Millennial MBAs, NextGen FinTech & the Rise of the Micro Conference

Continuing the millennial and fintech discussion, I recently attended the country’s largest (business) student run digital media conference, the Berkeley HaaS School of Business’ PLAY — a show curated by high achiever millennials, in which SoFi and PayPal were major sponsors, where some 20% of the agenda was focused on financial services disruption, and 25% of the exhibiting, pre-funded start-ups proposed some kind of re-invention of personal finance.
My learnings:

  • In an unstructured analysis by Foundation Capital, roughly 3500 fintech start-ups have received funding in the past 10 years, with some 60-70% started in the past 4. This indicates that many new fincos are just now coming out of their incubation and beta periods.
  • To be perfectly clear, SoFi aspires to do away with your old school banking relationships (if you’re a millennial). SoFi’s narrow target allows the company to rely less on lead generation vehicles – a cost and competitive advantage.
  • As a whole, SMB lending is in trouble, and that’s exactly where nextgen fincos are finding opportunity.
  • Lending Tree portfolio extends to medical and educational loans though SMB lending is still its core. The company has loaned $13 billion so far, with $9 billion in just the past year.
  • Credit Karma claims 45 million members – representing a quarter of all US residents who have a credit score. As a partner to lenders, the company is currently focused on facilitating the student and SMB loan process, but counts as well amongst its customers a broad base including top 10% earning individuals such as consultants, lawyers and bankers.
  • The bulk of finco competition resides on the supply front, with many companies competing for traffic and attention – this situation likely to force many companies to focus on a specific niche, and to become brands and product lines within larger well-resourced entities.
  • Lending Club on average reduces the debt load for SMBs and consumers by 7% versus their old loans.
  • Banks for the most part are embracing the fintech newcos (know they enemy), but not so much Sallie Mae which is finally seeing a threat to its student loan monopoly.
  • That said, SoFi has originated $6 billion in student loans so far in 2015, tiny in relation to the $1.4 trillion market.
  • Fintech newcos are developing their own models of risk, with a focus on cash flow and income versus credit score benchmarking. SoFi no longer uses FICO scores as a “blunt instrument.”
  • That said, most established newcos are not using un-tested “wacky” data like social media profiling either – primarily to adhere to regulations and best practices such as Fair Lending rules.
  • FDIC reports show that there’s been a rise in bigger loans above $1 million – up 55% — while small loans (i.e. for SMBs) are down 24%. So the customer base for alternative lenders is growing, with “even young white guy business owners” having trouble getting SMB loans via traditional outlets today and seeking other means of financing versus a past demographic of primarily black and Latino business owners from the inner city and other less affluent geographies.
  • Mobile usability still has a long way to go in fintech, with only a small handful of newcos allowing for account opening via mobile.

My take:

  • Contrary to some naysayers who believe that we are about to hit a fintech bubble, we are not yet at the peak of the next gen finco wave as companies who have been in stealth mode the past 1-2 years are now emerging, with the strongest finding their product-market fit in the coming year.
  • Niche in fintech is big business. Whether it’s taking SoFi’s stance of focusing exclusively on millennials, or addressing a single sector area such as auto loans, consumer acceptance of handling their finances online and via mobile has reached enough critical mass to support these niches.
  • FICO score will be largely irrelevant in next 5 years. While the company has remained under the radar with the Consumer Financial Board, which is too busy attacking the banks to yet look at the underlying flawed foundation/credit bureau underpinnings of people’s financial lives, the fintech newcos are heeding consumers’ pain and addressing it appropriately with their own measures and credit risk models.
  • The success that alt lenders have with SMBs will continue to accelerate as new small business owners discover the advantages of going with non-traditional lenders and the word spreads organically throughout local business communities. As some of these businesses grow into small franchises over the next decade, they will continue to be proponents and users of crowdfunding and alternative lending as their loan size needs increase and in some cases, become permanently disenfranchised from traditional lenders.
  • Mobile is still greenfield for fintech. The companies that figure this out will rule in the next 5 years, regardless of their position today.

While small compared to more formal tech industry events, the PLAY conference is representative of a new wave of bringing tech to a wider audience in the spirit of Dreamforce (i.e. providing substantive sessions and/or high profile speakers at low cost/free tickets) and content curation in which students or “non-experts” are developing independent voices and running their own home grown events versus passive attendance at more established/massive industry events. Panels and speakers tend to be less scripted, if at all, engendering honest and meaningful discussion. While not entirely free from “pay for play,” these under the radar “micro conferences” are at the least refreshing and gaining mindshare as they literally allow everyone to be in the same room, and can be highly insightful when attendees’ and presenters’ guards are down. We’ll be covering more of these organic, niche events in the coming year.

Fighting for Their Financial Freedom: Millennials Reinventing FinTech

One of the more enlightening sessions at this year’s Money 20/20 payment industry conference (9,000+ attendees) featured new findings from a Foundation Capital survey on Millennials and Financial Services. The survey found that U.S. Millennials as a generalized group (those born between 1984 to 1997) are financially stuck – they have bank accounts, but are swimming in student debt and thus have no money to spend on investments and the extras after food and rent. Not surprisingly, most Millennials do not believe that what savings they have – mandatory Social Security contributions – will actually materialize for them in retirement.
And as indicated by such emerging social constructs as the post-college group house, Millennials are essentially stuck in the bottom tiers of the needs pyramid — not only can’t they save for big purchases, but they are also postponing milestone life events such as getting a place of one’s own, marriage and family.
Ergo you could say that millennials – even more so than the capitalist generation before them (i.e. the wolves of Wall Street) – are obsessed with money. And how it holds them back.
At the same time, Millennials are very facile with their mobile financial apps and rely heavily on them for financial information, services and purchase decisioning. They may have big brand bank accounts, but to them the brick and mortar branch, the ATM, even physical money– are becoming less relevant.
All the above lays the groundwork for continued massive disruption in financial services as Millennials fixate and act on their [lack of] money obsession and the status quo education and financial systems that have literally left them living in their parents’ basements.
And thus driven by the financially disenfranchised (but still optimistic) Millennials, a new FinTech Renaissance is emerging. From alternative methods of lending like SoFi ($1 billion capital raised in Sept. 2015 to help consumers refinance their student loans) to services focused on helping consumers to understand and take control of their credit scores (Credit Karma raised $175 million in June 2015), to bitcoin and other cryptocurrency technology that represent a new payment rail and partial replacement for fiat ($1 billion+ investment in 2015 with blockchain development companies like Chain raising $30 million), Millennials are taking down – or at least making less relevant — the traditional financial power structure one sector at a time.
Over the course of the next year, we’ll take a look at some of the emerging financial services disruptors and trends coming out of Y-Combinator and other incubators and launchpads such as Draper FinTech Connection and Plug and Play’s Fintech Accelerator.

The Internet of Things and Networks of Everything

The Internet of Things (IoT) has been a hot topic for several months now, and there are new stories about it in the business and technology press on a daily basis. While it’s easy to view these as hype at worst and vision at best, there is no denying that purveyors of hardware, software and services are dedicating and creating the resources they will use to capitalize on the IoT. Last week alone, there were three announcements that show just how quickly the IoT market is progressing and how big of a business opportunity it is.
On Monday, September 14th, IBM formally launched a distinct IoT business unit and named former Thomas Cook Group CEO Harriet Green as its leader. The new IoT unit is the first significant step by IBM toward delivering on the $3 billion commitment it made to IoT in March. IBM signaled in Monday’s press release that the unit will “soon” number about 2,000 consultants, researchers and developers, who will use IBM’s assets to help customers get up and running on the IoT. Those assets will likely include the Bluemix platform-as-a-service (PaaS), Watson and other analytics software, as well as the MQTT messaging protocol standard for machine-to-machine communication that IBM submitted to OASIS in 2013.
The next day, Salesforce.com used its annual Dreamforce conference as the grand stage on which to unveil its IoT Cloud. This offering has at its core a new “massively scalable”, real-time event processing engine named ‘Thunder’ (to complement Salesforce’s ‘Lightening’ UI framework). IoT Cloud connects IoT resources and Thunder rules-based workflow to route data between them, triggering pre-defined actions. For example, when an individual enters a retail store, a beacon can offer them discounts based on qualification criterion such as loyalty program status and in-store inventory levels. Scenarios such as this will be possible because of IoT Cloud’s integration with the Salesforce Sales, Marketing and Analytics Clouds. IoT Cloud is currently in pilot and is expected to be generally available sometime in the second half of 2016.
While these two announcements are important milestones in the respective organizations ability to help customers connect to and use the IoT, they do not enable them to do so immediately and risk being labeled as more IoT hype. The sheer magnitude of resources assembled for each of these vendors initiatives signals that they believe that the IoT will be both real and profitable in the not-so-distant future.
The final piece of related news from last week underscores that smaller, pure-play vendors are delivering tools that help their customers get on the IoT now. Build.io announced that Flow, its integration PaaS that had been beta released in March, is now generally available. Flow features a drag-and-drop interface that is used to connect IoT elements ─ sensors and other intelligent devices, backend systems, mobile applications and other software ─ into an integrated system. Connections are made at the API level. Like Salesforce’s Thunder, Flow uses rules-based event processing to trigger actions from IoT data. In essence, Build.io is delivering today a critical part of what Salesforce intends to make generally available later this year.

Current State of the Internet of Things and Networks of Everything

These announcements, taken together, mean that the IoT is poised for takeoff. The first sets of user-friendly tools that organizations need to connect IoT nodes, transmit their data and use it to drive business processes are available now, in some cases, or will be coming to market within a year. We are on the cusp of a rapid acceleration in the growth of the market for software underpinning the IoT, as well as the network itself.
This latest batch of IoT announcements from software vendors underscores another thing: the IoT will initially be built separately from enterprise social networks (ESNs). Many organizations, particularly large enterprises, have experimented with ESNs and a few have managed to build ones that are operating at scale and creating value. Those businesses will be turning their attention to IoT development now, if they haven’t already. They will pilot, then scale, their efforts there, just as they did with ESNs.
Eventually, organizations will realize that it is more efficient and effective to build Networks of Everything (NoE), in which humans and machines communicate and collaborate with one another using not only the Internet, but also cellular, Bluetooth, NFC, RFID and other types of networks. This construct is just beginning to enter reality, and it will take a few years before NoE get the market attention that ESNs did five years ago and the IoT is now.
At some future point, when NoE have become a fixture of networked business, we will look back at this month (Sept. 2015) and declare that it was a watershed moment in the development of the IoT. We’ll also laugh at how obvious it seems, in hindsight, that we should have just built NoE in the first place.