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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.

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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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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Monday Recap: Money 20/20 in Las Vegas

The day started early at 8am with an outstanding session on FinTech – Venture Capital: Insider Perspectives, featuring Tom Stafford of DST, Dana Stalder of Matrix, Tricia Kemp of Oak HC/FT Partners, and Ravi Visawanthan of NEA.

Key take away was agreement no one really knows if we’re in a bubble for FinTech companies; the number of new entrants is truly staggering (well over 1,400 payments plays on Angelist for example) but while some are getting Series A from the likes of Matrix, and some continue to attract growth funding to delay their IPO, from the likes of DST or Oak, “frothy” is about as far as most would go in terms of describing the market.

Although not stated often enough, it seems one driver is the emergence of mobile commerce solutions – a decade after they were heralded during the dot com bust, when I was still working at Scient. Tom spoke with clarity how FinTech is going through a transformation like enterprise software providers saw with the cloud, which can now sell into SMB’s (acquiring them more like a consumer play might, i.e. without a salesperson) and at lesser cost, due to the rise of services like AWS.

But I think he went too far to say that larger Financial Services companies don’t do customer acquisition, service or loyalty right, and will be relegated to arcane asset-liability, risk management and back-office tasks in ten years (Wells Fargo, American Express and Capital One are excellent at what he thinks of the domain of start-up’s; user experience at Wells Fargo is top notch, for instance, and AMEX wrote the book on loyalty). But VC’s will have their inbuilt bias towards new startup’s…

For all the talk of Apple Pay, it still seems no one is covering Apple Pay as well as A16Z’s Benedict Evans. I recommend checking out his late October post on his blog on Apple Pay (and listening to the podcast the day iPhone 6 was unveiled).

Stripe’s CTO Greg Brockman was terrific on payments and technology, and importance of continuous change. You can see why Stripe is at table, alongside much larger and more established companies, enabling mobile payments for Apple Pay.

I had a chat with with Arunan Sri, from Pivotal Labs, who talked about the importance of large companies learning to be more agile from both a business and development perspective, to become more like Stripe in continuously improving their products.

Key surprises — Ryan McInerney spoke convincingly on how Visa fits into the future, again by not resting on its laurels, but innovating around payment Security (giving a great example of how tokenization is more than just a buzz word and technology, it’s taking away the consumer’s fear around using their card for online purchases), and the need to be Intuitive (e.g. in today’s world, to move past old models, e.g. 7-10 days to get a new card, but issue cards in real time) and Instinctive (with Visa now creating a new digital payments platform that’s platform and device agnostic).

Kudos to Osama Bedier – clearly a crowd favorite – for a great talk on what he and Poynt are doing with their new product, which seeks to do for merchants what smart phones did for consumers. Beyond NFC, EMV, the Poynt team are offering up a cool device that merchants will want, consumers will love, and just keeps going with great partnerships and integrations with Vend for POS, Bigcommerce (e-commerce features, e.g. pick up in store) and Boom (traffic/conversion analytics).

Hill Ferguson from PayPal did a good job telling the crowd why he’s glad that the world is just now discovering payments are interesting after all, but key take-away was the 15-year vet of the firm sees us just as at the beginning of the FinTech change.

Next, a straight-forward talk on Citi’s Consumer Bank CEO, Jane Fraser who spoke on Citi’s shift to focus on urban markets, and leveraging its best practices gained in mobile-centric Asia. Good article on strategy was published in today’s WSG.

A great day overall but went out with a whimper: a bit stilted interview with CEO of Western Union on how he feels about all the start up’s trying to eat his lunch, but most surprisingly a terrible presentation on “what is banking” by the Winklevoss brothers, causing amusing tweets, e.g. “Winklevoss Brothers teaching 7,500 payments experts banking 101.”

Overall, though, Jonathan Weiner and team put together a top-notch day here at the Aria in Las Vegas.

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