Last month, I joined 10,000+ of my closest friends @Money2020 to talk payments, banking and lending. The growth of this conference has been amazing to watch since it was launched four years ago.
Fintech is unquestionably experiencing a boom in the last few years; 2014 global investment in Fintech eclipsed $12B in 2014 (and is on pace for higher volume in 2015). This is 6x historical annual average from 2008-2012.
So, what’s with the recent hype? Why is the segment exploding from typical $2-3B to $12B+? The reality is, there has been an explosion of two Fintech subthemes:
- Alternative Lending (mostly P2P and on balance sheet lending platforms)
- Payments (mainly mobile peer-to-peer payments).
Our research shows that 80% of investment volume is in these two segments, with $3BN last year invested in “other” Fintech – consistent with historical patterns.
Everybody hates to use the word 'bubble'...
There’s no doubt that there will be several tremendous returns from the $10B investment in the lending and payments sectors, and likely several unicorns. However, I suspect that the frothy investment environment in lending and payments will leave many investors disappointed.
Edison isn’t dabbling in Fintech as it becomes hot. We’ve blazed the Fintech trail, with 40 nearly investments made over the last 30 years.
Our investment focus spans Wall Street solutions (FolioDynamix), trading (Edgetrade), capital markets (Gain Capital), financial applications (Best Software), banking software (Andera), security and compliance (eSentire, Compliance Science), and real estate (Redvision). We’ve also made some great investments in the lending (BFS Capital) and payments (Billtrust, PHX, Softgate) space long before it was cool. (Although @FlintLane is convinced that we were super cool when we led his Series A back in 2006.)
So, what areas in Fintech do we think are hot? We’re excited about three horiztontal themes that permeate across the broader Fintech landscape.
1. Democratization of Financial Services
One of the most difficult yet important things people do is manage their money. In reality, most "don't know what they don't know" when it comes to financial management, and the democratization of financial services – with popular tools in the robo-advice and P2P lending space – all help level the playing field.
Emerging technologies in this space empower people to more confidently make informed decisions and be more responsible with their money. These direct-to-consumer brands are here to stay, but I believe incumbents in the wealth management space will actively supplement their powerful advisory relationships with these elegant solutions (much like Blackrock’s acquisition of FutureAdvisor), creating opportunity for several software companies that service this community.
2. Data Exhaust
In our mobile, connected world, a data trail follows every interaction and transaction.
The sheer amount of data available today, whether it be social media data, transaction and spending data, etc., has paved the way for a number of new opportunities and business models. For example:
- Big data has found its way into hedge funds and asset managers for trading decisions
- Behavioral data is driving underwriting methods on the insurance side
- Cash flow and customer sentiment data is driving small business lending decisions
And, data around our own individual consumption and spending is driving how companies and brands tailor their message throughout the consumer journey.
3. Changing Regulations
Recent major shifts in regulatory environment - Reg NMS, Dodd Frank - have required financial institutions to invest significantly in compliance, transparency, security, & risk management. Our last two Fintech investments have been in this area and we expect our next one will be as well.
This extends well beyond financial services, into law firms, accounting firms and others that receive material non-public info. But, every time there is a perp walk or insider trading scandal, Complance Science rings their bell.
Compliance goes well beyond just a check the box for regulation. It is fundamental to protecting a corporate brand.
Same holds for data breaches and portfolio company, eSentire, provides service to prevent these breaches. These have heritage in the financial services community, more specifically hedge funds, and due to regulation, financial institutions are very rapidly expanding to protect data.
Regulatory trends around dark pools, RegNMS
These require broker-dealers to provide full transparency on trade execution quality and routing location. Many of the solutions are black boxes with limited transparency. We’re excited about the new technologies that offer transparency to both sell-side and buy-side firms. Think Flash Boys.
Larger firms are struggling to implement regulatory requirements quickly and depend more and more on nimble third party technologies and service providers. As many regulations are just being phased in now, we’re pretty excited about the opportunity to invest in this space.
So, we’ll continue to make investments in Fintech. Even when it becomes less cool to do so.