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.

No, you really do need a CIO…and now!

For those that follow my writing, this post may have a familiar ring to it. Unfortunately, there is a reason I’m writing about this yet again as the point still eludes many.

The curious case of Acme Inc

Take a recent example for Acme Inc (company name changed). Acme is a mid-sized organization without a CIO. I spoke with the CEO and another member of the executive team that were trying to solve tactical technology and information problems on their own. In this case, Acme is experiencing solid growth of 50% CAGR. They believed they were being strategic in their technology decisions. The truth was far from it. It was painfully apparent they were way out of their wheelhouse, but didn’t realize it. In a way, they were naive that the decisions they were making were locking them into a path where, near-term, the company would not remain competitive. But they didn’t know that. They were looking to solve a technology problem to support their immediate growth trajectory without thoughtfulness of the opportunity. They were also relying too heavily on their technology providers whom they believed had the company in their best interests. Unfortunately, this is not a fictitious story of what could happen to a fictitious company. It is a real situation that occurred with a real company. And sadly it is one of many.

Trust is incredibly important in business today. There is no question. But as one mentor once taught me many years ago: Trust, but verify. In the immortal words of Deming “In God we trust, all others bring data.”

What is a CIO?

What is a CIO and do I need one? This is a question that many chief executives ask as their business evolves. I addressed a similar question about the CDO in ‘Rise of the CDO…do you need one?’ last year.

For small to mid-size enterprises, the conversation is not taking place soon enough. Many are still contemplating how to task the IT manager or director with more responsibility. Or worse yet, the responsibilities are being shared across the executive team. In one example outlined below, the results can be catastrophic.

So, when do you get your first CIO? And if you have a CIO, do you still need one? Isn’t the CIO’s role simply about managing the computers? In a word, no.

Do I need a CIO?

The short answer to this is yes. From small to large enterprises, the need for a CIO is greater today than ever before. Many will see a CIO and their organization as a cost center that eats into the bottom line. If so, that is a very short-sided view. Today’s CIO is very strategic in nature.

More than ever, business relies heavily on technology. But more than the technology itself, it is how it is applied and leveraged that makes the difference. The how relies heavily on context around business value and applicability. It requires someone, the CIO, to make the connection between business value across multiple disciplines and the technology itself.

Can other executives provide this capability? No. They can provide a different caliber of tactical implementation, but not the cross-functional strategic perspective that a CIO brings to the table. And it is this cross-functional strategic perspective that brings significant value to differentiate companies.

Information is the currency of business. It is what drives business decisions that will affect the success and failures across a myriad of dimensions. The CIO is the best position to understand, drive and expose value from information. The value of the information

What does CIO stand for?

This seems like a perennial subject. What does the ‘I’ in CIO stand for? Information? Innovation? Inspiration? Integration? The bottom line is that the I stands for the same thing is has always stood for; Information. Today’s business is driven by information. Technology is simply an enabler to leverage information. Integration, innovation, etc are all functional means to drive the value of information to a company.

If information is gold, what is technology? Technology is similar to the mining and refining equipment to extract and process the gold. Without it, the gold may be discovered, but in small quantities using ineffective means. A major factor in today’s business is speed. Access to information quickly is paramount.

The evolving role of the CIO

The CIO’s role (past and present) is far more complicated that many appreciate. A CIO is really a business leader that happens to have responsibility for IT. In addition, a CIO is really a CEO with a technology focus. A CIO is strategically focused and able to traverse the entire organization at the C-level. That last attribute requires a level of experience very different from the traditional CIO.

In the case of Acme, a CIO would be a great asset moving forward.

The organizational challenge of mobile app development

With mobile application development a persistent priority within the enterprise, most IT organizations find several common challenges among their efforts:

  • The creation of an effective, consumer-level, customer experience is not easy for many traditional developers.
  • Existing enterprise IT infrastructure does not lend itself to mobile applications support.
  • Mobile application development is not a one-time event, but rather a continuing process of ongoing innovation.

Customer experience presents one of the primary opportunities for a business to differentiate itself, and increasingly customers are interacting with companies via a mobile device. In many ways, the challenge is organizational, as IT departments struggle to gather the resources and create the environment required for successful mobile innovation.

Banks grapple with developing the mobile channel

Retail banking is one vertical where the greatest demands on mobile have converged: banks serve consumer and small business markets with complex, highly-regulated products that have the highest of security requirements.  Though mobile phones are consumer-oriented devices, banks in general have struggled to bring a consumer-level customer experience to their complicated mobile apps. But banks are investing heavily in the channel, and they are learning how to create an environment for successful app development and delivery.

Several recent developments in the financial sector provide indicators of how mobile application development can be both innovative and institutionalized:

  • NASDAQ has recognized the importance of the customer experience in using mobile applications, and as Wall Street Technology reports, has purposely brought in a cadre of designers far afield from banking technology to create their investor relations customer experience. The company decided it is better to bring in top-level designers and introduce them to financial services, than to take experienced financial services developers and introduce them to top-level design. Thus the firm formed a design team with experiences as diverse as online retail, Disney, Broadway theater, design agencies, and nonprofits. The team spent six months learning the NASDAQ business environment before creating its new app for investor relations professionals.  As Michael Cotter, the SVP of corporate solutions at NASDAQ OMX put it, “I think user experience is a strategic differentiator. I fully believe that the end user experience is what drives value.”
  • Similarly, the consumer driver app Uber has become something of a model for bank technologists. Uber was both the highest-rated non-financial mobile app among a panel of bankers and among the inspirations for JPMorgan Chase’s new mobile banking app.
  • From the other direction, banks are finding that aspects of their commercial-level applications can scale down for the consumer mobile banking market. Banks have already built applications that enable their commercial customers to see multiple accounts, keep running balances, make various types of transfers, and the like. Many of these same capabilities can be translated to consumer and small business products, and if they have been developed on a common mobile application platform, that translation is all the easier.
  • Even mid-sized banks are finding value in mobile application platforms. The MA-based Eastern Bank, with $8.7 billion in assets, opted for a mobile development platform to enable the firm to keep innovating with its mobile products. Development platforms will become viable for more SMEs as the tech market packages such innovation engines for smaller and smaller enterprises. This approach can be seen as part of a broader need to update financial services technology infrastructure.
  • A recent report on mobile banking highlights the receptivity found in the small office/home office (SOHO) market.  Just over a quarter of those surveyed were interested in a checking account package that included mobile banking and 62% of those were willing to pay a fee. Although the report apparently concludes that there is a great willingness to pay for mobile services, I expect that once the market (likely quickly) moves to mobile banking as a required, “check off” item, additional fees will not be welcome. A similar report shows that coming into the new year, the mobile channel represented 20% of merchants’ payments. That may not seem like great penetration, but it represents a doubling of volume over a 12-month period, and in that time the share of merchants accepting mobile payments more than doubled from 30% to 66%. Mobile banking as a share of online banking can probably be expected to increase at least as rapidly. And, there is of course a poll showing the importance of mobile to Gen Y’ers when selecting a bank: fully 78% say it is at least somewhat important.
  • Indeed, Bank of the West’s Quick Balance mobile app, which recently won the Monarch Innovation Award for most innovative financial service product/feature, targets the small business market. The app enables a customer to view five accounts simultaneously or, on an iPad, view up to 30 days of pending payments and eBills—capabilities traditionally provided only to commercial customers—as well as customized messages or promotional links. These commercial-level capabilities are combined with a consumer level of simplicity: no traditional login is required to access the multiple account view.

Conclusions

In sum, although banks have some scars for their early efforts and misses in designing customer-friendly mobile apps, their experience shows the following:

  • The mobile channel is inevitable for both consumer and business customers. A rapid adoption curve and changing demographics are transforming markets.
  • Simply assigning traditional engineers to design consumer-level apps is probably not a good solution, with nontraditional design engineers likely needed to provide the level of customer experience required: Consumerization is a trend to which IT departments must proactively adapt.
  • Infrastructure must be updated, and a modern development platform is critical not only for agile, continuing innovation, but also for the efficient leverage and integration of development components across applications and departments.
  • Although these requirements are first realized within large enterprises, vendors are increasingly packaging products to enable development and innovation for lower levels of the SME market as well.
  • Applications and IT departments that can combine sleek consumer design with institutional-level platforms and practices can effectively bring higher levels of products to lower levels of the market more effectively and efficiently.

Cloud provider Internap adds hosted offerings for itty-bitty companies

Internap bought Voxel early this year to boost its dedicated hosting and public cloud portfolios and to extend its reach into smaller companies. Now its new Voxel.net Agile Hosting services will let even tiny businesses configure and deploy IT infrastructure from an online configurator.

Vidyo raises $22.5m more, doubles headcount and revenues

Vidyo has raised a $22.5 million Series D round of financing led by QuestMark Partners, with participation from existing investors Menlo Ventures, Rho Ventures, Star Ventures and Four River Group. Since being founded in 2005, the startup has raised a total of $96 million.

iPad’s enterprise growth bested only by iPhone

The iPad is leading the tablet charge in small and medium-sized businesses (SMB), resulting in a growth spurt that puts the Apple device out in front of nearly all other comers. I say nearly, because there’s still one device that sees even more activations: the iPhone.

Today in Cleantech

One cloud computing benefit is that small businesses don’t have to be constrained by the size of their data center.  But there’s another one brought up by Ronan Kavanagh at the Cloud Computing Journal that’s likelier to affect the ability of smaller enterprises to simply conduct business.  Clouds can help SMBs prove their green credentials, which big companies are starting to require of their contractors and suppliers.  And let’s not forget that customers are getting eco-savvier by the minute.