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.

Goldman Sachs and a bank consortium launch Symphony

A consortium of 15 banks — led by Goldman Sachs — are bankrolling a messaging and networking platform, Symphony (see Consortium of Leading Financial Firms Invest in New Communication and Workflow Platform — Symphony). David Gurle, an executive with deep messaging experience at Microsoft, Skype, Avaya, and Perzo (acquired by Symphony in September), assumed the role of CEO in October.

David Gurle source: linkedin

The effort appears to be motivated by the financials of Bloomberg terminal use —  $24,000/user/year — and as a result the consortium has dropped $66 million into Symphony, a standalone company. According to Kevin Duggan of the New York Post, Goldman has over 19,000 users, and other members of the consortium are using the tool as well.

Symphony acquired technology from Markit last year, and has incorporated collaboration and messaging assets of that company. Markit was also supported by the bank consortium.


Markit screen


In the recent press release, Symphony states that the core technology has been handed over to an unnamed ‘open source foundation’.

I hope to get a demo of the platform in the coming weeks.


Google is looking to bring a mortgage comparison tool to the U.S.

Ready to buy a house? Google would like to help you get a good mortgage: New job listings suggest that the search giant is looking to bring its mortgage comparison tool to the U.S. market as part of its Google Compare service.

[company]Google[/company] has helped would-be homebuyers in the U.K. since late 2012 to find mortgages via Compare, which also helps U.K. residents to find deals on credit cards as well as travel and auto insurance plans.

Now, the company is looking to hire mortgage specialists in both the Bay Area and Seattle for Compare, with ads specifically spelling out that potential candidates have to have worked at least three years as licensed loan originators. A completed Nationwide Mortgage Licensing System (NMLS) exam is also encouraged, and candidates are advised that they “may not also be acting as the licensed individual for any other mortgage entity while working with Google Compare.” Google didn’t respond to a request for comment for this story.

Google is currently only operating Compare as a credit card comparison tool in the U.S., but the New York Times revealed earlier this year that the company has plans to bring auto insurance comparisons to U.S. consumers as well. In addition to mortgage specialists, Google has also been looking to fill other positions to staff up the Compare team, with one ad reading in part:

Come join the Google Compare team as we build comparison ads products that provide great answers to our users in the financial/insurance verticals. We operate as a startup within Google, exploring interesting new ideas around how to present more financial choice to users and save time by increasing access to financial information.

Financial information that Google could profit off, one should add. Compare is an ad product at its core, meaning that Google earns money every time a consumer takes an action based on its recommendations. The more money at stake, the higher is Google’s potential cut, which is why mortgages are especially interesting.

And the company does have a very potent funnel: Google Trends shows that search interest in mortgage loans is almost as big as interest in credit cards, and a lot higher than in interest car insurance plans. Google already launched a mortgage calculator in its search results last month. Soon, it may follow up by actually letting you search for mortgage rates from participating lenders right on its home page as well.

Stellar, South African nonprofit to bring digital savings to young girls

When Stellar launched last summer, Joyce Kim like any other startup exec wasn’t getting much sleep and found herself trolling Twitter in the middle of the night, San Francisco time. In September, Kim, the co-founder and executive director of the Stellar Foundation, posted a tweet, asking if anyone wanted Stellars, a cryptocurrency, to top up their pre-paid mobile phone cards. All the way over in South Africa, Simon de Haan responded yes.

It wasn’t that de Haan was short on mobile phone minutes. Instead, as the CTO of the Praekelt Foundation, he tweeted back to Kim that he would “like to find ways of making the transfer of funds to & between people, who only have a non-data feature phone, super easy.”

Today, Stellar plans to announce its new integration into Vumi, an open-source messaging platform run by the Praekelt Foundation, a South African non-profit.

“When Joyce sent out that tweet I jumped on it because it was very clear that, if it worked, the potential for the majority world (and first & foremost Africa, being our home base) would be enormous,” de Haan said in an e-mail.

The Praekelt Foundation initially developed Vumi, a messaging platform similar to WhatsApp, for philanthropic reasons. Instead of a consumer, social application, the Foundation applied it to altruistic arms, like MomConnect, a state-endorsed maternal network supported by UNICEF and the Bill & Melinda Gates Foundation that messages registered pregnant mothers with reminders about doctor’s appointments and other important pre-natal information. Other countries have used Vumi to register voters in Libya or bring citizen journalism to South Africa during an election season. And even Facebook’s Internet.Org has noticed the South African nonprofit, bringing some of its apps for moms connecting to the internet for the first time under its free app umbrella in Tanzania.

Adding money to the mix

Stellar is a decentralized payments network, funded in part by payment processor Stripe and supported by the Stellar Foundation, that allows users to easily send money like e-mail. It’s not just limited to its native cryptocurrency, Stellars, though — it can be used to send anything from dollars to South African rands. (Its appeal to a number of people and currencies also caused a major headache when a ledger fork problem was discovered in the Stellar network in December. Kim assured me that’s being resolved and a new version of code will be released in a few months.)

By adding Stellar as a payments platform, Vumi is getting a way to process payments for the first time. It’s an attractive prospect — thinking down the road, a government could send a pregnant woman money for a bus fare to get to a clinic, theorized Kim (Full disclosure: Kim worked with Gigaom founder Om Malik in 2007 on the Gigaom Show). “Because both Stellar and Vumi are open source, it will be possible for other organizations to include and extend the Stellar Savings application to enable them to build unique financial inclusion products suited to the developing world,” said Gustav Praekelt, CEO of the foundation, in an e-mail interview.

In the coming weeks, the Praekelt Foundation plans to launch a new messaging app designed for young girls in developing countries. But as messaging apps evolve, it won’t be for trading emojis and stories back-and-forth. Instead, the Praekelt Foundation wants to offer young South African girls the chance to start a digital savings account that uses an alternate currency they’re likely to swap: airtime minutes.

“We know that girls are familiar with the concepts around buying and transferring airtime, and felt that this would be the best avenue to introduce them to the concept of savings,” said Praekelt, the CEO. “Of course, by using stellar as the underlying currency infrastructure we will be able to extend this product (and future applications), to to work across many countries, currencies, banks and other incentives.”

Adding wallet services to a messaging app may not be new to developed markets. Snapchat, which is now a hybrid publishing and messaging platform, added SnapCash to allow its users to send money back and forth. Other companies, like Microsoft, are also spotting the potential in the budding banking and e-commerce market of Africa. However, many of these require banks or credit cards — things young girls in South Africa or in any other developing country may not have. Instead, they have phones that come loaded with pre-paid mobile minutes. Using the Praekelt Foundation’s app, a young girl would be able to easily swap, and more importantly, store their Air Minutes.

When I mentioned that this integration seemed like a limited market (young South African girls who have downloaded this app), Kim was quick to correct me. “It’s actually a huge audience,” Kim said. “This can reach where traditional financial services never have.”

And she’s right. Many banks and even software developers don’t spend time developing for a populace who may have little money in their bank accounts and only swap in small transaction amounts — we’re talking minutes of phone calls here, not hundreds of dollars. More importantly, Kim says, it’s taking Silicon Valley code and applying it to a problem that can have a domino effect in a young girl’s life, teaching her financial skills and how to save money.

“It’s using these protocols to have an immediate impact on people’s lives,” Kim said. “That’s just something we need to see more of in this space. The fact that it’s in developing world is amazing.”

This story was updated at 10a.m. to add comment from de Haan.

New from Watson: Financial advice and a hardcover cookbook

IBM has recruited a couple of new partners in its quest to mainstream its Watson cognitive computing system: financial investment specialist Vantage Software and the Institute of Culinary Education, or ICE. While the former is exactly the kind of use case one might expect from Watson, the latter seems like a pretty savvy marketing move.

What Vantage is doing with Watson, through a new software program called Coalesce, is about the same thing [company]IBM[/company] has been touting for years around the health care and legal professions. Only, replace health care and legal with financial services, and doctors and lawyers with financial advisers and investment managers. Coalesce will rely on Watson to analyze large amount of literature and market data, which will complement experts’ own research and possibly provide them with information or trends they otherwise might have missed.

The partnership with the culinary institute, though — on a hardcover cookbook — is much more interesting. It’s actually a tangible manifestation of work that IBM and ICE have been doing together for a few years. At last year’s South By Southwest event, in fact, Gigaom’s Stacey Higginbotham ate a meal from an IBM food truck with ingredients suggested by Watson and prepared by ICE chefs.

Source: I

The IBM food truck.

But even if the cookbook doesn’t sell (although I will buy one when it’s released in April and promise to review at least a few recipes), it’s a good way to try and convince the world that Watson has promise beyond just fighting cancer. IBM is banking on cognitive computing (aka artificial intelligence) to become a multi-billion-dollar business, so it’s going to need more than a handful of high-profile users. It has already started down this path with its Watson cloud ecosystem and APIs, where partners have built applications for things including retail recommendations, travel and cybersecurity.

Watson isn’t IBM’s only investment in artificial intelligence, either. Our Structure Data conference in March will feature Dharmendra Modha, the IBM researcher who led development of the company’s SyNAPSE chip that’s modeled on the brain and designed to learn like a neural network while consuming just a fraction of the power normal microchips do.

However, although we’re on the cusp of an era of smart applications and smart devices, we’re also in an era of on-demand cloud computing and a user base that cut its teeth on Google’s product design. The competition over the next few years — and there will be lots of it — won’t just be about who has most-accurate text analysis or computer vision models, or who executes the best publicity stunts.

All the cookbooks and research projects in the world will amount to a lot of wasted time if IBM can’t deliver with artificial intelligence products and services that people actually want to use.

Hey, IT, want to innovate? Become a network

Innovation may be an aging buzzword, but IT execs are only too happy to hear their CEOs parrot it. CIOs can get their seat back at the executive table if they can help turn their company – and its product – into networks.