It should be clear now that financial technology, or “fintech”, is more than just a buzzword—it is, indeed, a quickly maturing movement for consumers, businesses and investors around the world. With the pressing need for drastic shifts in how we all access, process and ultimately spend money, it comes as no surprise that fintech has skyrocketed forward, even without clear, consistent direction from the governmental powers that be, and despite a heavy dose of skepticism from conventional financial services providers. The startup scene has been taken over by technology-driven entrepreneurs—able and willing to take some power away from traditional financial institutions and offer it back to the consumer. Whether we’re talking about a new mobile payment system, a different flavor of crowdfunding platform, or an innovative marketplace-lending medium, it seems there is a new fintech baby birthed every week. With that comes more growth, more investment, and even more speculation. There is no fool-proof way to predict the fintech future with 100% accuracy, but based on the changing landscape of the financial industry over the course of the last decade and more importantly, throughout 2014, it is safe to say some developments in fintech are eminent for 2015.
First, Follow the Money
Since 2008, investment in financial technology startups from the most well-known venture capitalist (VC) organizations has grown from millions to billions—an undeniably impressive feat. But where, exactly, is that money going? VCs are champions at chasing tech unicorns in the market, and despite what any investment analyst may predict, it is easy enough to determine who and what will win big in fintech over the course of the next year by following the trail—cashed venture capitalist checks. Throughout the second half of 2014, marketplace lending, personal finance management (including investment advisory services), mobile payments, and virtual currency all found themselves in partnership with VC firms.
In the lending environment specifically, the uptick in capital infusion can be credited to the successful IPOs of Lending Club and OnDeck, with both quickly experiencing higher valuations in stock price than any analyst could have predicted. Meanwhile, technology-based investment advisory and personal finance management tools grew in popularity given the high demand by consumers tired of the high-cost management services offered through big brokerage firms. And no one was surprised by the credibility added to the mobile-payments scene thanks mostly to Apple’s mid-year application release. All of these animals have something in common—the disruption of an antiquated system that simply does not cut it for individual or business consumers any longer. Where there is a need, fintech startups have been there with a shiny new solution, and venture capitalists are helping bring those services to market more so than ever before. That trend isn’t ending anytime soon.
Data, Data, Data
None of the fintech boom would have been possible without the collection and subsequent analysis of data from both consumers and business. Think about the world before social medium and smart phones—scary, isn’t it? Businesses gathered information on consumer behavior and demand over the course of months, years, even decades. Similarly, consumer response to products or services took time to be addressed, or simply was never brought to the attention of those who could impact change. Now, our society relies so heavily on social media and access to real-time information that the thought of waiting longer than 2.7 seconds for data in whatever capacity is excruciatingly painful. Companies are able to collect information on what consumers need, want, hate or could do without, and consumers are able to connect with those companies in mere moments. Some within the fintech universe have used that to their advantage, creating platforms and services that speak directly to the needs of consumers, all while providing it in a manner that is convenient, easy, and by all means, cheap. Everybody wins—except the companies who have been slow in using that information to their benefit. Big companies are turning to smaller fintech startups seeking partnership for data collection and analysis, but that isn’t happening. Instead, startups are taking over the landscape of financial services completely, based on the data they are able to acquire quickly, with more efficiency, and with a greater level of understanding of its meaningful use.
So, what does that have to do with the upcoming fintech marketplace? Put simply, everything. The more data that becomes available, the greater the expectation for transparency from regulatory, consumer, and business perspectives alike. As data takes an even strong hold on the financial services industry, companies will need to be able to deliver in a way that is beneficial to the consumer by meeting the criteria they have for user experience, and again, fintech startups will be there to answer the call to action. Big banks simply don’t have the flexibility to move as quickly on consumer demand developments derived from big data as small, nimble startups do. Throughout 2015, it is anticipated that the collection and analysis of consumer data will become even more refined, but only beneficial to those able to put it to good use for the consuming public. In case you’re keeping count, that’s fintech for another big win.
Different Shades of Green
Even though venture capitalists have taken the cake on fueling the growth of fintech startups, companies are utilizing the buying public to gain traction on underlying projects that keep interest in the sector at the forefront. Take crowdfunding platforms, for instance: inventors, non-profits, and startups are able to fund their missions from individuals in the crowd. “Investors” in those projects are then rewarded with early product releases or discounts, and most importantly, a sense of ownership in a company/person/project in which they believe. Many of these individuals are offering minimal amounts of cash for something small in return, but it all adds up.
Now, if we shift our focus to equity and debt-based crowdfunding, we’re faced with a slew of issues as it stands currently. Individuals are allowed to take part in equity-based crowdfunding and marketplace lending only if they meet certain requirements based on their net worth or income, and this dramatically cuts down the opportunity for businesses and potential investors alike. Because regulations for these types of crowd-based investments are muddled at best, no one is exactly sure what the future holds for these platforms or for the startups that depend on them. This is the case even despite hope that clarity will come from the SEC later this year. For now, those with dollars that are the brightest shade of green—investors deemed sophisticated (by outdated guidelines according to many), or venture capitalists with proven expertise—are at the front of the line to take part in some of the most promising opportunities on the market today. We recently held a webinar with securities attorney and crowdfunding expert, Ray Burrasca of Colorado Crowdfunding, and he addressed in depth much of the gray area around investing opportunities today and some of the things coming down the pike (see Crowdfunding Part II: Understanding Public and Private Offerings under the JOBS Act ).
No one has the crystal ball for fintech’s future, but the stage has been set for continued growth far beyond 2015.