The fintech industry has matured greatly since Modern Trader dove deeply into the major trends and shakeups in our inaugural issue tackling the space (see “Tomorrow’s Trading Technologies,” Modern Trader, May 2016). Last year, we asked dozens of industry leaders about the major trends that investors could anticipate. This year, we’re going beyond sector specific dives and buzzwords that have become too common in the fintech space.
No shortage of innovation
A recent report by Pricewaterhouse Cooper (PwC) indicates that the sector has seen remarkable growth in cloud and core processing solutions as shifting consumer preferences drive widespread adoption.
PwC indicates that adoption and investment in artificial intelligence (AI), blockchain technology and machine learning are on the rise. The industry has witnessed a decline in new payment solutions and robo-advising offerings as the more established firms in the space have deterred new competition.
But what are the other trends that PwC and others following the money might have missed? Modern Trader has reached out to some of the most influential minds in the fintech space for our annual “Trends in Fintech” feature. More than 50 respondents weigh in on deal making, the impact of the Trump administration, innovative fintech companies flying under the radar, and much more.
Modern Trader readers will recognize many of the respondents, including Leigh Drogen at Estimize, Tom Glocer of Communitas Capital and David Kedmey at EidoSearch. This year, we’ve invited a larger roster of power players in the space, including CEOs, investors and some of the biggest influencers in the space.
1. Global VC-backed fintech funding was down 13% in 2016 from 2015, although the number of deals were virtually the same. Have you noticed a tighter fintech funding environment?
“Yes. We support the vast majority of digital advice [Registered Investment Advisors] and broker dealers (aka robo-advisors). The number of new start-ups offering robo advice dropped significantly from 2015 to 2016, mainly as a result of [two] factors: 1) an already crowded space of competitors and 2) scarce access to funding.”
—William Capuzzi, Apex Clearing
“Fintech went through the typical Gartner hype cycle. Many players rushing into the fad had questionable quality, value or understanding of this space and will be shaken out in consolidation. But fundamentally, fintech is a very exciting space. Finance is a prime candidate for technological disruption over the next 5 to 15 years.”
—Howard Siow, Taaffeite Capital Management
“Fintech has always been judged to a higher standard than traditional consumer facing endeavors. Reversion to the mean for funding isn’t unexpected as the markets move in waves based on the uncertainty.”
—Jared Broad, QuantConnect
“No, the funding environment is not tighter; it is just that there were fewer mega-deals in 2016.”
—Eyan Bensoussan, Ferst Digital
“Yes. valuations were out of whack with business model development.”
—Leigh Drogen, Estimize
“Yes, the move to passive management means shrinking revenue and profits in the industry and therefore fintech firms must fight hard for revenue.”
—David Kedmey, EidoSearch
“There is no shortage of new companies popping up in the fintech funding space, but the change is in the news of them appearing. The space has now aged enough to allow anyone with a few dollars to buy off the shelf “lender in a box” software to start lending money. The age of super launches is starting to dwindle, as the bigger is better strategy is clearly not working.”
—Rich Burgess, Connect Lending
“Seeing tightening in the early stage [venture capital]. Late stage [VC] still remains robust.”
—Monel Amin, DiligenceVault
2. Which potential policies of the new administration present opportunities or challenges for fintech firms?
“An overlooked tax law — Sec. 1244 — that de-risks angel investing is due to be indexed to inflation from the current levels last indexed in 1978. When this happens, more family office monies will flow into the Seed/A rounds of startups, filling the funding gap that exists, particularly outside Silicon Valley, NYC/Boston and LA.”
—Joe Milam, AngelSpan
“Challenge is that POTUS is involved in policy making; opportunity is that Cabinet members take the lead.”
—Tom Glocer, Communitas Capital
“Regulatory reform will help push innovation and investments into different areas. Also, spending cuts mean that people need to do more with less. This shift could be a net positive for technology companies in the longer term.”
—James Austin, Vertex
“Huge opportunities with the new administration. Corporate taxes, repatriation of assets, better entrepreneurial environment.”
—Blaise F. Labriola, Zoonova.com
“The biggest change facing the advisor community is the Department of Labor regulatory change to apply fiduciary standards to retirement accounts. For us at Apex, this creates an enormous opportunity as it forces the wealth management community to change towards a more digital world especially for the smaller accounts they service.”
3. Do you see evidence where the U.S. regulatory environment is hindering the future growth of the fintech industry?
“For entrepreneurial/startup funding, it is improving. But it needs to get better.” —Joe Milam “In our case, not really. Regulation around digital currency is a slow moving process and we recognize that.”
—Gilbert Valentine, Athena Bitcoin Inc.
“We are taking a “wait and see” approach to the new administration. We invest in angel and seed round fintech companies, so there are more important factors than regulatory reform.”
—Chris Randle, C2 Capital Management
“Regulation is always an advantage for incumbents and a barrier to new firms. We have seen peak financial regulation.”
“Retail brokerage is heavily regulated — for good reason. When individual investors’ savings are at stake, it’s critical to make sure firms act in a way that protects them. While regulations sometimes lag the forefront of technology in the private sector, we’ve found regulators themselves to be thoughtful and well-intentioned.”
—Bernard George, Nvstr
4. With equity exchanges copying the IEX model, is the era of a “speed” arms race in trading execution over?
“I believe ‘material alpha,’ absolute return levels to compensate for the beta/risk will be harder to come by. I don’t believe speed will matter, or further reduction in cost. Absolute returns will come down over the coming years, while risks will go up.”
“Dodd-Frank and bank holding company rules limit investments.”
—Michael Kennedy, Veracen LP
“The speed race will continue to live on as folks continue to try to find arbitrage opportunities. With that said, the focus for the next several years will be on execution quality and “clean” sources of liquidity.”
“The speed race (to zero) is an endeavor of diminishing returns. In its place is the rise of Artificial Intelligence. Excellence in AI depends on a mastery of big data.”
—David M. Aferiat, Trade Ideas LLC
“Yes, done. Data is the new speed.”
“Liquidity will never go out of fashion. U.S. trading volumes have been falling since the 2009 crash and the ability to quickly execute large trades is harder. HFT liquidity providers will be required to ensure the markets remain sound; IEX cannot replace that.”
5. How important is the growth of blockchain technology?
“Blockchain will eventually revolutionize the financial services industry. It will take many, many years, though. Unfortunately, unless the utilities (Depository Trust Clearing Corp., Options Clearing Corp., etc.) and the largest banks embrace and implement this, we are only as good as our weakest link.”
“Blockchain in many ways seems to be an answer looking for a question. And yet the opportunity does seem to be most possible in the back office. Perhaps blockchain will be a part of T+1 settlement.”
—Tim Decker, RelateTheNews
“Blockchain is the future. It won’t happen in 2017, though, but it’s inevitable.”
“Not that important. I don’t see blockchain as anything more than an evolution of existing technology and processes. It will be a few more years before it has an impact that will lead to improved experiences.”
—Blake Wood, Envestnet
“Very important indeed. Although we may not see a mainstream application immediately, but blockchain as a technology has the ability to bring about large scale disruption in multiple sectors such as improving supply chain traceability in food, curbing piracy in the entertainment industry as well as safer and faster transactions in real-estate.”
—Romesh Jayawickrama, BankerBay
“The year 2017 would [bring a] commercial application of this technology. [One example of this could be] NTRS’s partnership with IBM for [private equity] administration.”
“Blockchain technology is in its ‘proof’ phase. Concepts in 2017 will arise and large institutions will start to implement proof of concepts. Bitcoin will be decoupled from blockchain. There is no specific sector yet where blockchain will disrupt particularly. Blockchain is usable for every sector. The banking sector is an easy vote, but due to the sluggish nature of these corporations, smaller-scaled businesses will embrace blockchain faster and will figure out how to utilize it. My guess would be the insurance sector and gaming industry.”
—Richard Groen, I/O Digital Blockchain
6. Which specific sectors or applications do you believe fintech firms offer that have the greatest potential to have material influence or true disruptive industry impact?
“Tough to say beyond improving how entrepreneurism is funded. The venture funding model is evolving and will finally be adopting more institutional/public market practices.”
“When AI researchers build a machine with the common sense of a three- or four-year-old, the entire industry will be transformed by teaching that machine to think about finance. Until then, we’ll see incremental improvements using tech in more specialized ways.”
“Blockchain, payments and lending.”
—Roman Zhukov, ETNA
“Portfolio and risk management. There is nothing out there, except Zoonova, for the average person to use in a web cloud environment that is affordable. This sector of fintech is currently dominated by Bloomberg, Thomson Reuters, and various software companies.”
—Blaise F. Labriola
“None and all. Fintech is almost only about incremental improvement, but they accumulate to a point where it becomes disruptive.”
—Emmanuel P. Marot, LendingRobot
“Investment research has not changed since the days of JP Morgan over a century ago. We have computers and more data now, but fundamental research is virtually identical. Fintech firms can and should disrupt this model, streamline the research process and mitigate human biases.”
—Evan Schnidman, Prattle
“Wealth management. Fees should fall and service should improve. Rebalancing and asset management will become commoditized.”
—Gerard Michael, Smartleaf
“Retail banking fintech is starting to reach a maturation point. The next wave of fintech firms will focus on capital markets and the institutional trading spaces. There is plenty of room for innovation and disruption in these areas.”
—Todd Schroeder, Forefront Technology
7. What fintech trend emerged this year that wasn’t on your radar in previous years?
“Bitcoin and blockchain technology was not on my radar in the previous years but that is a space that has great momentum at this point and seems like is a trend which is here to stay (at least for the next few years).”
—Anmol Singh, LiveTraders
“Companies want Application Programming Interfaces for virtually everything now. There’s always been demand for data and key functionality, but lately there’s a growing market for access to virtually everything a company like ours does.”
—Ed Kaim, Quantcha
“Every bank now wants to have their own pocket robo-advisor.”
—Roman Zhukov, ETNA
“It is a bit of the opposite. In 2013-15 it felt like many trends were just around the corner. Like any heavily regulated industry, change takes much more time than the innovators predict. The slowing of adoption of blockchain, bank disintermediation, and passive investment wealth managers (Wealthfront/Acorn) is the more noticeable change in the past year. Not that they aren’t growing still, but that they aren’t here yet.”
—Joseph McCann, Slingshot Insights
“There may be a slowing of robo-investor growth as the market becomes crowded and the buzz fades. This combined with average performance may cause investors to seek higher performance alternatives.”
“More and more fintech companies build their products around their data mining, analysis and predicting capabilities, for example in the insurance and investment industries, but also business intelligence and more. Specifically, the applications of artificial intelligence and machine learning techniques are very much on the rise.”
—Yaron Golgher, I Know First
“Automation. Established companies need to automate their funnels to allow themselves further reach, increased revenues and decrease costs. As other companies expand into the industry, they require automation to help bridge their knowledge gap and initial human capital investment.”
—Nicc Lewis, leveratelive
8. What fintech company (outside of your own) do you admire most? Why?
“With so many concentrated in payments/banking/trading, it is hard to find any that really stand out.”
“Bloomberg — not for its technology, but for its adoption and long running price inelasticity.”
—David M Aferiat, Trade Ideas LLC
“SoFi, for its ability to expand like a bank, without becoming one.”
—Emmanuel P. Marot
“Other than my own, symphony, Trendrating, alpha sense, eToro and Motif.”
—Tom Glocer “Poundwise.
“It’s new at the forefront of behavioral finance and retail client management.”
—James R. Denke, After Hours Capital
“AlphaSense. As a former M&A banker, I know the torture of Ctrl+F’ing through 10Ks and 10Qs. It’s horrible and AlphaSense reduces that pain.”
“Robinhood is a greater leader in this space as they are democratizing access to the markets while driving down the price of access for retail.”
—Tim Decker, RelateTheNews
“Funding Circle: They give the current funding needs a nice interactive twist. Easy connection from investor to investment seeking company.”
9. What up-and-coming fintech company should the industry be paying attention to?
“Quovo. I am a big fan of this firm. They tout themselves as the “Data platform for the future of finance.” Based on my interactions with them, I believe this.”
“Palantir: Able to generate revenues from big data and security concerns continue.
—Michael Kennedy, Veracen
“Alta5. They have a terrific team and are going to be making a big push in 2017 to go to market.”
“Xinfint. They are building an ecosystem that, if done right, could change how new fintech applications get built and consumed.”
“Cadre: Real-estate crowd funding seems interesting. Credit scores and identity are very interesting! Anything in the sharing economy seems interesting but I don’t know if that’s necessarily fintech...”
—Gilbert Valentine, Athena Bitcoin Inc.
“Benzinga, Daily Fintech & Fintech Genome.”
10. If you were to give an award to one industry person for their contributions to fintech over the last year, who would it be?
“Philip E. Tetlock. His book “Superforecasting” invigorated the discussion about what it means to quantify forecasting skill.”
“Howard Lindzon of Stocktwits and Robinhood for increasing the awareness of this industry and making it easier for people to get involved in the markets.”
—Anmol Singh, LiveTraders
“Ophir Gottlieb for his contributions on Twitter (he also runs CML Pro).”
—Ed Kaim, Quantcha
“Brad Katsuyama, CEO and co-founder of IEX. IEX is attempting to disrupt the exchange monopoly and create a neutral venue for all classes of investors.”
“Efi Pylarinou from Daily Fintech for her broad but also very structured and informative coverage of the new developments and companies in the arena of financial tech.”
“Tom Blomfield, CEO & co-founder of Monzo. Really love how the guys get the job done — should be an example for every challenger bank.”
—Nadia Nolan, SDK.finance
“Zach Perret at Plaid. They’ve built a great enabling technology that many in the ecosystem are benefitting from.” —David Haber, Bond Street “Jason Raznick of Benzinga. He and his team have created a phenomenal platform, the Benzinga FinTech Awards, that trump anything we’ve participated in before.”
—Kevin Evenhouse, NewsHedge.com