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.

 

The 2016 Tradestreaming Awards winners: Best investing technology and fintech investors

Fintech entrepreneurs focused on two seemingly contradictory things when it comes to investing. On one hand, we have roboadvisors that automate the investment process, removing the human element and biases we bring to the table. On the other hand, big data and analytics firms continue to bring new inputs to active investors to help them make better investments.

The Tradestreaming Awards recognize the talent, energy, and vision that are required to create great digital financial products and the people who create them. The following are our inaugural winners in the investing category.

Best Research Provider

Awarding a business that continuously excels at producing the highest quality research for individual or professional investors.

tipranks Tradestreaming Award winner

WINNER: TipRanks

TipRanks analyzes the analysts, providing transparency on who’s opinion is predictive on a particular investment and who’s not. The firm has a retail product and also sells its data to institutional investors. TipRanks’ Smart Portfolio service provides an analytical layer on top of portfolios to help optimize performance.

Best New Investment Platform

Awarding an up-and-coming investment platform that provides individual investors with necessary tools to build a strong portfolio.

diy fund tradestreaming award

WINNER: DIY.FUND

The software-assisted portfolio manager has investors begin by setting goals on their way to constructing a portfolio. Like a roboadvisor for DIY investors, DIY.FUND sends alerts when a portfolio needs attention by making risk exposure easier to understand.

Best Early Stage Fintech Investor

Awarding an angel investor or venture capitalist who has amassed a trophy room of top early stage fintech investments, whether they’ve already played out or are on their way to hefty ROI.

QED tradestreaming awards

WINNER: QED Investors

QED Investors’ portfolio reads like a who’s who of some of this generations top fintech companies. The portfolio is overweighted towards online lending, in part because the firm’s founders were top leaders at Capital One, and includes Avidxchange, Can Capital, Credit Karma, Green Sky, and Klarna.

Best Later Stage Fintech Investor

Awarding a venture capitalist or private equity investor that has minted money by investing in later stage fintech companies.

bain capital tradestreaming awards

WINNER: Bain Capital Ventures

Bain Capital’s fintech portfolio is comprised of firms like FlyWire, iex, and Receivables Exchange. The fintech investment team is lead by Matt Harris, who founded fintech venture firm, Village Ventures, before rejoining Bain Capital in New York.

Come join these award winners at our first Tradestreaming Money Conference as we explore the impact technology is having on big finance.

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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