Financial technology startups are attracting investors, but they are going to need the support of larger companies to get their innovations out into the market

Fintech: US investors banking on the future

The main challenge for Fintechs, according to Jeff Schumacher, CEO at BCG Digital Ventures, is to “offer customers optimal use of their money within a relatively small window of time.” A mantra which he feels should guide fledgling companies trying to succeed in what has become a booming sector. During a debate at the Collision tech startup conference in New Orleans at the end of April, the business consultant and venture capital provider discussed the future for Fintechs with Shai Wininger, co-founder of Lemonade, a startup which has set out to revolutionise the insurance sector.

Sectors set to take off

Schumacher and Wininger see two innovations as particularly promising: the blockchain and peer-to-peer services. “The blockchain is still in its early stages, it’s where the Internet was in 1996,” pointed out Jeff Schumacher, underlining: “But the potential is huge.  Aside from its use with bitcoin, the idea of a database incorporating traceability of interactions harbours almost infinite possibilities, in areas as varied as travelling without a passportsmart contracts and risk management. The blockchain is as disruptive as electricity once was!

Image d'une pièce Bitcoin sur un clavier

The P2P model enables people for example to finance themselves or insure one another. “Our objective at Lemonade is to offer an alternative to the traditional model where one company insures a large number of individuals. We want to allow these people to insure themselves and to insure others,” explained Shai Wininger. He sees this as a way of reducing both fraud and bureaucracy, while reducing the cost to the user. This model works not only for the insurance business: Lending Club for instance provides a platform for peer-to-peer lending.

If these two trends are to really take off, they will need to gain customers’ trust, especially by reducing the risks. This is what Lending Club does with its formula that enables a user to contribute a very small part of any given loan.

Fintech firms attracting investors

In recent years we have seen growing investor interest in Fintech startups.  Total global investment in financial technology companies grew from $2.4 billion in 2011 to over $19 billion in 2015. North America tops the list in terms of investment in the sector, attracting over half the funds invested by venture capital firms. Startups have been able to carve out major chunks of market share in the fields of payments (Stripe), investment (Wealthfront) and savings (Digit). Companies working to provide alternative, non-bank lending – including Lending Club, Kabbage and OnDeck – are also enjoying success.

Debate on the future of Fintech at the Collision event

Nevertheless, startups are still far from being able to compete head-to-head with traditional financial players. While US banks granted $580 billion in loans during 2014, the amount lent out via online alternatives came to a mere $10 billion.
In contrast, while major players still dominate the market, they are struggling to come up with any really disruptive innovations: “At large companies we see titles such as ‘Chief Innovation Officer’ being created, whole innovation departments taking shape… but it’s hard for a big organisation to change its fundamental structure, its culture, its DNA,” argued Shai Wininger.

Cooperation called for?

So might it be in the interests of startups and major financial institutions to work hand in hand? The newcomers are well-placed to offer innovative ideas to the incumbents, benefiting in return from financing and distribution networks that are extensive enough to push their ideas forward. “A startup cannot radically transform an industry. Change will come from a combination of new entrants and traditional players who have the necessary funds to make a difference,” predicted Jeff Schumacher.

See article on Fintech startups and the banks by Louis Treussard, CEO & Prospective Director at L'Atelier BNP Paribas

Shai Wininger explained in detail how he sees the situation: “I think it’s a two-phase approach. First of all, innovation has a high chance of coming from new entrants, who have the freedom and flexibility to act. But at some point they have to face the challenge of growth, and that’s where large companies can take over and use their channels of distribution to scale the innovation nation-wide and then globally. It’s easier for them to acquire a technology from a startup and to incorporate it into their structure than to try and develop it internally”.


By Guillaume Renouard