Author: Michael Halloran

My Take on Finovate

As I wrote recently in TheStreet, it’s been a big week for FinTech, with a number of funding deals – Affirm, Vouch, Credit Sesame and NerdWallet – announced to coincide with the industry’s big Finovate conference in San Jose.

While you can read about who won the audience’s vote for best of show awards in lots of articles, I didn’t really agree with the list (which is more about popularity than impact), so I’ll share what I thought stood out as most compelling.

Unlike presentations at Finovate, where founders had no more than seven minutes to present their ideas, I had the benefit of being able to select some of most compelling startups, and then spent between 30-60 minutes in a 1:1 with founder/CEO.

Who really stands out in terms of innovation and having the potential for long term impact and relevance? I was most impressed by LendKey and Credit Sesame – and will say why here – but several others (Trizic, Wealth Forge, Hedgeable, NAMU & CUneXus) showed a lot of promise.

LendKey: Loan Search Engine Riding on Existing Bank Brands

LendKey’s vision is “lending as a service” – a white label solution for community banks and credit unions to provide online lending. It’s got a killer UX, and the product offers a “Kayak”-like shopping experience for loans.

Unlike LendingTree, where you get redirected (and “offers” can easily turn into declines or result in price changes), LendKey is more like Uber for loans.

One key difference is that you work with a brand you know – your bank or credit union (with one less login and your finances are in one place).

You start at your bank’s site. But like using a travel search engine, you use sliders to adjust the amount you want to borrow (and other features). By using its dynamic pricing engine, you are shown a range products across the LendKey loan network (i.e. not just from your bank).

The network matters, since sometimes banks will hit regulatory limits for certain products, so you may find a better deal at another institution.

Smart play. I like its positioning – and working with incumbents (i.e. brands you may trust). It business can also scale (the US is fragmented with thousands of banks, so lots of partners).

Backers like DFJ are wise, I think, to be invested in LendKey, which has around 100 staff mainly in New York, but also in Ohio, with plans to come to California. I would keep definitely an eye on LendKey.

Credit Sesame: Helping Consumers with Liability Management

I’ll admit it. When I first saw Credit Sesame on stage making its 7 minute presentation, I didn’t get it. The aha moment just didn’t come that quickly. I thought they were like Credit Karma, with fewer customers – but I was completely wrong.

After a sit down with Adrian Nazari, CEO of Credit Sesame, I left feeling they should have won Best of Show at Finovate. Having worked at Morgan Stanley within Global Wealth Management, I understood right away when he spoke of the difficulty of finding advice for the “liabilities” (credit) side of your balance sheet.

People go to their FA for various reasons, but for nearly all segments, their advisors fail to help them with useful tools or ways to think about managing credit (or credit/investments in holistic way), since they generally focus on investments.

“Should I take out a 15 yr mortgage or 30 yr and invest the rest?” or “What kind of mix of debt should I have now – and in 5, 10 and 15 years?” are questions people should have good answers for (and not just think of when they buy a house).

Credit Sesame has shown it can attract customers (6m today) with its free credit reports, and mobile solutions. But it is differentiated by its focus on product vs. traffic. The company has a compelling vision of what it can do for consumers, and wants to be a Product company, not just a traffic and referral business.

Given Credit Sesame has found traction in the market, won numerous mobile and app design awards (and a Webby award), and has such a compelling vision for a gap in the market, it is no surprise to me that they announced new funding this week.

While there will be innovation in credit from the likes of Affirm and Behalf, I think giving better information and helping us all to really manage the liability side is a huge opportunity – and I’m excited to think that Credit Sesame could actually deliver it.

Other Standout Companies

I also wanted to give a shout out to a few other companies I think had interesting solutions, and a strong management team.

Look for more later, but standouts at Finovate this year were Stratos (multiple cards-on-one card with a strong software angle), CUneXus ( “digital direct mail” software to enable loan offers within an online banking site), Avoka (omni-channel solution enabling banks to reduce drop-off rates for transactions) and NAMU (mobile banking).

I’ll also later talk more about MX and WealthForge (CapLinked plus workflow with an ability transact in a single platform, used by innovators like EquityZen and RealtyMogul).

I thought I’d written enough on robo advisors, but want to say more after speaking with founders of Trizic (white label robo advisor that can be offered by banks) and Hedgeable (digital wealth platform with complex strategies, e.g. downside risk protection).

OK, that’s it. My seven minutes are now up…. But take just one more minute to watch this short video on Credit Sesame:

Cue Video!

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Wealth Management

For progressive minded and tech savvy individuals, the new wealth and investment firms such as Future Advisor, WealthFront and Personal Capital are appealing choices for how to invest. Some of the discount brokers such as Schwab have reacted to these startups by rolling out new products, such as Schwab Intelligent Portfolios, that provide benefits of robo advisors, with the peace of mind of choosing a company that has been in business for much longer.

For those who want to manage their own money, instead of using the robo advisors, startups like Robinhood offer a low-cost way to trade stocks. But I’ve found that self-directed investing has a number of drawbacks, including its complexity, potential for information overload, the lack of accountability for any advice you elect to follow, and the cost of your time.

Investing and managing money on your own may not be a great option unless you have an interest in the financial markets or the proper education or training.

But having somebody else do it has meant being kept in the dark about what you’re being charged. Fortunately, the new style of firms focused on investing provide some compelling alternatives to the traditional way of investing.

Old Way: Traditional Providers

Traditional money managers, in my view, suffer from inefficiency (e.g. paper-based systems, inefficient processes), don’t put average investor first (e.g. giving favorable treatment to big institutions) and often rely upon antiquated technology.

Beyond this, many big firms have become adept at nickel and diming their clients, making the fees hard to see and finding ways to make money (e.g. stock lending positions in their clients portfolios) that doesn’t benefit the client. The new rules proposed to hold brokers to a higher standard of care are no surprise, given the way the industry has tended to operate.

many big firms have become adept at nickel and diming their clients

Better Way: Money Management in the Digital Age

The good news for investors is there’s an innovative and progressive movement coming out of the FinTech industry that’s helping people do the things they need to do to invest successfully. And yet many consumers, investors and even long-established investment professionals are simply not yet aware of the potential for disruption.

For those who want to invest through a secure advisor, see it grow for the future at low costs and not have to deal with all the headaches and confusion in between, these new companies offer a solution that streamline processes and sidestep many of the problems of the past.

Tech Companies at the Core

These new digital wealth management companies, including so-called robo advisor firms plus innovators, such as Hedgeable that deliver automated investing with downside protection, are more like tech firms in terms of being lean, data-driven, nimble and looking more to the future and trying to fix the problems with current offerings versus traditional industry practices.

I’ve not included all types of firms (e.g. equity crowdfunding, or automated savings/investment firms, like Digits or Acorns), but below is a table of key companies.

The software engineers, scientists, intellectuals and finance professionals who are building these firms have invented powerful digital platforms, in my view.

The methodologies and investment processes of the new digital wealth management companies work because they are based on proven, successful investing truths; over the long-term you will make money, if you invest early and often, stay diversified and keep the fees to a minimum.

Some of the innovative features these companies offer:

Analytical software that effortlessly create personally tailored portfolios and diversified investment plans based on financial needs, goals, time horizon and risk tolerance.
Clean user interface that organizes and displays investment data succinctly and intuitively and consolidates investment data in simple, easy to understand formats.
Online platforms and processes to make opening accounts fast and easy and helps create efficiency around tax considerations and money transfers when necessary.
Smart Phone apps that present organized access to financial data and display market and portfolio statistics with unprecedented clarity 24 hours a day.
Interactive knowledge sharing platforms that better educate those who want to learn more.
Low fees and incredible transparency around fees which provides clarity as to where clients’ money is going, how it is performing and how much it all costs.

These companies offer a range of services to differentiate their offerings: SigFig brings a refreshing and scientific approach to investing via data-centric investment software. Wealthfront will manage your first $10k for at no cost, and provide an industry leading software service for understanding and minimizing taxes.

Personal Capital and FutureAdvisor investigate your investments, held elsewhere, and tell you fees you’re being charged by your bank or asset management company that you may not be aware of, given how opaque fee disclosure is in the industry.

Investing Tools

If you want to make your own decisions, companies will support you with their cutting edge platforms and let you create your own portfolios. Having a lean, highly functional and data packed platform where information is easily collected, organized and presented will only benefit your efforts.

Motif Investing offers an intuitive platform where you can design your own portfolio or basket of stocks based on your specific investment ideas, concepts and strategies which you can learn about by clicking through their impressive ‘Discover your Investing DNA’ feature.

Even if you’re with a traditional advisor, there are tools to help your advisor boost after-tax returns of your portfolio, since fees and tax-inefficiency hurt total returns. For instance, Boston-based FinTech firm, LifeYield enables advisors to increase returns by up to 33% through tax efficiency.

Tax efficiency, through so-called tax loss harvesting, has been around for a while, but many see the technology-led innovation of startups like Betterment pushing traditional providers, like Schwab, to offer this service to more customers.

Transformation in Wealth & Investment Management

The financial services industry remains ripe for transformation. By recognizing the problems of the past and using technology to correct them, the new style wealth managers offer a greater level of transparency, work more efficiently, and offer low-cost, risk-adjusted, after-tax returns.

As this paradigm shift continues, the financial professionals who traditionally had better access to market data and investment ideas are being impacted, despite the fact that the scale of the new providers is still relatively small.

Although still small in terms of market share, traditional providers are being shown up for relatively weak user experience (UX), slower processes and higher fees. Most of all, startups are bringing new levels of transparency to fees and costs.

What’s Next?

Technology has undeniably benefited the consumer in myriad ways, considering its impact on everything from shopping to how we communicate with others. Now it’s past time for the investment world – along with investors – to catch up.

Schwab has already responded to the competitive threat. Companies like Fidelity are behind startups like FutureAdvisor and talking to startups like SoFi. The market share of rob advisors is very low, but I believe the future of wealth management is unwritten, and may depend upon the impact of those FinTech startups seeking a better financial future for all of us.

– Alex Hill

This week’s post on the FinTech Blog was written by Alex Hill, who worked in the financial services for more than ten years before leaving to pursue other interests, including the emerging FinTech industry. Alex is based in San Francisco, where he is with a global FinTech organization, NewFinance.

FinTech & Cybersecurity

Since the annual RSA conference was in San Francisco last week, the topic of this week’s edition of The FinTech Blog is cybersecurity.

I was at RSA last year with Morgan Stanley, and just read that the key takeaways for 2015, according to Network World, are: 1) visibility (i.e. seeing how you’re doing); 2) data center security; 3) two-factor authentication; and 4) services.

I’m emphatically not a security expert, but can speak to certain aspects of security – from a business perspective – which can be of value to early-stage FinTech startups and industry enthusiasts less familiar with security.

I recently sat down with Barry Schneider, CEO of LOYAL3, perhaps one of the most interesting of the FinTech firms based in San Francisco. While a later edition will include the full interview, I was struck by his comment that doing things right on security, regulation and privacy isn’t just ‘important’ – “it’s everything.”

Security Is Everyone’s Business

From my own experience in financial services and at FinTech startups, the role of security is more than technology. At Morgan Stanley, for instance, everyone takes an annual training class on the importance of protecting private information, knowing your customers (KYC) and enforcing Anti-Money Laundering (AML) rules.

There’s a lexicon of terms, beyond KYC/AML, such as PII (Personally Identifiable Information) and Material Non-Public Information (MNPI) to learn. It’s a lot to learn, but I’ve found Intuit Developer maintains a great security blog.

Risk Officer

Having briefly played the role of a risk officer – which convinced me of the need to return to role in product management and/or digital strategy – I can tell you that the people in this area play critical roles. I’ve learned a lot from some great managers working in risk, such as Morgan Stanley’s Lynn Riehl.

If you’re at a FinTech startup in engineering or operations, you should be aware of requirements for who are regulated. The rules are complex, but a good start is familiarity with PCI rules for cards and the FFIEC guidelines for some banks.

Although too costly for a seed-round firm, mid stage startups would be smart to seek out experts such as Adam Shapiro, at Promontory Group, who can help navigate regulatory issues, and legal advice as they build their products.

Role of the CISO

Over the last few years, some of the larger financial services firms, along with some other industries, created a new role, the Chief Information Security Officer (CISO). Morgan Stanley has one of the best in Gerard (Jerry) Brady, who taught me a lot about information security.

From knowing the difference between IDS (Intrusion Detection Systems) and IPS (Intrusion Protection Systems), I later learned you should assume you’ve been made, i.e. never think you are secure, and the old paradigm of securing a perimeter is no longer sufficient (which speaks to key takeaway from RSA on visibility).

Startups probably think less about some issues, like data centers, since many use AWS instead of their old data centers, but it’s never too early to have a CISO if you are even a partner to a bank, or other financial services company.

Jerry also had an almost encyclopedic knowledge of companies in the security space, being able to explain and cite the pro’s and con’s of working with innovators such as CloudFlare, Passages Security, vArmour and Prevoty.

The old paradigm of securing the perimeter is no longer sufficient…

The CISO can play various roles, but should lead thinking on new threat vectors, staying on top of what’s new, manage the vulnerability assessment and Information Security (InfoSec) teams looking at third-party providers.

Data Center Security

In terms of data center security, another key theme at RSA, I won’t speak to this as much, but advise mid-stage FinTech startups to follow the industry leaders in this space, such as Palo Alto Networks and more players to enter this place, such as Illumio (backed by Joe Lonsdale’s Formation 8; Joe co-founded Palantir, a key player in security at banks).

Two-Factor Authentication

While it’s less relevant to a FinTech startup, I was intrigued to read that two-factor (2FA) security was a key theme at RSA last week. At many banks, employees use RSA token generators, but seldom make clients out of concern over cost. For clients, the second factor in 2FA is often the mobile phone. Many have asked whether banks are doing enough.

Services

Although I didn’t get as much opportunity to work with Dave Chen – the leader of Morgan Stanley’s banking team focused cybersecurity – as I’d liked when on Sand Hill Road, it was clear Dave is the banker in the world for security technology.

The final key theme at RSA was services – so it’s telling that Dave was ahead of the curve, putting together the deal to merge Mandiant, the services team called in to address crises such as the breach at Sony Pictures, with FireEye.

Although excited to be back on the business side, I wanted to give a shout out to one of the truly great service providers that I had the chance to work with recently:

Bracket Computing. I’m a big fan of this company and its CEO, Tom Gillis, along with his stellar team, including CTO Jason Lango; VP of Sales, Chris Pappas; and VP of Product & Marketing, Ambika Gadre.

I’d also like to congratulate Bracket on their selection last week into Wells Fargo’s exciting new Accelerator program.

Final Thoughts

Hopefully this week’s post will shed some light on the criticality of security, complexity of the regulatory issues, for for some of the FinTech startups or others who haven’t worked in strictly regulated industries.

Screen Time!

And if you want gain deeper insights into security from actual security experts, check out these videos of keynotes from last week’s RSA event!

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IPO’s: I’ve Got Five on It

As I wrote last week in my first story on TheStreet.com, I’m bullish on the prospects of FinTech and wider tech industry’s recent and upcoming IPO’s, so I’ll shift focus my this week from marketplace lending to marketplaces for equity markets.

Last week, well known New York startup – and yet another success story from Fred Wilson‘s Flatiron Ventures – Etsy, went public. Although not a FinTech company, my interest in Etsy’s IPO is due to equity crowdfunding aspect of its IPO.

You may think it was just another IPO – just as OnDeck, the fintech company, went public in Dec. 2015. But, while my former colleagues at investment bank Morgan Stanley took Etsy public, what was unusual was a portion of the offering was reserved for crowdfunding – in keeping with the company’s focus on individuals, and it’s story of empowering individual artists and designers.

Beyond the company’s desire to do something with its public offering to reinforce its brand, it was pretty surprising to me that Morgan Stanley allowed individual investors without a relationship with Morgan Stanley to get shares.

In my experience, high profile anticipated IPO’s, such as last year’s Nimble Storage, are very hard to get access to as a regular retail investor. In fact, this is often touted as one of the benefits of doing business with a full-service broker.

Marketplace for IPO’s

What’s going on? Why would a very traditional investment bank, especially Morgan Stanley – with its core strategic wealth management business – be open to equity crowdfunding that in some ways undermines its business model?

As part of broader development of crowdfunding – from new products (e.g. Kickstarter), stakes in startups (e.g. CircleUp, AngelList), loans (e.g. Prosper, Lending Club) – equity crowdfunding is finally growing in acceptance and importance.

In fact, the biggest FinTech IPO of 2014 offered an equity crowdfunding component: While underwritten by Morgan Stanley, LendingClub offered crowdfunding using Fidelity Investments (where I began my career).

In the case of Etsy, last week, however, Morgan Stanley used not the market leader, LOYAL3, nor Fidelity, but rather its own in-house global stock plan services (GSPS) capabilities, along with its platform partner, IPREO.

(Morgan Stanley is a leader in stock plan services from when Citi’s contributed GSPS to MSSB joint venture; Colbert Narcisse, the long-time leader of the unit is a well-known innovator).

Bottom line: From the conversations I’ve had with those who in this industry, what’s driving this change is increasing market validation of the role and value of equity crowdfunding.

Another recent success in the context of the IPO market is this month’s underwriting of GoDaddy, where LOYAL3 played the role of partner to enable retail investors to participate in IPO.

LOYAL3 is a great company that’s a “marketplace” for direct investing and getting access to IPO’s. Like many leaders in FinTech, it’s based here in San Francisco at border of the Financial District and SoMa, near Prosper and Lending Club. It’s the industry leader in its space.

LOYAL3 signs up companies – from tech companies like Amazon, Twitter, Yahoo, Facebook and Apple, to others ranging from Mattel, Hasbro, and McDonalds – so that individuals can buy their stock directly at low cost.

Direct investing in companies has been around for a while, however LOYAL3 brings innovations from its technology to make it easier to focusing on the “brand building” and relationship aspect of “investing in what you love,” its earlier tag line. It makes sense – an example of investor Peter Lynch’s rule to invest in what you know.

I expect to see LOYAL3 and others riding the wave of giving individuals access to low-cost investing and access to IPO’s in 2015 and beyond. Strategically, they might expand into the pre-IPO crowdfunding market (where CircleUp competes).

Regulation: Watch This Space

For those interested in this area, watch for the continued word on the final regulations and clarifications of rules for equity crowdfunding arising from the JOBS Act. Recently, in fact, I tweeted a link to California’s draft crowdfunding framework:

FinTech IPO’s to Watch in 2015

Although it’s really anyone’s guess as to which companies will go public, the legendary Morgan Stanley IPO team I saw at 2725 Sand Hill Road – including Andy Kearns, Dave Chen, Paul Kwan – will offer VC-backed tech firms advice on timing.

But based on public information I’ve read in the press, several of the big FinTech names are all considered strong contenders to go public in the next year, including Oportun (formerly Progresso Financiero), PayPal, Square and Stripe.

oportun

Others, such as Ant Financial (Alibaba’s finance arm) and Avalara, a cloud-based solution for taxes may follow: the pipeline for FinTech IPO’s will be interesting to watch.

Since today is 4/20, I’ll wrap up by saying when it comes to IPO’s: I’ve Got Five on It. It’s not a lot of money, but the individual investor should be able to participate in this asset class, and hats off to those who make it happen.

Roll Video: Link

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P2P & Marketplace Lending

As the online lending industry prepares for its big event, the LendIt USA conference in NYC on April 13-15, I thought it a good time to discuss peer-to-peer (P2P) lending.

To me, this aspect of FinTech is the perhaps the most interesting, innovative and straightforward versus other areas, such as payments (with all its participants – as noted in my last post), digital banking, cryptocurrency, and robo advisors.

P2P lending is disruptive and proven; it adds value in a clear way by providing better rates for borrowers, and higher rates for savers seeking to invest. Companies are tech-led, often with a distinctive ‘non-bank’ culture, people and work environment.

But at the same time, there are a few misconceptions I’d like to address – without detracting from the alternative lending industry’s innovation and success.

Most readers are familiar with P2P lending, given the press coverage lately. But for those who don’t know a lot about P2P, I’d suggest starting off by reading Peter Renton’s superb blog: LendAcademy.

Inspired by Peter Thiel’s question (from his book, Zero to One), “What important truth do very few people agree with you on?” here’s of few of my thoughts on P2P:

First, although this misunderstanding is more pervasive in the public than readers of this blog, ‘P2P lending’ is really not true P2P – and hasn’t been for some time. The fuel behind the industry’s growth has come largely from big institutional investors.

prosper

(The name marketplace captures the shift. For instance, at providers like Prosper, around 2/3^rdof investors in its loans are institutions and 1/3^rd are retail investors).

Beyond this, some in the press say that banks are “threatened” by marketplace lenders. A classic example of this was in the 2014 post “Why Wells Fargo Is Terrified of Peer to Peer Lending” published on Lending Memo, an affiliate link site (i.e. paid for clicks to alternative lenders). The truth is far more nuanced.

Just as institutions play an important role in the P2P model, big banks (especially the larger ones) benefit in myriad ways, e.g. wholesale banking groups are getting revenue from the related growth in ACH payments. Banks also profit by lending to the institutional investors that participate in the new platforms.

And CEO Renaud Laplanche has stated, Lending Club is expanding the market, not trying to take out the banks. Someone once said, having met Laplanche at a meeting at a bank: “He would fit in here easily.” (He’s famously low-key).

Having worked at Morgan Stanley, I know its people and franchise played a part (along with other banks, like Wells Fargo) in building Lending Club, from placing Mary Meeker and John Mack on the company’s Board, to helping plan as well as manage its IPO, to capturing the post-IPO wealth management opportunities. This is true at other big banks across other platforms.

And not just the big banks. Forward thinking banks, like Celtic Bank, behind Kabbage, also benefit from the growth in new lending marketplaces.

Another line often heard that I would disagree with is the marketing meme: “You know how bad banks are? Use X – we cut out the middleman.”

But many of the institutions are hedge funds or private equity firms. In fact, some funds just put up 15%, borrowing the rest from Citi, to leverage up their returns on marketplace sites from 8% to 12%. (This is fine by me, but let’s spare the David vs. Goliath myth about banks vs. startups since the story is more symbiotic).

And is the experience much better? Perhaps on pricing and speed. But some of customer experience (from Notes and using tools like Nickel Steamroller to having to master XIRR to see how you’re doing) isn’t a lot better, if you ask me.

What important truth do very few people agree with you on? – Peter Thiel

“Banks can’t innovate and are too slow” is another piece of conventional wisdom that I partially disagree with, though I agree to a point. To me, Schwab’s roll-out of the Intelligent Portfolio’s is a proof that incumbents can be fast followers.

But I agree that the nimble size of startups, focus on customer needs, role of VC’s and lack of legacy technology can lead to more innovation. And the startups can lead to others having to up their game, e.g. Prosper’s superior credit model will lead others to improve their model, for example.

I could still envision banks, either as a consortrium or supporting a startup backed by the VC’s active today in FinTech, e.g. Canaan Partners, CoreVC, Foundation Capital, A16Z, General Catalyst Partners and Google Ventures – starting a broker-dealer to create a cross-company secondary market in notes from Prosper, LendingClub and others.

I’m sure there will be plenty of other interesting conversations about SoFi’s valuation, and whether Lending Club’s post IPO performance suggests anything other than too high expectations (plus effect of the looming June lock up) at LendIt.

It’s a pivotal time for marketplace lending, as recent articles in the FT and on some industry blogs have noted. It’s clearly in the early innings, but I expect lots more great things to come from marketplace lending.

But to close, having sailed for LBS vs INSEAD in a race around the Isle of Wight, I’d like to just give a shout out for Lending Club’s record time across the English Channel last week (see photo at top).

Impressive achievement and useful reminder there’s a world of adventure out there – beyond the stock market and marketplace lending!

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Payments Players In S.F.

Electronic Transactions Association (ETA), the global trade association for the payments industry, is holding its annual event here in San Francisco this week.

For many, the move from Las Vegas, the traditional location of the event, to S.F. represents a shift that emphasizes the growing role of technology, and in particular the impact of local FinTech startups such as Stripe and Square.

Below is a table of the Top 25 Companies in FinTech, ranked by employees in greater S.F. Bay area. Note how many are involved in payments (Visa, PayPal, Square, BlackHawk, Yapstone, Verifone, Stripe, Bill.com, Taulia, Revel & Boku).

Although ~ 5,000 people are in S.F. for this event, a small fraction of Dreamforce (annual Salesforce customer event), the key changes underway in payments landscape from Apple Pay to Samsung Pay give this event outsized importance.

The San Francisco Business Journal even has a cover story on payments this week, reinforcing that fact, and calling out interesting startups like PayNearMe (a panelist at last week’s SF FinTech Meetup run by PlanWise‘s Vincent Turner).

Although I’ve worked as a consultant with clients like MBNA (prior to its acquisition by Bank of America), launched co-branded cards and even worked on an ACH initiative, I am not a payments guru like Karen Webster of PYMNTS.com. But I follow FinTech and have a passion for innovation and the space, so will make a few observations.

First, legacy payments companies – and by this I refer to the broadest set of banks, merchant acquirers, aggregators/gateways, and payment networks – are not standing still, and should be watched just as carefully as startups.

Ben Horowitz, in talking about A16Z’s investment in TransferWise, said that “there’s not a lot of innovation coming from the banks.” Likewise, Foundation Capital predicted last week that banks will be disrupted by the new players in FinTech.

stripe

I admire TransferWise and am a huge fan of Stripe, having had the opportunity to sit down with its COO, Billy Alvarado, and see its CTO, Greg Brock, speak at several FinTech events – but feel that A16Z and Foundation Capital may be overstating the case.

The fact is that not all the value added is not coming solely from the startups. Just look at a less cool, big legacy player in payments: Heartland Payments Systems.

The stock has doubled in the last few years, as its executed well and managed its costs while revenue continues to grow:

I would look to startups for their ability to be super fast, be focused on great products and use the latest tech stack, but don’t forget about value created elsewhere, e.g. among big corporates.

Beyond value, I’d also say innovation is not the sole domain of venture-backed startups. They are important, but I think the differences between venture funding and private equity are starting to narrow.

In today’s Wall Street Journal, Andy Kessler argues “The Glory Days of Private Equity Are Over”. I disagree since companies like Betterment (see my recent interview with its co-founder) are receiving funding from both VC’s and private equity firms. Peter Christodoulo, a partner at Francisco Partners, sits on board of Betterment, Paylease and Paymetric.

Or consider First Data. It went private in a deal led by KKR. While it may seem to be a cost-cutting driven deal, consider that in recent years it began sharing ownership with employee-partners (like a VC funded business). And in terms of innovation, First Data is expected to make major new announcement here at TRANSACT 15. (I don’t know its president, Guy Chiarello, but met him when I was hired into his organization at Morgan Stanley where he’s still widely admired an an innovator, not a cost-cutter).

Likewise, Vantiv, one of the major sponsors of TRANSACT 15, went private several years ago in a deal with Boston-based Advent International, and continues to win awards and do well in terms of market share.

So, I think it’s clear startups and corporate players, plus VC’s and private equity all can create value and innovation. I look forward to announcements here at TRANSACT 15 in San Francisco, and will be sharing details on Twitter.

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Interview with Betterment Co-Founder & COO

The FinTech Blog publisher, Michael Halloran, caught up recently with Eli Broverman, Co-Founder and COO of Betterment to talk about its recent success and find out what inspired him and Co-Founder Jon Stein to create Betterment.

MH: Eli, it’s been a couple of years since the two of us met at Morgan Stanley’s offices. There’s been a lot of growth at Betterment, but to begin can you share what inspired you and Jon to start Betterment?

EB: The “problem” in the financial industry inspired Betterment. The problem that we saw was companies were not thoughtful about how to deliver the best products or be aligned with their customers.

At Betterment, we want to be the obvious answer to the question “What should I do with my money?” There was no great option on how to invest the right way: automated, low cost, with a great user experience.

We built this company out of the need we saw in our personal lives. Friends would ask for recommendations wanting the same type of service we wanted and it did not exist – so we set out to build it.

MH: I know one of the big differences between you and some of the others out there is the way you chose to make a big upfront investments in what you built. Can you tell me more about that?

EB: Absolutely. When we started thinking about how to really rebuild the entire customer experience, we quickly realized that we needed to start from scratch. We could have just built an online-based advisor as a front end and sat on top of a legacy broker-dealer, but that would not offer the type of experience that we thought customers deserved.

MH: How hard was to build our your platform from scratch? What were the key challenges?

EB: The key challenge was time. It took us nearly two years to build the systems and receive SEC and FINRA approval. Betterment handles everything: trading, cash movements, statements, basis tracking, tax statements, and everything in between, so naturally it takes time.

MH: Can you share any key moments, when you felt like the Betterment team achieved a big breakthrough, in terms of getting the platform to be a MVP?

EB: We have had many moments where I feel the team made a big breakthrough. Launching at TechCrunch Disrupt was a moment neither of us will ever forget. Some of the most notable ones are when we surpassed $1 billion in assets and more than 50,000 customers

Betterment on Mac

MH: You’ve also been called the Apple of online investing. Can you say more about how the team feels about user experience and the UX design process?

EB: At Betterment, delight is one of our core values. We have invested a lot of time and talent to make sure we provide the best experience for our customers, whether that is mobile or online.

MH: Why do you think others, especially large companies in financial services, seem to fall short in terms of UX?

EB: Often times the traditional industry doesn’t want to deliver a clean, easy-to-use experience. By making things complicated, companies can make more money by overwhelming you with options. It can also be challenging for companies that just keep building on top of their legacy technology. The way their technology stack is structured, it can be nearly impossible for them to create a good experience without tearing it down and completely rebuilding.

MH: Can you share any big insight you gained from the process of building out your platform that might help others in other sectors of FinTech, who are just starting out?

EB: My biggest piece of advice would be to remain patient. Building in FinTech can be incredibly challenging and a slow process at the onset.

MH: How do you see the industry for online investment management unfolding in the next few years, e.g. in light of legacy players like Schwab rolling out Intelligent Portfolios?

EB: I think everyone has taken notice that there is an enormous demand for a product like ours. The category will definitely become more crowded which most people would consider a challenge, but we really only see opportunity. As more of these companies enter the space, people will research the various options and we are confident that we’ll come out on top with the best product on the market.

My biggest piece of advice would be to remain patient. Building in FinTech can be incredibly challenging and a slow process at the onset.

MH: How do you feel about being part of the NY tech / FinTech startup scene? Do you envision having other locations, or do you think you’ll stay focused on NY?

EB: We love being part of the NY tech/FinTech startup scene. There is incredible talent in this city and it is one of the core reasons we chose New York to start Betterment. We have no plans to open offices elsewhere at this time.

MH: How would you describe the culture at Betterment?

EB: Incredible, we pride ourselves in having a great culture. We have a very fun, hard-working team. It is a very open, transparent environment.

MH: What keeps you awake at night?

EB: I think about our customers nonstop and what the next thing should be that we build for them to continually improve their experience.

betterment mobile apps MH: Can you share anything about the future of Betterment?

EB: We are growing so fast at the moment and seeing so much opportunity! We will continue to grow the team and expand our current offering and advice.

MH: What is the number one suggestion you would give to any FinTech startup?

EB: Don’t rush the process when first starting out. Take your time and make sure that you have built the best possible product you can before launching.

MH: Thanks for sharing your “founder’s story” and best wishes for continued success.

Note: Betterment will be a host company for John Battelle’s NewCo NYC event in May, so engineers, product managers, designers (or any fan of Betterment) can visit NewCo’s site to sign up for to visit Betterment’s offices (seating is limited).

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FinTech in Ireland

With a name like Michael Halloran, I thought it only fitting to give Ireland its due on St. Patrick’s Day by pointing out a few of the more exciting startups and established fintech companies in Ireland.

Irish Startups

Penny Owl is a modern, fintech startup founded in Ireland but with support from US as a graduate of the commerce.innovated startup accelerator from MasterCard and Silicon Valley Bank. A winner of Best Android App with partners like SF-based Common Sense media, I think Penney Owl will be a fintech success story.

Datahug is a cool company, whose cofounder, Connor Murphy (no longer directly involved in the business) I had the chance to meet at Morgan Stanley’s London CTO Summit in 2013 and at a New York Enterprise Technology Meetup. It’s a CRM solution used by VC’s and other financial services firms.

Once hailed as Dublin’s most promising startup, its product enables ways to measure the strength of personal relationships within and across companies using email, phone and other data. Datahug is expected to grow as a result of its partnership with Salesforce, which bought a stake in the company.

Another exciting startup is Blackhawk Analytics that provides a cloud-based solution to enable firms to increase the efficiency of their banking costs and discover trapped cash.

Information Mosaic is a third up-and-coming leader, focused on post-trade technology. It was just profiled in Banking Technology magazine in Jan. 2015.

FinTech – Enterprise Software

Barracuda FX is based at the International Financial Services Centre (IFSC) in Dublin and provides a next generation Order Management and Execution platform for FX, with a truly open platform. They compete with Broadridge, which just acquired Two Four’s FX platform (for which I negotiated a license for Morgan Stanley years ago).

Fenergo is a Dublin-based award-winning provider of client lifecycle management, used primarily by large banks like BMO, State Street and Bank Leumi, although it can be used by other institutions. It’s raised $5m+ in funding to date.

FINEOS is a private Dublin-based software firm, founded in 1993, with over 350 employees that serves the life, accident and health insurance industry across group and individual markets, with major market share in the US, and a global presence.

Rockall Technologies is another Dublin software company, with a market leading position in collateral management (across wealth management, trade and wholesale banking). Its software is used by banks around the world, as well as by both Wells Fargo and First Republic Bank, here in San Francisco.

FinTech – Payments

Monex is a Killarney-headquartered data processing business that handles over €20bn worth of credit card transactions, and provides dynamic currency conversion for near real-time processing of card transactions.

Galway-based Fintrax is another processor that was sold to private equity group Exponent last year for €170m. Fintrax processes credit card transactions and handles VAT refunds for a variety of businesses and has over 600 employees.

Realex Payments is one of Europe’s largest and fastest growing online payment gateways, processing payments valued in excess of €28 billion per year for 12,000+ retailers across Europe. Based in Dublin, the company has 150+ employees.

FinTech Ecosystem

With my previous exposure to the FinTech Innovation Lab in New York and London, I was glad to see the establishment of a FinTech Innovation in Dublin in 2014 year, bringing Accenture and a consortium of banks to help foster fintech startups.

There’s also an active FinTech Ireland Meetup for those that want to read up (or drop in if you’re in Dublin) on the latest.

SF Connection

With so many Irish coming to San Francisco in the 19^th century, it’s no surprise how many street names are Irish surnames, like O’Farrell, Geary and Kearny.

Today, Irish-Americans like “super angel” Ron Conway, KPCB Partner Matt Murphy, and Bracket Computing CEO Tom Gillis are here in SF / Silicon Valley, along with Patrick and John Collison, the Irish brothers who co-founded Stripe.

(I find it a striking Stripe’s HQ in the Mission is just blocks from John O’Connell High School, named for a businessman born to Irish parents living in S.F. in 1873. The Collison brothers moved from Ireland to S.F. nearly 150 years later.)

So the tradition of the Irish working in business and technology seems to continue to this day. Sláinte ague táinte!

Happy Saint Patrick’s Day

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I’d like to thank Deirdre Moran of the IDA and Edel Coen of Enterprise Ireland for their help with this post.

Apple Watch & Apple Pay

There are plenty of places where you can read about Apple Watch, but I’d like to focus on how Apple Pay fits into FinTech world and its digital banking potential.

After the event hosted by Tim Cook, Apple Watch has been winning a lot of praise for its innovation. Despite a lot of comments out there, my personal favorite comment was David Pogue’s tweet:

I also loved that Tim Cook said he’s been wanting something like this since he was 5 years old. But from a FinTech perspective, beyond Apple Pay, one announcement that stood out for me today was launch of Mint for the Apple Watch.

It’s fascinating to watch an entirely new third-party software ecosystem start up literally before our eyes, with other favorites including the new Salesforce apps announced today. Details on these are available in Marc Benioff’s twitter feed.

I was in Mountain View last week at Intuit, owner of Mint.com, and was impressed by recent developments, especially at the Intuit Developer Group. IDG has embraced an API and platform-centric model (see my earlier post on this topic).

With Intuit products like QuickBooks Online (QBO) and Mint.com winning in the marketplace (e.g. 1M+ subscriptions for the QBO’s cloud offering) and strategy of moving from product > platform like Salesforce, I was hardly surprised to see Mint as an early partner in the nascent Apple Watch ecosystem.

Since at both the announcement of the watch last fall, and even at today’s SF event with Tim Cook, there were not a lot of details on how Apple Pay will work with Apple Watch, it’s useful to recap what we know at this point.

According to a recent report from CNET, who caught up with Edy Cue, SVP of Apple, last week, customers have an option to lock or unlock the Apple Watch, so that you don’t have to approve each transaction on the watch.

What’s fascinating is the the way most customers can use their Apple Watch with Apple Pay by authorizing it when they put on their watch, so that they don’t need to have their iPhone with them to use it.

Seen as a clever and novel approach to authentication, as reported in GigaOM today, wearing the watch to maintain approval for the payment, means if you take off the watch (or it’s stolen), the watch recognizes this and payments will no longer work (unless you reenter passcode or pair it with iPhone).

It’s a new way of thinking about multi-factor authentication that seems natural to me. I can envision lots of digital banking innovation with Apple Watch.

Today’s news also makes it clear Apple Pay’s hardware-based (so-called “secure element” that introduces hardware based security) and tokenization of credit card info is used by both phone and watch, so you don’t need the phone to be secure.

A lot of commentators, included Benedict Evans, have said the there’s a “delight” vs. utility story to the Apple Watch, and I think that’s true, just as Apple Pay is more than a story of how to make an in-store payment.

Personally, with Apple Pay, for instance I love being able to download an app and authorize transaction using TouchID (vs. having to put in Apple ID password).

My wife’s already asking for the Apple Sport Watch for her birthday next month (I guess I’m lucky she didn’t fall for the Apple Watch Edition).

If you missed my post last week on the launch of Samsung Pay and Android Pay, you can read it here, however it’s striking that at last week’s World Mobile Conference in Barcelona, as many pointed out, the big banks were conspicuously absent – despite the key role of mobile to the future of banking.

I was glad to have been at Jason Calacanis’ Launch Festival last week, catching up with old friends like Adam True from Morgan Stanley. I was also glad to catch up with Emmanuel (Manny) Dounias, a private banker who focuses on tech sector.

Although there weren’t a lot of FinTech companies at Launch, the winner of the startup competition was a Bitcoin startup called Abra to help the unbanked (and those paying high fees for money transfer to developing countries).

But this week it’s all about the Apple Watch. You can read more at TechCrunch, but I suggest reading initial observations from Benedict Evans when it was announced, or reviewing AdWeek‘s summary of major brands working with Apple.

And by all means watch the keynote or ad video on Apple’s site since I think that to understand Apple Watch you have to see and experience it, rather than just read about it (so I’ll stop writing).

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Android / Samsung Pay

It’s been a whirlwind week in FinTech, with some big news coming from the Mobile Worldwide Conference in Barcelona.

The first big announcement was Samsung with the announcement of Samsung Pay. Samsung clearly doesn’t want to be left out of the revenue stream, or have its phones stand out (vs. Apple Pay on iPhone and Apple Watch) for lacking a key feature.

Although Benedict Evans didn’t comment on the functionality yet, so I’ll have to wait for a A16Z podcast on what all these mobile payments developments mean from a mobile ecosystem perspective (but I liked his retweet of the following summary):

Smsung S6 tweet

It seems to me while Samsung Pay is less revolutionary in the way Apple Pay is (and can be used for online purchases as well as in retail stores), it will still capture share in mobile payments by using Loop Pay’s technology that enables pay-by-phone at older US payment terminals, by making your phone (cleverly) appear to be a nearly card with a traditional magnetic stripe.

This matters since until October 2015 in the US, merchants may lag on upgrading their point-of-sale terminals to work with NFC, since until then, the rules on liability for cards without Chip-and-PIN (so-called EMV rules, for Europay MasterCard Visa) limit the merchant’s liability for fraud.

For more on Samsung Pay, there’s a video from CNET on the news at this link.

(It’s nice to hear of old-fashioned hardware innovation, so hats off to LoopPay, plus Dynamics and its founder/CEO, Jeff Mullen, who continues to do deliver amazing things with cards that mimic and dynamically rewrite traditional mag stripe. Their innovation led to a strategic investment by MasterCard.)

The other big announcement at Barcelona was the launch of Android Pay.

A key take-away here is that Android Pay is not really a traditional “product” for consumers, but rather more of a payments framework and API layer, according to Sundar Picha, the Googler in charge of Android Pay.

It also doesn’t replace Google Wallet, but Google Wallet in the future will ride on top of the broader Android Pay platform. For more information on Android Pay, there’s further detail in this week’s article in The Verge.

I’ve written in the past about the growing importance of open API’s in banking and payments, so to me Android Pay plans seem a smart strategy to me of focusing on what it takes to foster a global platform vs trying to build a product, especially in light of the differences between the Android ecosystem (open) vs. Apple’s (closed).

It will be interesting to see if Android Pay will become a major world-wide platform. I think the smart money feels the jury is still out, given past experience of Google Pay but there’s no denying fact that Android has been “kicking it”, as Morgan Stanley tech banker, Dave Chen, reminded me last year (despite recent hyper growth at Apple).

I think we will all get what we want – Apple devotees like me will be glad to use Apple’s products, while others in US and around the world get the opportunity to use Android Pay and Samsung Pay to take share from traditional payment methods.

The third piece of news this week was PayPal has bought Paydiant for its$280m in order to bring its QR Payment technology for retail payments to its 160 million PayPal users. There’s a certain wow factor to its solution — having used it at Money 20/20 — that’s hard to explain without completing a payment using the platform.

I’d met Jed Rice, Paydiant’s SVP of Business/Corporate Development, at Money 20/20. He tells their story well and the demo made a big difference to my understanding of the product. My tip: If you want to see what Paydiant brings to PayPal, check out the video from Paydiant (that includes a product demo). Here’s a good recap from Fortune of why deal makes sense for PayPay.

Had I known how much FinTech news coming, I might have gone to Barcelona this week, however I was glad to be here in San Francisco attending Jason Calacanis’s developer and startup-focused festival, Launch, at Fort Mason in SF. I finally got a chance to meet Peter Thiel, when he signed by copy of Zero to One.

Another event in SF was Morgan Stanley’s TMT event, which included a presentation by Adam Nash on WealthFront today. They announced that they now have $2B in assets under management.

(I’m already starting to revisit some of my earlier skepticism about the robo advisor category, especially given the recent market success and funding for Betterment led by Francisco Partners).

While there’ lots to report from Launch, including a few FinTech stories, I’ll save them for a recap later this week. But rather than wait, I’d like to close with a video from my favorite company at the festival, called Connect, a social media mobile app.

Check out this inspiring video on their site called Bring Social Back.

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