After a brief face-off between two worlds – slow, old financial institutions and fast, young technology startups – it seems peace has been restored between the two.
Legacy financial firms and financial technology startups aren’t competing for the same customers anymore, instead they’re working together. Fintech couldnt have come this far without its venture capital firms, which have been funding most of the innovation in the space before banks and private equity firms got in and started throwing in some of their capital. But today many parts of the fintech ecosystem are saturated and riding parallel hype cycles. Plus, these companies aren’t really taking off. And now that they’ve redefined their relationship with banks, startups have even more support to refocus on building solid products and developing customer trust.
In this installment of Confessions, in which we trade anonymity in exchange for honesty, we talked to a fintech venture capitalist who has worked with banks and payments companies for more than 10 years.
Chatbots were very exciting to you early on. Today that market seems kind of crowded and very noisy. Has it changed your position on them?
Consumers aren’t downloading apps they’re spending their time in messaging. The platform widely varies based on geography. People in Japan use Line; in China, WeChat; in Europe, Whatsapp; here, Facebook Messenger. Chatbots are overhyped in the Silicon Valley sense. A lot of Silicon Valley investors in fintech startups are really not experts on how the financial system works. In fintech you’re going to have a startups that do X, Y and Z, come out and go direct to consumer, and for each time they do that the banks respond with an internal homegrown version of that product.
How do you measure the potential of a young but established startup?
The thing you want to ask in fintech is how many fintech companies have gotten over a million users? That’s the elephant in the room. For all the money, all the hype, all the headlines… What are your friends actually using and doing differently that’s fintech? Direct to consumer fintech ideas outside of Venmo haven’t been blockbuster hits. Those second, third and fourth spots are what consumers at least find very interesting. But by and large all these ideas being talked about, I don’t see people using them.
But you keep investing, that’s your job. What keeps you on your toes?
I’m actually becoming much more bullish on fintech as time goes on. It was a copped industry – just three or four years ago, everyone in fintech knew each other and that was how small credit was, that’s how small payments was. Now if I go to Money 2020 I’m there for half an hour and I don’t know one person. That to me is a really strong sign for the industry.
How has fintech evolved for you?
Fintech is a ridiculous title because you’re taking one little word and including 30 industries. Chatbots, messenger and mobile first trading – that’s about five percent of the industry. Wells Fargo is pretty much a fintech company if you think about it because what are they? Ledgers, a set of accounts, databases, a website, apps. Fintech is just true financial services in the modern world… not just kitschy little cute products being built.
So legacy institutions have already “won”?
Now Citi has a whole fintech division and Goldman Sachs is building their own products. [Fintech] is actually happening, it’s just going to be a little different, it’ll be about working with financial institutions instead of disrupting them – because of the regulatory complexity of this whole thing. No one’s going to give you finance to be a bank.
There are half dozen companies right now in the running to be a really big business, a big brand, a household name. They have a lot of capital, they’re building brands, each of them are leading with what they think will be a product with a hook – mobile first trading, student loans. Once they get you with that hook, then they can offer you a whole suite of financial services.
Are startups just waiting to be acquired by banks then?
You’re going to have students that want to bank with SoFi and consumers who want Robin Hood accounts so they can buy shares of, say, Snapchat. I think you’ll have people that say: This is my life savings, this is my livelihood, I’m not kicking around and playing games with a company that’s a year old – I’m gonna have Citi hold on to my money.
Consumers want choice and people’s relationship with their own money is incredibly emotional. If my grandfather worked at General Motors and I inherited General Motors stock, I have sentimental value to this stock. It’s completely irrational and silly, but people are like that. Very smart people are like that. They’ll do an electronic check deposit from an app but won’t deposit it into an ATM because they don’t trust it because no one is around.
We spend so much time talking about technology and the future. You say fintech is now, but consumers don’t feel that.
Financial literacy is so big relative to people’s understanding of what’s safe and what’s not. Take Visa and Citi and JPMorgan and look how much money they pump into branding and marketing so people think they’re safe. There will always be that group of people that will want to bank with a bank. It will be table stakes that banks will have to offer modern products the same way they had to do debit cards, ATM acceptance, electronic check cash. Same goes for insurance. There’ll be people that want to get an insurance policy with Lemonade and people doubtful it’ll be around in 15 years when they need it.
It’s not like sending an email instead of a regular letter. The consequences are serious. Over time, the fintech companies will continue to chip away market share but that’s when Lemonade’s name is in the same breath as State Farm, but it’ll take some money to get there.