Recently, we have observed that many Fintech start-ups are talking a big game about world domination. These entrepreneurial buccaneers, and the venture capitalists backing their soaring valuations, seem supremely confident that they can storm Wall Street and grab all the loot while longstanding Financial Services lubbers wipe away their QE encrusted eyes. Some point to the well known CB Insights chart, the Unbundling of a Bank (see here) and express a compelling case for why they can do their part to disembowel the entrenched institutions in their given vertical.
While Fintech start-ups are having a richly deserved moment in the sun, we do not believe that they are poised to topple Wall Street as we know it. Despite regulatory strictures, unproductive legacy assets, turf protecting IT departments, brand damage, capital shortfalls and other headwinds that have paved the way for upstarts, industry mainstays will not be as vulnerable in perpetuity. They also benefit greatly from having systemic importance to our economy, captive customer bases and governmental protections that incumbents in other sectors do not enjoy. These “assets” could begin to cap the velocity of start-up driven Financial Services disruption.
The Big Pharma Playbook
As the Fed seeks to (very) gradually normalize the cost of money and the Great Financial Crisis grows distant, the Fintechization of our nation’s longstanding banking, trading, financial data and investment sectors is poised to blunt the swords of outside disrupters. With it, instances of big firms being outclassed by a few developers with no industry experience but an awesome algorithm may become less frequent. In its place, a more symbiotic relationship should follow as Wall Street embraces the Big Pharma playbook: search for dynamic young companies, start writing checks and scale your newly acquired innovation on your powerful platform.
Wall Street will also evolve from within at a quickening pace. Take Goldman Sachs, for example, which in the last several months has made major moves to burnish its Fintech credentials. Those actions include creating an online lending division, buying several billion dollars worth of online deposits, offering an open source analytics platform for its trading clients and co-founding a consortium (with J.P. Morgan and Morgan Stanley) to create a powerful, new Big Data company.
Direct Investments and Accelerators
Fintechization has picked-up steam with others such as Banco Santander, BBVA, Blackrock and Citigroup, which have all made multiple investments in young companies ranging from back office plays to money transfer start-ups. Accelerators sponsored by the likes of Accenture, Barclays, Bloomberg and Wells Fargo have also gained traction in recent times. The goals of these investments and initiatives vary, but in general, these firms are all interested in becoming cool again. And there’s no better way of getting cool than to own a piece of the edgiest companies and co-opt their pirate ethos.
We think Fintechization is poised to accelerate in the upcoming years as recent internal and external investments begin to bear fruit. We may still see a few more high-profile Fintech IPOs come to fruition, but in the next few years, established Financial Services players will likely do a better job at incorporating new innovations into their core product offerings. Smart Fintech start-ups should recognize the benefits of putting away their eye patches, donning a shirt with buttons on it and changing their tone as Wall Street regains its footing.