For better or worse, the meteoric rise of ride-hailing giant Uber has become shorthand for startup success in America. Beyond the meme’ed and mocked “it’s Uber for X” description of many a new business these days, Uber’s $50 billion valuation — and the manner in which it has crippled industry mainstays and trampled over municipal regulations on its way to that massive number — is something that many entrepreneurs strive for. But in the world of financial services, where regulations are stringent and legacy players are massive, Uber-like disruption from fintech startups is a trickier equation. Can companies like SoFi, Betterment and Wealthfront truly do to banking what Uber has done to the taxi industry? Or will the JPMorgans and Wells Fargos of the world ultimately fight off these upstarts?
These were the central questions of Tuesday’s Buttonwood conference, a gathering of Wall Street and Silicon Valley executives hosted by The Economist. And throughout the early sessions of the conference, a consensus emerged: fintech startups might be hot, but don’t discount the banks.
“I think it’s interesting that you referred to this as finance’s Uber moment,” Blythe Masters, CEO of Digital Asset Holdings and former JPMorgan executive, told Economist editor Zanny Minton Beddoes. “The scale of the potential changes in the way the industry works is perhaps comparable to what is ongoing in the taxi industry, but the mechanism by which that change is coming about is going to be relatively different. The main reason: financial services are not limousine services. Financial services are about money, and people’s savings and people’s livelihood.”
Masters went on to say that, because financial services involve Americans’ livelihoods (and not just, say, their taxi ride to Brooklyn), regulations ruling the space are many multitudes more complex than they are in other industries — and the 100-plus year-old banks have a leg up in dealing with these rules.
“Anyone who imagines that as a result of the advent of new technology we will see a world where incumbent financial institutions who provide vital, heavily-regulated intermediated services, custodial services, safe-keeping services will be decimated and completely removed from the picture overnight is just naive and wrong,” she said, pointing out that customers of legacy banks can pay bills and deposit checks through their iPhones — so it’s not as if there’s been no innovation in traditional financial services.
Masters’ views were shared by one of the pioneers of the new world: Chris Larsen, co-founder of Prosper Marketplace and CEO of money-transfer startup Ripple.
“To be successful [in financial services], you need to reconcile three key domains: tech, capital markets/risk mitigation, and compliance. Those are three really difficult domains that Silicon Valley companies are pretty naive about,” Larsen said. “You see a lot of bluster around ‘we’re going to kill the banks, disrupt the banks,’ but most of that is nonsense. Silicon Valley works on two-year time cycles; regulatory change can take five or ten years… and banks are good at reconciling those domains.”
This isn’t to say that the banks are without their own flaws. Deborah Hopkins, chief innovation officer at Citigroup, acknowledged that the banks have not been great about partnering with smaller or younger firms — and partnerships will be key to success over the next five to ten years. In a separate session, Wells Fargo innovation group head Steve Ellis noted, “My personal view is that banks are very inward focused. I’ve sat in meetings where people say the customer matters, but it’s a 70-page deck and that bullet is on page 33. That should be first.”
There’s also a not-insignificant talent issue hampering Wall Street’s ability to keep up with Silicon Valley: Economist global economist Joseph Lake noted that his research has shown that banks are having a very hard time hiring who they want, while the fintech upstarts are inundated by resumes from those looking to flee the banks. His panelists — Wells’ Ellis along with Chase head of digital Gavin Michael, HP Enterprise Services EVP Mike Nefkens and Orchard co-founder David Snitkof — nodded in vigorous agreement.
Perhaps the comments that most deftly balanced optimism for future of fintech with a sober understanding of what banks are capable of came from Sequoia Capital partner Pat Grady. In a morning Buttonwood session, Grady started his comments by underscoring how large of an opportunity there is for fintech companies to come in and take market share from the banks.
“With fintech, I think we’re in the second inning,” he said. “There’s maybe $2 trillion of market cap in top 30 banks; the entire financial technology universe, if you add it up, is only about $100 billion of market cap. And so the disruptors in the sector are about 5% of the value of the incumbents.” (By comparison, he noted, Amazon, which challenged Wal-Mart’s business, has a $260 billion market cap, compared to Wal-Mart’s $188 billion.)
But Grady went on to caution that, despite the size of this opportunity, many of the fintech names we see today will be gone by 2020.
“I would bet that of those 5,000 or 6,000 [fintech startups] that exist, 90% of them are out of business in the next five years,” he said. “As much as the narrative of disruption likes to say, ‘look at these big dumb slow dinosaurs who are going to get killed by these smart, nimble fast upstarts,’ it’s just not as true in financial services. Granted, regulation slows down a lot of the incumbents, but banks are generally very, very smart. JPMorgan has more developers — 20,000 plus — than almost any technology company in the planet. … So I think the death rate of fintech startups will be much higher than it is for other startups.”
This article was written by Maggie McGrath from Forbes and was legally licensed through the NewsCred publisher network.