, and ApplePie Capital.

Caribou Honig, QED Investors
Caribou Honig, QED Investors

As part of our conversation, Caribou shares his personal path to how he ended up as part of the founding team of QED after a post-MBA career at Capital One where he developed a passion for data-driven marketing,, including responsibility for a $50 mm marketing budget, management of a 200 person underwriting operation, and cracking the code on digital credit card origination. This experience, along with his co-founders which include the founder of Capital One, provides a differentiator for the investment firm when it comes to deal flow and portfolio building.

In this episode, Caribou shares his views on:

  • his background running data-driven marketing at CapitalOne and how this impacts his firm’s approach to investing in early stage fintech
  • why “data-first” strategies are more likely to win
  • hist team’s 150 years of experience in consumer lending market and why it’s such an exciting sector right now
  • current trends in the financial technology space
  • how incumbent financial institutions view startups in the space
  • how these larger financial firms are planning for their futures
  • QED’s investment mandate and the types of fintech companies that fit well into the investment firm’s sweet spot
  • the companies in his portfolio and the investment thesis behind them
  • lastly, we’ll talk about where Caribou is looking to make investments in the future.

Listen to the FULL episode

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