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FinTech Gets Traction: Five Questions For The Industry's Leaders

This article is more than 8 years old.

I've been working in this sleepy little backwater of the financial industry, called FinTech, for longer than I would care to admit. For the majority of that time, I've had to endure awkward cocktail parties as I told people that I worked in finance or public relations or technology. Quite often I’d say "it’s complicated" and leave it at that.

Then about a year ago something strange happened: people began to drop FinTech in to casual conversation the same way they talked about "cloud" or "the Internet of Things." For those of us who’ve dedicated most of our professional careers to the space, the sudden recognition is both gratifying and somewhat irritating. How I feel about it is best summed up by an email I received from a friendly competitor who’s been in this industry for about as long as I have:

My colleagues were passing around the following [FinTech Report] excitedly today ... it's like we discovered cheese!! How can something boring and stuffy that you and I have been doing in our sleep for decades now be the hot new tart in town?!?!?!?

To understand why FinTech has suddenly shot from president of the chess club to star quarterback, I spoke with six leaders of the FinTech movement: Jon Stein, CEO & Founder of Betterment, Justin Brownhill, Managing Partner of SenaHill, Alex Tabb, COO of the Tabb Group, Jean Donnelly, Executive Director, FinTech Sandbox, Jon Zanoff, Founder, Empire Startups and Evan Rapoport, CEO & Founder of HedgeCoVest. I asked them what was accounting for the surge in interest in this space, what this meant for their recruitment efforts and what got them interested in FinTech in the first place.

This is what they had to say:

Dan Simon: It feels like FinTech has really broken through the public consciousness in 2015. Would you agree?

Jon Stein: Robo-advisors - what the press calls Betterment and its imitators - broke through in 2015, I think that's fair to say. When we launched back in 2010 at TC Disrupt, we were a voice in the wilderness, saying, "What everyone does with their money is going to change." But, no one believed us then. We were the only ones saying it - and many had failed before us. Now I think people see that the change is real and immediate, and the question is how fast will everything change, rather than whether it will change. The change has become inevitable.

Evan Rapoport: Absolutely. 2015 is the year FinTech has gone mainstream thanks to a number of tech innovations (which didn't exist a few years ago) but also an influx of VC money and consequentially a major marketing push around all these products. Some of these solutions - such as Robo advisors - have been around for longer than a couple of years, and predate the Betterments of the world, but it's been the recent marketing around the host of FinTech solutions that has really pushed the industry to the forefront.

Justin Brownhill: We would agree. The macro trend that we are experiencing is that the distribution efficiencies of the web is providing consumers both choice and digestible financial education/information for the first time in history to a much wider audience. Whether it is for borrowing purposes (ie. P2P lending), financial planning (ie. Robo-Advising), buying stocks or bonds (ie. online brokerage) or efficient payments (ie. mobile/electronic payments), the consumers now have the power to make a BUY decision, rather than being SOLD financial products. This represents a seismic change from the brick and mortar and  other historical relationships.  There is a whole new generation, the millennials, who are self serve, and inclined to conduct business differently than other generations. It's a significant trend.

Jean Donnelly: FinTech has certainly attracted a lot entrepreneurial talent and a lot of capital in the last few years. As customization of financial services becomes more prevalent, and folks are using advanced technologies in other areas of their lives, people become more aware of the need for improvement in this space.  However, some of the best FinTech innovations will be invisible to consumers and seamlessly integrated into their lives.

Alex Tabb: There is no doubt about it, FinTech is one of the hottest areas of technology investment and a whole lot of people are paying attention.  There are a whole new group of non-traditional investors and innovators looking at the FinTech space and developing new technologies and services that have the potential to revolutionize the way we think about the sector.

Jon Zanoff I don’t see HBO doing a FinTech spinoff any time soon.  That said, we have seen a surge in interest in several sectors. For instance, every major government organization we work with are spending time and resources to ensure they’re sponsoring innovation in FinTech.

Simon: I've worked in FinTech for 15 years and for most of that time it's been a relative backwater. Now all of a sudden it's a very sexy area with a lot of mainstream media interest and a great deal of PE and VC money flowing in. To what do you attribute this level of interest?

Stein: Many of the fintech verticals are multi-billion dollar opportunities. Any time that kind of capital is at stake, PE and VC will follow.

Rapoport: Much of it is just that: the VC money drives marketing and that drives public awareness, making FinTech a very attractive area all of a sudden. But it's worth giving credit to some of the traditional financial services players also. The brokers and custodians have had their own innovation, enabling open APIs which these new providers can tap in to. If it wasn't for innovations at these traditional providers then there wouldn't be a new FinTech revolution happening right now.

Brownhill: Adoption of handheld devices, with ubiquitous usage and instant access to data, along with demographic trends of money flow/purchasing power to the Millennials, are some of the driving forces of capturing consumer mind- and wallet-share for financial products. It's a very disruptive trend which means opportunity for institutional investors.  It's far easier for entrepreneurs to get to "proof of concept" faster and with less capital than a decade ago, which is resulting in thousands of budding businesses trying to make their mark.  As such, “two guys and a router” (ie. scalable, low cost, and smart decision tools) are allowing entrepreneurs to level the playing field against the incumbent institutions.  This David vs Goliath concept is something the media likes to latch onto because it looks like David has a fighting chance to win, and win big...

Donnelly: Who said FinTech wasn’t always sexy? Entrepreneurial activity really preceded media and investor interest. FinTech is a very big space. It contains multitudes. I think there is a confluence of trends and events that are driving and enabling that activity. On the consumer side, we see the rising importance of mobile and its impact on banking and payments, and a loss of trust in traditional financial providers after the financial crisis. On the institutional side, we have the growing importance of alternatives for all types of investors. Impacting both, we have the acceptance of cloud computing which enables low-cost, high-performance computing.

Tabb: I believe that a whole new group of investors and innovators are involved. Traditionally, FinTech has been dominated by large institutional players and/or their members who left to start up something new.  Now we are seeing outsides leverage emergent technologies and focusing them on the B to C opportunities which lend themselves to PE and VC engagement.

Zanoff: FinTech is fertile ground for disruption.  Established firms with fiduciary responsibility simply can't afford to "fail fast".  They don't have the freedom to be cavalier and take chances by diverting their roadmaps away from longstanding competencies.  The net result is that startups will play a major role in changing the face of traditional financial services.

Simon: What specifically got you interested in FinTech? Presumably you could have brought your focus to bear in a range of disciplines, why technology for finance in particular?

Stein: I have always wanted to help people - and I happened to find myself working in finance, consulting to the country's largest financial institutions on risk management, consumer products, and investing. I knew from day one that I would learn about how the business worked and ultimately seek to build a better business. I saw firsthand the bad practices that were hurting customer outcomes. This is the problem I set out to solve.

Rapoport: I witnessed the power of technology when we launched the precursor to HedgeCoVest - hedgeco.net - just a simple thing like putting hedge fund data on a site, unlocked a huge pent up market demand, including clients around the world. So technology scaled and globalized our offering overnight and I've been fascinated with the potential of technology ever since. Now as we launch HedgeCoVest we're already seeing clients coming to us from Russia, China and the UK.

Brownhill: All the partners at my firm, SenaHill, have been FinTech executives and operators over the past two decades, driving the electronification of markets in a variety of innovative ways. Disruption is in our blood. We recognized a large vacuum of talent, capital and experience within FinTech which compelled us to come together a few years ago to help invest, scale, and advise these innovative companies throughout their life-cycle. This is a tremendous opportunity.  Think about how technology is impacting the Financial Services sector currently: 1 - every new revenue and product initiative is being fueled with and by technology as the solution or disrupting factor; 2 - industry-wide expense management programs are creating scalable efficiencies only through technology; and 3 – all regulatory solutions are best served market-wide with electronic solutions. This is true across the entire sector, whether it be commercial banks, capital markets, wealth management, front, middle, back-office and beyond.   It's all encompassing.

Donnelly: With an engineering background, I’ve spent 15 years in financial services focused on scaling financial operations and utilizing data to drive decisions.  The need for new technology to make this happen has been a constant.  For me, being a part of innovation in this area is very appealing.

Tabb: I have always been interested in emergent technologies.  My interest in FinTech started when we started our firm.  As an industry analyst, I have had the unique opportunity to speak and work with some of the sector’s brightest minds when it comes to technology.  These experiences acted as a catalyst, spurring me on to understand newer, faster and more efficient ways to create and manage wealth.

Zanoff: I was initially recruited out of engineering school into a proprietary derivatives trading firm.  From there, I've simply become addicted to the pace of both FinTech and Gotham City in general.  There's never a dull moment with opportunities to improve products, systems, and processes at every turn.

Simon: Traditional FinTech players (like SS&C, SunGard, TR etc) have traditionally struggled to recruit top talent when the best developers often want to work at Google, Facebook, Apple etc and finance hasn't been considered a particularly 'sexy' arena. Now that FinTech is cool, or at least cooler, are you seeing an influx in developer talent?

Stein: We're fortunate in this regard. We have an incredible engineering team. From day one, we've had great engineers that could have easily gone and worked at the likes of Google or Facebook. Engineers want to work on interesting problems that solve real world problems and that's exactly what we're doing.

Rapoport: We're certainly seeing a greater interest among developers in FinTech. More than money, developers are drawn to work on something Epic. We find our talent are attracted by something that's a game changer, not just a 'me too' product. There's certainly a war for tech talent right now, and hiring the best and brightest in any industry is always a challenge but the fact that FinTech is a hot industry all of a sudden is certainly helpful.

Brownhill: There is a definite trend. In fact, one of our portfolio companies 'untapt', (www.untapt.com) is looking to solve this exact problem of attracting talent from traditional Tech (e.g. Googles, Facebook), to FinTech and financial services.  They've built a modern recruitment platform that is designed to highlight all the exciting careers available to programmers in financial services.  It doesn't sound "sexy" to work in financial services, but there are so many compelling and disruptive innovations happening, both at start-ups and within the major industry players.  In our opinion, its more of a marketing issue for financial services vs. a reality of not providing truly fulfilling and exciting career paths.

Donnelly: The engineers and other people at FinTech startups are tremendously talented and could work anywhere. They are attracted to the ability to work with cutting edge technologies, to the chance to solve really hard problems, and of course, to the startup culture. Attracting this type of talent is a challenge that exists at financial services firms in general, not just at the traditional FinTech firms you mentioned. That’s why it’s important for all these firms to have a strategy for staying close to innovation happening at FinTech startups. Its one reason established firms are getting involved with FinTech Sandbox.

Tabb:      In the past, what lured top talent to the sector was not money, but opportunity.  The opportunity to play with and develop some of the fastest and coolest tech in the world. Unfortunately, over the last few years, the ‘cool tech’ aspect was replaced by big paychecks as innovation morphed into evolution.  As a result, many of today’s top technology developed moved to other arenas.  Now that new players and new opportunities are available, the challenge for the more established players will be how to lure them back to their organizations.

Zanoff: No effect whatsoever.  The investment potential and the opportunity for disruption will attract entrepreneurs to the space, but young developers want something different.  They want transparency into the company’s overall strategy, the ability to influence the product roadmap, and a modern software framework to move quickly.  It’s more common in traditional FinTech to see the decision-making centralized to a few, little optionality in projects to work on, and a frustrating pace dictated by older tools and legacy code.

Simon: FinTech firms were, by and large, centered in NYC due to the proximity to the banks which were their targets (smaller hubs were based in Boston and Chicago for the same reason) but now a new generation of FinTech players seek to offer services direct to consumers we're seeing FinTechs cropping up in the Valley, silicon beach, Austin and a number of non-traditional venues. Does it matter where a FinTech firm gets its start in life? Are there any benefits to being located in NYC or Boston or Chicago over these newer locations?

Stein: Proximity to banks matters more for enterprise focused fintech companies, but for consumer companies like ours, location tends to matter less. I chose New York because its where I live and the founding team wanted to live. It's the best city in the world. However, our location has certainly helped us recruit some elite wall street talent.

Rapoport: I believe there are still inherent benefits to having a presence in a major financial center which is why, even though we're headquartered in West Palm Beach, Florida - we have an office in midtown Manhattan. For us, the traditional financial industry (specifically hedge funds) represents an important constituency even though our investors can come from literally anywhere in the world. Having a headquarters by a beach, however, is a good draw for developer talent. We think we've created the best of both worlds.

Brownhill: While it’s not a prerequisite to be in a financial services hub such as NYC to build a FinTech business, we still believe there are definitive advantages to operate in major metropolitan areas.  Even in a “connected” world, there is no replacement for a density of human capital and face to face interactions with strategic partners.  Also, we define FinTech much more broadly than the direct-to-consumer models that are popping up across the country.  There are many more disruptive and emerging companies that are institutional, and that client base exists almost exclusively in the major metropolitan areas.

Donnelly: I agree that it doesn’t matter where FinTech firms gets started these days. You want to start your company where you’ll have access to capital and access to talent. What does help FinTech Startups is access to folks who have experience in financial services to help navigate the obstacles and as the established firms have moved offices across the country over the years, that aspect of talent is accessible in more locations as well.  At FinTech Sandbox, we receive applications from all around the world that we hope to support.

Tabb: In a word, No.  In today’s FinTech market it makes no difference where innovation comes from.  No one cares anymore where you are located.  Yes, it helps to have a presence in New York, Chicago or London, as that is where the major markets are located; but more importantly, it is critical that startups know the market they are trying to enter.  Financial services is an immensely complicated marketplace with built in engineered complexity that oftentimes will act as a barrier to entry for most outsiders.  So while your origination story does not have to be directly connected to one the global financial centers, you need market expertise to be successful.  After all it is difficult enough to revolutionize the way the world manages its money, let alone doing so without on the ground experience.

Zanoff: Proximity to the banks is very important, but not just for sales distribution.  FinTech is highly nuanced from the need to navigate regulation to the highly specialized expertise required.  FinTech entrepreneurs need access to domain experts and thought-leaders in order to scale quickly - making the role of community more important than ever.