Financial technology, or fintech, as it is more popularly known, is one of the hottest areas for investment in Silicon Valley, attracting $12 billion in capital in 2014, up from $4 billion in 2013. Financial services, with its strict regulation, has always been thought of as an untouchable behemoth when it comes to transformation. Fintech might just turn the industry on its head.
Fintech is a diverse set of sub-industries all supporting different facets of financial services. To give a sense of the variety of companies out there, here is a small sampling:
Motif has caught on to the trend of thematic investing in the industry and brings it to individuals through six categories comprising 150 “motifs,” including sector strategies, values-based investing, and income strategies.
Thinknum offers a browser-based repository of data for financial analysts. Users can access and build models, collaborate with other users, and shock test models with their QuickBuilder functionality.
DataFox allows companies to track and gather information on other companies for sales, research, and investment purposes.
Symmetric aims to provide transparency in hedge fund investing by allowing users to search funds and/or managers and monitor performance. It is also possible to drill down and determine performance attribution.
The key trend among fintech companies is their unbundled approach. You will notice in the company descriptions above that each firm has a specific niche. As this article from The Economist describes:
“Few want to take on the central, regulated core of taking deposits. Each may offer a superior or cheaper service in its specialist field… ‘Silicon Valley is coming,’ warned Jamie Dimon, JPMorgan Chase’s boss, in a recent letter to shareholders. ‘There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.’”
It is possible that nimble startups, unafraid to withstand multiple failures as is the norm in Silicon Valley, may begin to eat into the stronghold of long-standing institutions. Financial regulators have let much of the innovation continue without a lot of complaining. And for consumer-focused products, a public wary of traditional financial service firms may find some benefit in a smaller, more transparent company.
However, what makes them nimble and transparent may also prove to be a limiting factor. With a specific niche, they are beholden to that one stream of revenue, whereas a larger bank may derive income from multiple sources – and provide consumers the peace of mind that insured deposits bring. The financial services industry needs technological innovation, and Silicon Valley may give them the nudge they need. Large firms may find competition in unexpected places, but it is less likely that fintech will replace them altogether.