Author: Michael Halloran

FinTech’s Zeitgeist

Recent conversations have led me to think that some of the zeitgeist of fintech is changing.

I think the focus on the hype and funding levels is shifting as both startups and mid-stage firms are pivoting from aspirational, even naive plans, to more strategic conversations.

For me, the decision of FutureAdvisor and its investors to fold its cards is but one data point. It’s arguably been both a case of capitulation on both sides, recognizing the challenges to achieve scale, and the difficulty of innovation at incumbents.

honest dollar

More than ever, it’s a card game, and playing your cards right can mean holding them close to your vest. The CEO of Honest Dollar, for example, spoke candidly on the gap between what people think they’re building versus what they’re actually building.

There’s smart and right out of Steve Jobs playbook. There’s a time and place for putting it all on the table – and it’s best not to do so too early.

Finovate

I wasn’t able to attend the recent Finovate event in New York due to a last-minute conflict, but was able to see themes from afar and through conversations with those in New York.

finovate

Mobile continues to be the key driver of the conversation. As Karen Webster, one of the most compelling voices on payments today, says: “More than any other, mobile is the ecosystem that has given rise to the sea change taking place in payments today.”

As she wrote on the @PYMNTS blog: “You can’t talk FinTech without talking payments, and you can’t talk payments without talking FinTech. They’re an inseparable marriage.”

I thought it was interesting that we both had seen Sprint Money’s partnership with Urban FT was one piece of news from the event.

sprint

As mobile gurus like Benedict Evans point out, although we in the US don’t often grok it, outside the US, telco companies operate more like banks or have a closer relationship with them.

In developing markets, phones can serve as the de facto means of payment. It will be interesting to see if the model will come to the US.

I think it will be a challenge given the Sprint brand and other options in the US, but demographic changes and aversion to banks might make it work in certain segments.

Payments News

Outside the marketplace lending space, other big news was the huge growth in payments processed by PayPal‘s Braintree unit. Just two years after its acquisition by PayPay this week it announced its authorized payment volume will be $50B this year.

braintree

Impressive, but with that growth factored in, the stock is still trading broadly flat to down from its IPO in July. The open question is whether the Dan Schulman can get PayPal to a place where it can compete with Stripe.

It’s interesting that Dan’s professional career includes little time in financial services (with time at AT&T, Sprint and Virgin Mobile vastly exceeding his time at American Express). I wonder what Dan thinks of Sprint Money? I suspect his attention is elsewhere.

Only about 1.6% of retail purchases are made online, though a majority research prices online or with our phones before making a purchase decision. That behavior may be changing….

Recently Stripe announced Stripe Relay, which reduces friction for in-app purchases. It’s big news, and could usher in more online and in-app purchases over time.

stripe relay

The New Zeitgeist

Today’s zeitgeist is shifting from how big the opportunities are to being smart and strategic. (For that reason, there was a wariness about many startups at Finovate this week.)

Honest Dollar’s whurley going beyond what many think are its modest plans is one example. Being ambitious and holding your cards close is the mark of a company you want to work for – and a startup that the best venture firms want to back.

I like the story he tells of an employee at Honest Dollar being asked what he’d done to achieve a big win for the startup, replying: “My job,” and walking away.

So here’s my advice to startups: don’t get caught up in the hype; focus on the job; and don’t show your hand too early.

It’s a smart strategy that will work better than raising too much, too soon and tilting at windmills. Remember, it’s business – you’ll need to think a few moves ahead.

Weathering the Storm

volatility

During all the recent stock market market volatility, I’ve been thinking about the long-running debate that tends to come up in the world of FinTech on the value of having an advisor.

Despite a drumbeat message to ‘ditch your advisor’ from robo advisors like Betterment and WealthFront, the reality is more and more are using advisors, who play a vital role at times like this.

While startups make a cost-comparison argument, research shows individuals working with an advisor often do better in terms of overall returns, in excess of fee difference.

This week saw a watershed moment in the world of robo advisors, with acquisition by BlackRock of FutureAdvisor.

Rather than cover this topic, I encourage readers to check out the analysis by RIA Biz.

Why Advisors?

There’s value in having a person to turn to and keep you on track. An advisor can help you plan for the future, control your emotions during times like these (e.g. market corrections) and as you enter different life stages, e.g. buying a house, planning for your kids’ education or preparing for retirement.

Screen Shot 2015-09-04 at 1.53.46 PM

A recent Q&A on Periscope hosted by Chris Sacca with long-time friend and financial guru based in Austin, Owen Brainard, made this very point.

RIA’s vs. FA’s

Brainard, like other RIA’s, emphasized an argument that a big firm’s advisors only push product, and have a lower regulatory standard of suitability (i.e. putting clients in products that are suitable, but not necessarily in their best interest, or the so-called ‘fiduciary standard’).

Fees matter – but aren’t everything

While the regulatory issue is true, so-called warehouse advisors can serve clients well if you ensure the advisor is paid in a way that addresses conflicts (i.e. a wrap fee). But there’s been a lot of growth in the RIA segment, which I’ll address in a future post, since working with an advisor 100% who must be aligned with your interests makes a lot of sense.

Starting Out

robinhood app

If you’re a Millennial or don’t have a lot of assets, there’s nothing wrong with an app like RobinHood to buy stock (although I wish they would offer custodial accounts).

Or you can choose to set up a self-directed brokerage account at Schwab, Fidelity or any of the new-style automated investment services (many of which tend to invest you in low-cost ETF’s from the likes of Vanguard).

Market vs. World Volatility

Despite the turbulent times in the stock market, it’s important to remember all the other issues we face around the world – especially the refugee crisis in this week’s headlines.

I encourage readers to be mindful for everything they have, even with the stock markets recent dips, and consider making a donation to UNICEF or a charity of their choice.

Here’s a short video from David Beckham on the current crisis in Syria:

Please consider a donation to UNICEF or any organization helping those in need.

Transparency

In a world in which Google’s reorganizing itself to boost transparency into its main business, I thought it would be a good week to talk about transparency.

I’m a big fan of a transparency. A former boss, now chief operating officer of Morgan Stanley’s technology division, used to remind me that sunlight is the best antiseptic.

He used the term referring to dashboards on financials, projects and risk – but I’m using in a context of being transparent with your customers about your value and pricing.

In my experience, banks, are less transparent than startups. I think a reason is that banks have a lot of different constituents – and less of a singular value proposition – but startups and banks can fall short.

Consider Lending Club. A former employee told someone it saves the average borrower only 1.5% after factoring in all its fees.

It’s still decent savings, yet the company plays up the gap between savings account rates (<1%) and credit card rates, as if it were passing along savings of that magnitude.

(This issue isn’t limited to Lending Club. As reported by Bloomberg, a disclosure by Citi on securities from Prosper gave a forecast return of 5.48% on low risk loans; total losses were forecast at 8%; 13.2% average APR)

Lending Club and its peers are great models, but I think they could be more transparent. I’m optimistic about marketplace lending. But to help make it better, I encourage everyone to provide feedback to the U.S. Treasury’s RFI on this sector. Comments are due on Sept. 3rd.

I just read Morgan Stanley’s Smittipon Srethapramote set a target of $24 for Lending Club (60% above from its current price).

I’ve not spoken to Smittipon since the IPO, but read he was bullish given acquisition cost trends and growth ‘runway’: I was glad given my upbeat take on Lending Club in TheStreet.com.

Another topic I’ve been thinking about lately is this chart:

Created by the Financial Brand team, including FinTech Mafia member, Jim Marous, it was well worth sharing. It does speak to both how banks may have their heads in the sand, and also the marketing work that remains to be done at some startups.

As an advisor to startups, I’ve seen how difficult it is to break out into even the level of awareness of firms in the table, despite the increase in venture funding for FinTech.

I’d like to mention a startup, LoanNow, which is early stage and seeking to break out. I recently spoke with Miron Lulic, President of LoanNow, a ‘white hat’ (or responsible) online lender.

Similar to LendUp, key differences with LoanNow is it offers installment loans vs. revolving credit, and provides higher loan amounts. I admire Lulic’s goal to make lending better via technology, which he observed was pretty appalling in the payday lending industry.

LoanNow wants to bring better technology and an improved user experience (UX) to an antiquated, category of lenders that they also believe charges its borrowers too much.

We Help Good People Get Better Loans

LoanNow offers ‘gamification’ (e.g. challenges to meet in order to lower the APR), but one innovation unveiled at Finovate was ‘group signing’, or micro co-signing by your friends, to lower your interest rate (similar to Vouch).

LoanNow has the potential to succeed since it’s motivated to do the right thing for its clients, and is laser-focused on its target customers.

It’s a tough market for startups without backers from the biggest names, but I wish them well – and think they’ll be successful.

Several VC’s are staying clear of online lending (seeing it is ‘too hot’ as Emergence Capital told me, or in conflict with prior investments, as First Round Capital and CrossLink Capital indicated).

But it’s good to see Andreessen Horowitz is embracing FinTech with its recent appointment of Alex Rampell, former CEO of Trial Pay, as a new partner focus on opportunities in FinTech.

Still, some startups may have to bypass VC’s and emulate Patch of Land, that grew with the help of several accredited investors and a credit line, before gaining larger investors.

Embrace transparency

Here are my two closing suggestions for other early-stage firms in the online lending space.

Be true to audience and brand. If you’re targeting the lower end of the market, i.e. payday loans, don’t use a web design firm to make your site look like you’re Stripe (targeting developers) or LendingClub (targeting prime borrowers). Be yourself – don’t try to be like someone else.
Embrace transparency. Be very upfront about your value vs. other options that exist, i.e. don’t knock the banks as being ‘not lending’ since 2008 or ‘ignoring the SMB market’ when recent published figures don’t support this. Tell the truth, and you’ll win with customers.

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Up’s & Down’s in FinTech

up_and_down

What’s up with (or rather what’s driving down) Lending Club these days?

Screen Shot 2015-07-27 at 3.10.52 PM

As someone who is optimistic about Lending Club’s prospects (as I had written in Jim Cramer’s TheStreet.com), I was surprised by the slump after its lock up.

My view is the stock suffers from fears of regulation, a reversal of halo effect on its stock from time of its IPO, and concerns about its numerous competitors.

Time will tell, but It’s striking that its Chief Risk Officer just sold $2m in shares at a price of around 50% off its high (and below its IPO price).

Looking at other players in the alternative lending space, there’s a lot of growth, with Patch of Land being one example.

I recently spoke with Patch of Land’s AdaPia d’Errico, CMO and early employee who joined co-founders Jason and Brian Fritton and Carlo Tabibi, to talk about the startups recent growth.

Patch of Land has seen huge growth serving “residential lending crowd funding enabled by the JOBS Act,” according to d’Errico.

By pre-funding its deals, a feature that started from its genesis as a business, she notes they combine a crowdfunding model with an ability to move quickly – a key requirement in real estate.

Patch of Land provides loans for those seeking credit for real estate purchases that often involve a plan to renovate, so it furthers the goal of founder, Jason Fritton, who envisioned restoring communities devastated by the real estate crash.

Fritton lobbied for rules to democratize capital formation for new business that were ultimately written into 2012 JOBS Act (Jumpstart Our Business Startups Act). I’ll explore Patch of Land more in 2015, when I discuss real estate crowd funding in more depth, but its recent progress speaks volumes about its and the broader FinTech industry’s potential.

Cumulative Loans Facilitated by Patch of Land

Patch-of-Land-Graph-May-2015

On a related note, it’s fascinating how despite the ink spilled over whether London, New York or Silicon Valley is “winning”, how many startups and investors are emerging in Los Angeles (e.g. Patch of Land, Realty Mogul, CoreVC).

Recently, Santa Monica-based writer and investor, Chance Barnett, observed how FinTech investments have quadrupled. It’s well worth reading his article in Forbes.

In thinking more globally about the various segments of the industry, it’s useful to explore the the myriad visualizations out there trying to capture all the startup companies in this space.

I think there’s a clear role for easy-to-follow visualizations such such as CB Insight’s “Periodical Table of FinTech” (see at this link), but I recently generated a network diagram view of two hundred FinTech startups using Quid Explorer’s intelligence platform used by private company investors, media firms and consultants like McKinsey & BCG.

The visualization of the FinTech ecosystem uses implied relationships between companies from keyword analysis to generate clusters of similar companies within the broader category.

Screen Shot 2015-07-27 at 2.36.18 PM Payments companies like Stripe are the largest cluster in light blue (bottom right) and blur into the dark blue category (where you’ll find vendors like Zuora).

At the far right, in yellow, you see the bitcoin related companies.

Patch of Land is there at the very top, in the dark blue real estate cluster. Equity crowd funding businesses like Angellist and CircleUp are the purple cluster.

The tool didn’t put all online lenders in one category, with SMB lenders (such as Kabbage) in the red cluster, while consumer lenders, such as SoFi, shown in orange at bottom left. (In reality, many of these operate in both segments.)

Lending Cluster

The other green shaded clusters show capital markets focused startups like Xignite in dark green, while the light shaded cluster is where you’ll find startups like Betterment and MaxMyInterest, focused on savings and investments.

These charts show the challenges in defining the FinTech space – given its diversity. But I found it interesting to see the complex relationships within and across sub sectors of the broader category.

As some of you already know, I’ve recently joined a FinTech startup and could not be more excited about its prospects. Look for more on that topic to come, but for now – since I’ve been away for a couple of weeks – I just wanted to say welcome back.

Thanks for your readership – which is now up to over 10k readers per month. I also hope you have enjoyed recent posts on Goldman Sach’s FinTech strategy, LendUp and LOYAL3 (which generated a lot of interest).

Look for more to come and enjoy the rest of your summer.

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Q&A with LOYAL3 CEO

barry_pic

Michael: LOYAL3 is pretty differentiated. How would your describe your model?

Barry: We provide easy and affordable access for everyone to invest in the brands they love, fee-free.

And that includes IPOs at the same price as Wall Street. It’s pretty cool, people can invest as little as $100 in IPOs, and receive the same enrollment priority as those investing $10,000

M: Loyalty is clearly a part of your story. Can you explain its role?

B: Bain & Company did a landmark study around direct ownership and loyalty. They found that customers who are also shareholders spend 54% more, refer 2x more and visit 68% more often. Our platform makes it easy and low-cost for companies to scale individual ownership.

M: What does the “3” in LOYAL3 stand for?

B: The “3” represents the company, its shareholders and its customers – the unprecedented value creation when those three get aligned. Our role is connecting brands with people who care about them through easy and affordable stock ownership.

M: Why do some companies select LOYAL3 to be a co-manager for their IPOs?

B: To increase engagement, branding and loyalty. What CEO doesn’t want to say to his or her employees, customers and partners “you matter to us – we wouldn’t be here today if it weren’t for you; and as a way to say ‘thank you,’ we are offering you access to our IPO stock at the same price as Wall Street.” It is very powerful.

M: For some time, individuals could purchase stock directly from some companies commission fee. LOYAL3 made it easier and expanded access to IPO’s, right?

A: Exactly. We see ourselves playing a big part in the story of financial inclusion. We want to provide access to IPOs for everyone. That is an audacious goal. Less than half of U.S. families hold stock and even less have access to IPOs. We’d like to change that. We provide IPO access on a first-come, first-served basis, with three key features (1) minimums as low as $100; (2) an incredibly easy user experience; (3) no investor fees.

M: What are some of the results achieved by LOYAL3?

B: We’re a data-driven company, so I’ll share some metric-driven insights. First, we measure Net Promoter Score (NPS), a proxy for loyalty, for clients. In every case, NPS increases after a person buys stock, in aggregate an average increase of 20 points. This is remarkable.

Even companies whose stock decreased from issuance price experienced an increase in NPS. And companies who started with a negative NPS still saw a rise in NPS with ownership. Those are profound data sets. It supports the thesis that ownership creates loyalty – and the increased loyalty is causal, not just correlation.

Another interesting outcome is that our platform investors have proven not to “flip” IPO shares. To the contrary, 97% hold their IPO shares at end of the first trading day.

M: What were some of key lessons learned in building the company?

B: I was employee number three, so I’ve been here from the beginning. One of the big challenges in this industry, as a startup, is regulation. We worked for three and a half years directly with the SEC to obviate the barriers to making IPOs and follow-on offerings available at scale. It took a lot of work and capital to successfully collaborate, including making business model adjustments and re-coding broad parts of our platform.

We’re proud of our working relationship with the SEC

A key lesson learned is that it is much better to clear innovative products and features with regulators prior to execution. We’re proud of our working relationship with the SEC, and feel we’re the leader in crowdfunding IPOs because of those three and a half years of collaboration.

M: What about technology platform? I assume you’re pretty cutting-edge?

B: You know, it’s interesting. We have a very modern technology platform. I know from our SVP of Technology’s conversations with some of the biggest firms on the Street we have the most advanced technologies in the industry. LOYAL3 is a technology company first and foremost.

Built on micro service architecture, our flexible design enables LOYAL3 to deliver new products and services scalable with less effort, materially reducing costs and delivery time. The critical performance advantage is how we deploy a verticalized agile process for maximum flexibility and teamwork that permits us to push out new features and fixes.

Barry7

M: What about culture? What do you look for when you hire?

B: Culture is very important to us. Look around the office here. It doesn’t look like financial services. It’s a tech company culture and the environment supports that.

Being smart is ante into the game – we expect that. We look for people who believe in our mission and who prioritize our “3 i’s” of integrity, innovation and interdependence.

M: Another topic I obsess over is User Experience (UX). You have a chief creative officer. That’s uncommon on Wall St., in my experience. Can you talk about that?

We aspire to deliver the very best UX, period.

B: Stephen Klein is our Chief Creative Officer, and Andres Davidovits is VP of Product. We obsess over products and user experience, testing everything. It’s hugely important. IphoneApp_invest_ammounts We work closely with brands. One of our differentiators is taking the complex and making it simple. Take our iOS app: you can buy stock in literally less than 25 seconds.

Digital marketing led by Dan Garzia and his awesome team is crucial. They drive the efficacy of our platform, in a recent IPO we raised $6.2m in 41 minutes and then closed enrollment.

We challenge ourselves to deliver more than the best user experience in financial services; we aspire to deliver the very best UX, period.

M: You’ve partnered with the likes of GoPro, Virgin America, GoDaddy, and Kraft Foods. What were some big moments in getting those brands to work with you?

B: They are all great brands with really great people, so it’s hard to single one out. But I was particularly proud of our team winning a co-manager mandate for the Virgin America IPO, and in the end, distributing 34% of the retail portion of their entire IPO.

And we really enjoyed partnering with GoPro on its successful IPO, working closely with GoPro and its executive team to engage their customers, fans and employees.

What CEO doesn’t want to say to everyone important to his or her company “you matter so much that we’re providing you access to our IPO at the same price as Wall Street?”

That is why LOYAL3 exists.

(Barry Schneider is CEO of LOYAL3. Michael Halloran is the Founder of The FinTech Blog and former executive with Morgan Stanley. This Q&A is an edited version of a conversation at LOYAL3’s headquarters in San Francisco.)

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Goldman & FinTech

To me, the big news last week was Goldman Sachs will launch a brand new online lending business to compete with startups like Lending Club.

The event was covered widely in the press but didn’t get a lot of buzz or discussion in FinTech circles – perhaps since a large incumbent taking on the startups doesn’t fit a disruption narrative.

It may also be since of the few of the FinTech opinion leaders writers know Goldman; I’m a in a position to comment since my former boss and CIO of Morgan Stanley’s Global Wealth (and Advisor & Client Technology Head) both went to Goldman, along with some other former colleagues.

Market Opportunity

Why did Goldman Sachs make a bold move into online lending at this time? I believe the expansion can be understood partly by the general growth of new lending businesses. The success of startups and new credit providers, like SoFi, Prosper, Kabbage, Patch of Land shows the market opportunity.

By entering this market, Goldman also opens a new chapter by expanding from a focus on institutional markets (which have been reduced in appeal due to changing regulations) to the consumer and small business market.

Impact on Business and Brand

The strategy mirrors that of Morgan Stanley, which clearly pivoted to more balanced business (with more recurring revenue driven by growth of wealth management and purchase of Smith Barney from Citi) post the financial crisis.

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Recruiting talent from institutions like Stanford has become more difficult.

An online lending business will help its brand, reputation and recruitment.

Will It Work?

Goldman Sachs is very competitive and has deep pockets to make it succeed, but I see the move as partly symbolic and partly a longer term effort to shift its business mix. It’s unlikely to change the culture right away, but it helps tell a story of Goldman diversifying its business and workforce culture.

I’ve been told by former colleagues that to thrive at Goldman Sachs, you to have deep vertical experience; it’s not a firm of generalists. Its performance-driven culture is unlikely to change. I can’t see it doing anything like Capital One (with its Capital One Labs, speed and almost tech firm culture).

c1 labs

Overall, I am skeptical Goldman will bring innovation or differentiation in online lending terms of Product, User Experience (UX), or certainly digital marketing – which are key success factors in the online lending space.

And they will have resistance in terms of its brand, which has like many of its rivals on Wall St. has been tarnished by the financial crisis and doesn’t resonate with consumers or small businesses.

But online lenders face their own challenges. A recent survey found few Americans are familiar with P2P lending. People confuse Lending Club with Lending Tree. Bottom line: the startup brands are really not that strong.

More importantly, online lenders who rely on hedge funds for funding of marketplace loans (such as Prosper and Lending Club) face risks that their borrowing costs may increase, and not be reliable over the long term.

Goldman is undoubtedly better than the recent crop of FinTech startups at finding the lowest cost of capital – and at managing risk, so the bank has some competitive advantages.

Beyond this, who better to come in and buy one of the big online lenders? This would have the benefit of addressing the brand problem, since I am confident the bank would retain the consumer brand of any startup it acquires. Imagine this:

Prosper is a Division of the Goldman Sachs Group Inc.

Why Not Wealth Management?

Looking at Goldman Sachs enter online lending, one question is is why it didn’t enter the digital wealth business?

In many ways, it would have been logical (even predictable), given Goldman is associated so strongly with investments. But the fact is that Goldman now operates a small private wealth banking unit. So going into the robo advisor segment would just represent going down market within a current business line.

Adam Nash, CEO of Wealthfront, told a group recently: “Every major investment firm, I promise you, is doing a build/buy/partner evaluation” of digital wealth management.

adam nash

Who knows – maybe after developing its online lending unit, it could then expand its wealth offering under the same brand.

In retaining the Goldman Sachs brand for its institutional and the high net worth, it would follow the same approach of Jamie Dimon segmenting Chase vs. JP Morgan. When it’s ready, it could make an acquisition. Or it could license a product like Trizic.

Given the best online lenders, such as SoFi, are expanding to wealth management, these products could operate co-exist in a common platform or brand at Goldman, so it might be its long-term strategy.

At the end of the day, I admire startups, but welcome innovation from anywhere. If they want to put the consumer ‘in its corner’ as its advertising said, I’m all for it.

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¡Viva FinTech!

fintonic-iphone

At John Battelle’s NewCo event last week, I had the opportunity to meet a founder of a FinTech startup seeking to revolutionize payments in Mexico. After spending time with team at Clip, I decided to write on a few FinTech startups focused on Spanish-speaking and LatAm markets.

clip

Rather than go into detail on Clip’s story, read the PandoDaily article on them for a recap of its business model and history.

In a nutshell, Clip is looking to be Square for Mexico, a market where cash dominates, merchants keep multiple card reader for different banks – and where credit is often as scarce as finding good customer service, according to Clip.

60% of the Mexican market (over 75 million people) is considered unbanked: Many line up to cash paychecks; cards are not as prevalent with consumers or merchants. Clip is trying to disrupt the market with technology, superior on UX, and through exceptional customer service.

I’d lower its reader price to compete with Sr. Pago, but I found Clip’s goal to deliver “customer happiness” vs. Comcast-like service found at Mexican banks was a compelling vision. Their energy and passion for the SMB and bringing change to banking in Mexico was inspiring.

They could, if successful, achieve a double bottom line impact in Mexico and Latin America – a topic on my mind after last week’s CFSI Emerge event.

iZettle and Klarna & Latin America

Beyond Sr. Pago and Clip, startup iZettle (which does business in Mexico today) is looking to grow across Latin America (bypassing the US market, which it sees as too competitive). It Screen Shot 2015-06-19 at 2.04.31 PM recently rolled out a low-cost card reader for Apple Pay.

Another startup, Klarna, is targeting the Latin American market: It just announced the hiring of an executive from American Express to lead growth efforts, noting he had led business development for Latin America.

Klarna, unlike iZettle, is also targeting the US market.

Fintonic

I spoke this week to another innovator in the Spanish FinTech category, Sergio Chalbaud, CEO of Fintonic, a startup founded in the wake of the financial crisis in Spain, whose PFM application has a 70% market share in Spain.

Fintonic aims to be more than a PFM solution. Rather, the goal is to be a “bank of banks” and help consumers meet their financial goals. Fintonic offers a lending and insurance centric mobile solution that “goes beyond a traditional PFM using, using proprietary algorithms and data” said Chalbaud.

The aim is to reduce the hassles of entering data and provide better transparency and terms for consumers. After success in Spain, Fintonic is expanding to Mexico and Chile.

“The reality is that the majority of Latin Americans are still ‘unbanked’ but our research shows this population wants to learn about their finances such as how to obtain loans.” – Serigio Chalbaud, CEO of Fintonic

BBVA and Simple

Simple, the online bank that was acquired by BBVA in early 2014 is yet another example of the marketplace involvement of Spanish banks in FinTech.

simple

Simple won praise for its product usability, elegance and corporate culture that was unlike that of a bank. Dave McClure of 500 Startups backed Simple in 2010.

Although Simple gained just 100k customers in the US, never earned a profit or – a critical show stopper – obtained a banking license, it inspired a lot of admiration.

In fact, as the NY Times reported the chairman of BBVA, Francisco González, was intrigued by its co-founder criticizing banks’ technology and service. González wrote a letter to Simple’s founders that later led to BBVA buying Simple.

Banco Santander & Innoventures

Another Spanish connection to the FinTech world is the role of Banco Santander, a well-run and acquisitive Spanish bank known for its global expansion under former CEO, Emilio Botín.

Having advised Abbey National, a large building society in the UK (similar to a savings and loan) later acquired by Santander, I’ve followed its global growth.

It’s worth noting that FinTech thought leader, Bradley Leimer, is Santander Bank USA’s Head of Innovation. Santander made news last year when it set up Santander InnoVentures. Its $100 million fund in 2014 will help the bank get closer to the wave of disruptive innovation.

Oportun

Another great FinTech story in this market is Oportun, formerly known as Progresso Financiero. The startup bank is run by Raul Vazquez, the former global head of e-commerce for WalMart, and widely admired business leader.

oportun

Providing affordable loans for the Hispanic community, it’s a new style bank with a tech-like culture and amazing customer service. Backed by FinTech venture capital firm, CoreVC, Oportun is expected to IPO in 2015-6.

Finnovista

For more information about FinTech and innovation in the Spanish-speaking and Latin American markets, I’d suggest looking at Finnovista, an organization that is 100% focused on innovation in financial services for Spanish-speaking markets.

I’m hoping that I’ll collaborate with Finnovista in the future, so watch for updates on this.

Look into Finnosummit, its annual event taking place in Mexico City in September.

(Sign up at this link)

¡Viva FinTech!

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Q&A with LendUp’s CEO

LendUp is a licensed, socially responsible direct lender offering credit, financial education and services to promote responsible borrowing in the underserved market. In 2012, the company went through Y Combinator, and later received funding from Google Ventures, Kleiner Perkins and Andreessen Horowitz.

Michael Halloran sat down recently with Sasha Orloff, Co-Founder and CEO of LendUp at its offices in San Francisco.

MH: It’s been a couple of months since we spoke. How are things going at LendUp?

SO: We’re growing. As you can see, we’re getting ready to move to bigger offices and are hiring employees as we expand LendUp into more states around the U.S, and grow the business.

MH: Let’s start with journey that led to the founding of LendUp.

s orloff SO: Sure. I graduated in 1999, during the dot-com boom period when the Bay Area, like today, was an exciting place with a lot of startups. I worked at a place called Ingenio.com that was acquired by AT&T.

Around that time, I read Banker to the Poor and got in touch with the author and founder of The Grameen Foundation. I was asked to spend six months in Honduras, but ended up working three years in Honduras, Mexico & D.C. creating software to help microfinance institutions. Later, after grad school, I joined Citi in New York.

MH: What was your experience like at Citi?

SO: I was in a rotation program. I worked in risk management, online acquisitions, finance and customer insights. It was a great experience, but I was frustrated. Each time I’d want to ask questions and develop predictive analytics, or test the user experience, or identify product innovation I was told what I wanted to do couldn’t be done. My brother, who later co-founded LendUp with me, and who was an early software developer at Yahoo, kept telling me that I had a software problem.

I went on to join Citi Ventures where I worked with Debby Hopkins, its founder and others, where I got exposure to a lot of entrepreneurs and businesses in FinTech.

MH: It was around then you decided to found LendUp, wasn’t it?

sasha jake SO: That’s right. My brother, who was now at Zynga, and I were talking about expanding access to financial services. To take what I’d learned at Grameen and seen was hard to do at places like Citi. Jake again told me I had a software problem. So we decided right then to start LendUp.

MH: I remember from our first meeting that you explained that you “architected” the business so that LendUp cannot make money from people who fall into a cycle of debt. But it’s got to be a hard to operate in a segment that’s garnered a lot of controversy, i.e. just saying payday lending gets people up in arms.

My brother kept telling me that I had a software problem.

SO: Definitely. It’s an ongoing challenge. You have individuals ranging from financial journalists to television personalities saying don’t ever take a payday loan, but they’re really not speaking from deep knowledge of this market. The alternative is not a low-cost home equity loan. The alternative is often a far worse choice.

We lend to the people who the bank can’t or won’t approve. But in order to compete and build a huge business, you have to be faster, smarter, and have a better understanding of the customers problems to not make revenue through the “debt traps” of our competitors.

That is where software and advanced statistical analytics come into play. We built our entire platform from scratch, with every competitive advantage Silicon Valley has to offer.

LendupUX MH: What are the goals of LendUp?

SO: We set up LendUp to do three things. First, we set out to improve people’s lives. We are the only lender in our segment that reports to the credit agencies so we can help borrowers build a credit history. Second, we want to be safe and transparent. We don’t hide what we charge. We put it out there. Third, we want to be convenient – to help save people’s time.

MH: I think of saving time as something people who can afford it are willing to pay for, i.e. convenience. Why time?

SO: You can make a huge social impact just by saving people time. A lot of people get a payday loan to help them through a situation like paying for a car repair. By saving them time through being online and mobile, we make a big difference to people, allowing people to not take time off work or be able to pick up their children at school.

MH: Let’s talk about the product and the platform. How does it save people time and how was it built?

Real-time decision-making is critical for us…

SO: As I mentioned, real-time decision-making is critical for us. We built our platform to enable much faster decisions for people to save them time and provide convenience. You can apply in 5 minutes, and get an instant decision. Customers can get money in their account in 15 minutes. We’re also a direct lender and are 100% transparent.

It’s all a custom build solution. Our code is written in Java, partly due to make it easier to connect to other systems and partly for the ability to find good engineers.

I’m passionate about analytics and we spend a lot of time thinking about creating predictive models, as well as making our systems easy to use from a UX standpoint and mobile optimized.

MH: Can you summarize the concept of the Ladder at LendUp?

SO: Sure. We lend small amounts of money to high risk borrowers – those that banks don’t approve. And as they build a credit history, we automatically allow them to borrow more money at lower rates for longer periods of time. That is the ladder: there are currently 4 levels – silver, gold, platinum and prime.

does it work

We know how important financial education is. It’s too bad that many banks don’t focus on this. In exchange for watching videos on topics like managing your finances and paying on time, the APR is automatically lowered for customers.

MH: So, it’s gamification?

SO: That’s right. Beyond education, we use behavior to reward people for doing the right thing. We have great analytics and can see that banks are not able to meet needs of the communities, and payday stores have popped up to meet those in certain geographies. But that still doesn’t help reach everyone in the community, not to mention payday lenders don’t help borrowers improve their credit and lower their APR’s.

CA Map

With the near universality of smart phones, almost everyone is now connected, even in the most remote areas. With our own customer built technology, we’re able to unlock safe capital for everyone, regardless of branch coverage.

And what we have seen proves just that – a mobile first lender is not just more convenient for busy, urban communities, but expands the reach to unlock new populations who have not had access to credit before, which is significant.

Credit Invisible

MH: So what’ the vision for LendUp looking ahead?

SO: Going back to my time at Grameen, I know that credit is not the only solution to people’s problems, we have to include education, general health and empowerment.

At LendUp, credit is just our first product. Right now we’re focused on expanding geographic coverage to more states. We’re licensed today in 17 states; the steps for getting licenses for lending and money transfer state by state, which are separate approvals, are not trivial.

Beyond geographic growth, LendUp wants to create a path to better, safer, financial products through credit building and other products. We have a partnership today with Moneygram; a local bank; and a few non-profits. We will be adding products and services over time to serve our mission of using software to get people to a better financial place. We call it Ladders, Not Chutes.

MH: To wrap up, coming up this week is the Center for Financial Services Innovation’s EMERGE forum in Austin, TX. You mentioned that you’ll be on stage this week. Do you have any message you’ll like to convey to the attendees?

cfsi
SO: I’m a huge fan of CFSI and what they’re trying to do within the financial services industry.

If I had to say anything it would be to encourage institutions to take action. Do not just see the event as an opportunity to learn what others are doing: Focus on actions that make an impact and measuring results, so that we can see success in serving the market.

I like what CSFI is doing with its partnership with JPMorgan Chase, but we could do even more. We need an incubator like Y-Combinator for the financially underserved.

I’d like to see: 1) VC’s getting more involved; 2) government policies to enable innovation; and 3) more startups in this space, since there’s not only a market, it’s a real opportunity to make a difference.

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Are Banks Boring?

Screen Shot 2015-06-01 at 9.09.50 PM

Last week I attended Yodlee’s incubator, ynext’s Demo Day in Palo Alto. Yodlee’s ‎Chief Strategy Officer, Joe Polverari, said it decided to launch ynext to learn how to innovate better by drawing on the creativity of entrepreneurs and startups.

His words reminded me of a comment from a top venture capital firm partner that focuses on FinTech: ‘Banks are simply unable to innovate, as they are structured.’

Some have even gone further saying “banks are boring.” Recently a NY-based VC gave me a high five after I told him I’d left Morgan Stanley.

I’ve worked at both startups and banks, so know firsthand that each place can be exciting or not depending upon the role, team and culture.

It fashionable to say FinTech is booming (and seems every day I see a new post noting investment is 3X higher now than it was). The pundits praise the innovators – and predict the demise of traditional banks, citing surveys on Millennials who want to “cut the cord” with banks.

cap1logo But yet the very first FinTech company was Capital One, the US bank. Its founders, Nigel Morris and Richard Fairbank, pioneered the idea of an individual credit card rate and product, putting technology at the center of its business strategy. Today Capital One’s innovation lives on in everything from its culture, products, work spaces, and units like Capital One Labs.

Having met with Capital One Labs a couple of months ago, I’ve seen first hand how the bank’s ethos, leaders (including SF-based Skip Potter) embrace innovation, creativity and Agile development.

It’s easy to forget that Merrill Lynch pioneered the Cash Management Account (not a startup); Barclays and Vanguard played big roles in revolutionizing low-cost efficient investment products like ETF’s (though robo advisors get a lot more press). In short, banks are not simply ‘desert islands’ of innovation.

EMERGE 2015

Nor are banks indifferent to the underserved. One case is point showing a focus on innovation and the underserved is next week’s EMERGE 2015 forum in Austin. This event is co-sponsored by the Center for Financial Services Innovation (CFSI) and American Banker.

The event bring 700 leaders together to network and advance innovations for the financially underserved—with consumer needs front and center.

FinTech-focused venture capital firm, Core Innovation Capital recently wrote that “if past years are any indication, content and programming will not disappoint.”

I hope the event gets well covered in the press, but it’s too bad some fintech startups seem to garner lots of PR, no matter what their agenda.

If past years are any indication, content and programming will not disappoint at EMERGE 2015

I find it disappointing that certain startups tout solving so-called problems of engineering graduates from the nation’s most elite colleges not paying a lower rate for their loans vs. community college students.

There’s a role for credit scoring and risk-based pricing, yet we shouldn’t be fostering redlining or limiting focus on the elite. The innovators who developed new pricing for high-potential recent grads should think more about inclusion.

Case in point was a party at a venture capital firm last week in Silicon Valley. There were a lot of very smart people, connected people, and wealth – but there wasn’t a lot of diversity.

I’m positive about the positive aspects of tech firms in financial services (e.g. giving value to younger people vs. a time-in-rank culture). But we can all reach for a higher standard of serving the bottom line and so-called double bottom line.

android pay

For example, the recently announced Android Pay (like Apple Pay) is convenient, secure, but not really a game changer. Startups like LendUp or Acorns, on the other hand, show innovations can go beyond client solutions to benefit the wider society at large.

So let’s all up our game and aim a bit higher.

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Ideas Are Commodities

As I was speaking with a partner of a venture capital firm waiting for the start of the pitches to start, he explained: ‘Ideas are commodities – it’s all about execution, it’s all about the team.’

As someone who embraces new ideas, it hit me like a punch to the gut, but I knew the core of the statement to be correct. As a strategy consultant, I’d come to learn that strategies most often fail due to execution.

The partner went on to say, “everything has to go right,” to be successful, noting his firm passes on 99% of pitches. Beyond this, since few bets pay off, and most value is created by just a few firms, the math of VC investing can be sobering.

Despite this, my mood lifted as I watched the enthusiasm with which founders pitched ideas at Plug and Play TechCenter and as I recalled a story on Marc Andreessen in this week’s New Yorker: “Tomorrow’s Advance Man.”

It’s worthwhile to read how VC’s think (e.g. pattern matching). It rang true, since a fellow advisor to a fintech startup, Trevor Healy, explained to me last week he’s found that pitching often involves answering the same list of questions.

Yet VC’s can transport you from the everyday and to think bigger about the future – just as Elon Musk did recently, in response to a question on what problems to solve: “Solar energy, global warming, and making humans multi-planetary.”

A16Z is a well-known backer of Bitcoin, a topic that came up when I met today with Debbie Brackeen, Head of Innovation Networks at Citi Ventures.

She recently ran a workshop on Blockchain with 30 executives from Citi from around the world. Her take was that, while people tend to hold firms views on its importance, the debate is valuable within Citi – and to how Bitcoin and Blockchain will unfold.

Debbie pointed out how in theory Blockchain offers the potential to revolutionize the way stocks clear, in addition to the more commonly cited potential to change how we pay for things. Although looking ahead, she said her team still finds it helpful to return to Andreeseen’s article “Why Bitcoin Matters.”

In fact, Bitcoin startup Bitwage, a startup focused on helping firms pay contractors in Bitcoin, stood out at the FinTech Expo today. A quote from Jon Chester of Bitwage resonated with attendees at the event:

But the highlight of the day for me was the chance to see Renauld LaPlanche, CEO of Lending Club, speak up close. Although we were unable to schedule a 1:1, key takeaways from him – who drew a big laugh from crowd as he began his presentation with a dense page of legal disclaimers – included:

LendingClub has no intention of ever taking deposits
Key partners include community banks and credit unions (that collectively would be the #4 bank in the U.S.)
Banks will struggle to create their own lending marketplace, given higher operating costs, IT challenges & their ‘DNA’

Renauld cited the importance of accelerators – like Plug and Play TechCenter, where LendingClub began as a small company – and had a clear rapport with Saeed Amidi, founder of Plug and Play.

Lastly, Renauld advised startups seeking funding to focus on the person, and not firm, when choosing an investor. He cited the value created by Jeff Crowe of Norwest (venture capital arm of Wells Fargo) in building relationships with the Bank, and helping to build out their business.

So, while ideas may be commodities (to a degree), the role of relationships was driven home by the more upbeat camaraderie of the leaders at today’s FinTech event, who came together to celebrate successes and share words of wisdom with the next generation.

If you’re looking for some advice for your startup, join an upcoming FinTech Meetup (e.g. SF FinTech Meetup, FinTech Startups Meetup in NYC; NewFinance or Innovate Finance in London).

Build relationships and try to get in front of an angel (following advice of Joe Lonsdale from Formation 8). Refining your story will help refine your ideas. Ideas won’t get you funded – especially in a red hot area of FinTech – but the dialogue can lead to relationships that make all the difference.

Jon Lehr, Venture Director of Work-Bench, recently gave some terrific advice on role of relationship building in his last article in TechCrunch.

So while the concept that ‘ideas are commodities’ may sound deflating, it just means ideas are only the start – you need to assemble the right team, and develop the right relationships with partners who can help you grow.

Finally, a big thank you to Scott Robinson, Director of the FinTech Accelerator program at Plug and Play TechCenter, Saeed Amidi, Founder of Plug and Play, and the whole team for putting on a great event in Sunnyvale.

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