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Fintech: A Revolution in the Making

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At last week's Fintech Mashup in New York City, Silicon Valley Bank brought together fintech entrepreneurs and investors to share their ideas about the future of financial services. The biggest takeaway: no question that financial services are ripe for innovation, but (take a breath) it's not going happen overnight.

We heard that true disruption in financial services is really just beginning, and it is going to be a long, bumpy road ahead. Fintech is a revolution in the making.

Moving from centralization to personalization

Where we are today: Steve Allan, head of SVB Analytics, presented the history of finance, two millennia in two minutes (great job, Steve). He explained that the promise of fintech lies in creating a more personalized and efficient system by shifting capital away from centralized financial institutions and back to the nodes of supply and demand. Those Roman money lenders had a good thing going, togas aside.

New payments and marketplace lending companies are scaling quickly, backed by huge VC investments. Lending and payments have dominated the landscape, accounting for nearly 80 percent of all fintech venture investment dollars in 2014..In the past five years, 10 percent of all VC dollars have been invested in fintech (led by lending and payments) and those companies have produced 20 percent of private companies now valued at $1 billion or more.

Lessons for fintech startups

We heard from a number of smart entrepreneurs and investors who are successfully building and investing in companies. How are they positioning themselves? Here's their advice to young startups:

  • Provide customer value beyond the transaction ("capital is a commodity")
  • Don't poke incumbent providers in the eye (you may need them later)
  • Make friends with regulators (compliance should be part of your product roadmap)
  • Don't fall in love with the platform (heads up alt lenders/blockchain): first identify a real problem to solve.

The fintech IPO path is strewn with landmines right now, so we probed for other exit possibilities. The advice: don't count on the big banks, for now. But non-banks, ranging from telcos (why wouldn't your mobile provider extend credit through your phone?) to PayPal, have been active.

Where is the smart money going?

With payments and lending getting oversubscribed, we asked investors where they are looking for better returns. Lending took off because it provided the quickest opportunity to take on established business lines and the quickest return on capital.

If lending is low-hanging fruit, look a little higher — for sectors that still need capital, are slower to adopt technology and have a vision for solving a large market problem. Among the picks:

  • Insurance: One investor quipped that insurance is where lending was in 2007; it won't get you a date, but it is a great opportunity.
  • Healthcare: The intersection of healthcare and fintech is huge when considering healthcare insurance and medical payments.
  • Commercial payments: Lots of people are focusing on merchant payments, but the commercial space (B2B) shouldn't be overlooked as it's still mostly paper-based.
  • Remittance: Cross-border transactions have tremendous potential, especially in the little-tapped B2B space.

Pioneering fintech investor Micky Malta of Ribbit Capital predicted that in the next 20 years we'll see the "creation of massive new consumer financial brands, things that don't happen every decade, but happen every number of decades ".

Stick around. It will be fun ride.

About the Author

Shai has more than 15 years of experience working with the startup and venture capital community. He moved to NYC from the Bay Area in 2011 to help build out the SVB office and launch a new group serving early-stage founders. His current focus is on engaging the local VC community in NYC. Previously, he was a Venture Partner at 500 Startups, where he conducted investing, fundraising, community building and portfolio management.

Shai serves on the NYC Advisory Board for BUILD.org, which is dedicated to proving the power of experiential learning through entrepreneurship, and igniting the potential of youth in under-resourced communities. He graduated from Santa Clara University. Similar to SVB, Shai has a global background, having been born in Israel and growing up speaking three languages. He is married to a California native and helps raise their two children and two yorkies.

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