A version of this post appeared in the Financial Brand on April 14th, 2014.
Game of Thrones: Fintech Power Struggles in the Age of Digital Disruption
The fintech headlines during the past year have been like a drumbeat signaling change in the Game of Thrones. When a notable shift of power occurs, industry sorcerers look among the entrails to try to understand the broader ramifications as flags over territories change, upstarts are crushed, and rulers usurped. Our kings, queens and courts pontificate about the changing landscape and its impact while deploying appropriate defensive or retaliatory tactics. While the financial services landscape may not offer a perfect parallel to the shifting balance of power between kingdoms in the Game of Thrones, if you’re not at least a bit concerned, you probably haven’t been paying attention. This is an industry in the middle of rampant disruption. And it’s only the beginning.
The Genesis of a New Empire
Banking’s new era is fraught with uncertainty and intrigue. Our industry is contracting, power is centralizing, and the intersection of technology and customer behavior only acts to deepen this pronounced march toward further change. How you view the current state of affairs likely correlates to your overall sense of urgency in addressing this wholesale disruption. While some are fighting against economies of scale, compressed margins, and onslaught of new regulation – others seek refuge in the shelter of a larger kingdom – KPMG asserts that a quarter of all community banks will attempt to sell in the next year.
The chasm between industry doomsayers and upbeat pronouncements by the FDIC illustrating the resiliency of the community banking model might be moot – conservative estimates project 40% fewer banks and 50% fewer credit unions by the end of the decade. Not surprisingly, the financial technology ecosystem is following a similar path – both within inner-fintech (firms primarily deriving revenue from partnering with banks and credit unions) and outer-fintech (firms looking to disrupt traditional financial relationships, infrastructure, and revenue streams).
As financial relationships rely increasingly on technology – our internal development, partnership choices, and pace of deployment become more critical. The surrounding fintech universe acts simultaneously as a hotbed of new star creation (newer entrants, startups or breakaway republics that often act as sources of industry inspiration), colliding galaxies (big bank or big fintech meets little fintech, results generally bad for the latter), and deadly black holes (languishing fintech that sucks the life out of once promising ideas). Where is the fintech universe headed? While some analysts point to the influx of investment (and huge exits) in the broader technology market and see a bubble forming, I personally don’t buy into that idea for fintech as a whole. The potential profit is simply too hard to resist.
Inner-Fintech Troop Movement
Consider recent moves within inner-fintech. One of the largest deals saw Fidelity gobble up LPS ($3.88B). Digital Insight shifted hands between Intuit and Thoma Bravo ($1.025B) and then to NCR ($1.645B). Canada’s D + H acquires Harland Financial Solutions ($1.629B), driving further contraction within legacy providers. FIS acquires mFoundry ($115M) + 2012’s pick up of Clairmail ($174M) by Monitise. Jack Henry acquires Banno (undisclosed). Both sets of deals demonstrating the criticality of acquiring established mobile development teams. On the payments side, PayPal acquires Braintree ($800M), seeking to revive developer credibility and mobile payment breadth alongside their aspiring Venmo unit. Early in the year, ACI bought Online Resources ($126M), consolidating increasingly irrelevant bill pay services, as well as acquiring the merchant relationships and IP behind it. Just a few weeks ago, origination player, Andera (itself having swallowed Finovate darling oFlows a few years back), was picked up by Bottomline (which now owns the business banking half of Digital Insight). Then consider what many industry insiders’ called the most compelling deal of the past year: Simple gets picked up by innovation-minded BBVA and causes as much industry navel gazing as Facebook’s land grab of WhatsApp (and now Oculus Rift).
Are these just established players shifting pawns on a board of fintech chess, searching for additional revenue and relevancy like a shark starving for oxygen? Or could this really be tired technology models in search of a boost of innovation while the industry plays catch up to ongoing digital disruption? It’s probably a bit of both. While some of these deals were more meaningful than others within the context of trends influencing the future of banking, they definitely demonstrate inner-fintech’s dynamism. Tracking these acquisitions and the incestuous shift of ownership is critically important to a bank’s strategy for technology deployment. Partnering for most financial brands, in lieu of expanding their internal application development, is now the basis for survival.
Outer-Fintech Offensives – Protect The Castle!
Globally, fintech investment has more than tripled over the past three year — rising from $928 million in 2008 to $2.97 billion in 2013 – with fintech investment increasing at more than four times the rate of overall VC investment.Source: Techcrunch (http://techcrunch.com/2014/03/26/london-fintech-cluster/)
While inner-fintech moves can create havoc for product roadmaps, vendor management and regulatory due diligence, what’s happening in outer-fintech should be more disconcerting. Venture capitalists are investing in banking’s infrastructure – the plumbing and the pipes. APIs and algorithms are driving greater efficiencies for everything from aggregation to money management to payments. In fact, there are now 1,044 payment startups listed on AngelList alone, encompassing 23,113 investors for an average investment of $3.9 million per company. Fintech is becoming an increasingly crowded space – these firms are collectively targeting the grand disruption of a multi-trillion dollar franchise – namely, the financial services system. And it’s just getting warmed up.
Since the beginning of 2013, venture investors committed over $800 million in new funding to develop businesses providing new investment, lending, mortgage and real estate, and wealth management services in the U.S. These startups have had their best quarter so far in 2014, when 13 companies raised $238.2 million in later stage funding — with at least $162 million committed in March alone. Source: Techcrunch (http://techcrunch.com/2014/03/24/startup-financial-services-companies-come-of-age/)
Forging Of Alliances
These inner-fintech investments should be a concern. Financial institutions and fintech players of all sizes must move to form critical alliances as the industry changes. If financial institutions aren’t able to focus on developing applications and efficiencies internally – they must partner to ensure relevancy. These efforts should be mutually beneficial activities – with customer value at the center of the value proposition. As much of traditional banking services become a utility, those that leverage personalized banking experiences for their profitable customer niche segments will thrive. As we move further into digital experiences, the next decade will be even more incredibly disruptive than what we saw in the recent economic downturn. As I’ve said before, there will be blood.
Bradley Leimer leads digital strategy for the Mechanics Bank in Richmond, Calif. He writes about ways to make banking better on his blog, Discerning Technologist. His initial exposure to Game of Thrones was the infamous ‘The Rains of Castamere’ episode (based on the Red Wedding story from the original books). While scared to watch much more of the series, he says he’ll dive right in – right after finishing House of Cards.
Why FinTech Startups are Difficult https://medium.com/p/98a11ffefad1
Do Startups Stand A Chance Against Valley Incumbents? http://techcrunch.com/2014/04/08/do-startups-stand-a-chance-against-valley-incumbents/
How To Value A Fintech Startup http://www.efinancialnews.com/story/2014-04-02/valuing-a-fintech-startup?ea9c8a2de0ee111045601ab04d673622
Berkery Noyes Releases Financial Technology and Information Industry 2013 M&A Report http://www.berkerynoyes.com/publication/trends/2013Full/fintech.aspx
There Will Be Blood: The Era of Engagement Banking https://bradleyleimer.com/2013/07/29/there-will-be-blood-the-era-of-engagement-banking/
WhatsApp, Simple, NextBank, And The Financial Services Delivery Model https://bradleyleimer.com/2014/02/22/whatsapp-simple-nextbank-and-the-financial-services-delivery-model/
Community Banks Remain Resilient Amid Industry Consolidation http://www.fdic.gov/bank/analytical/quarterly/2014_vol8_2/article.pdf?source=govdelivery&utm_medium=email&utm_source=govdelivery