YapStone Blog

“Silicon Valley is Financing the Fintech Revolution” written by Tom Villante, Chairman, CEO & Co-Founder, YapStone.

In a 2014 letter to shareholders, Jamie Dimon, Chairman and CEO of JP Morgan Chase, issued a stark warning to Wall Street: “Silicon Valley is coming” to steal the banks’ business.  And only one year later in his 2015 shareholder letter, Dimon surprisingly claimed that JP Morgan is now on technically equal footing to Silicon Valley.  Either JP Morgan has made incredible strides in the last 12 months or Jamie Dimon is in denial that what we are seeing is the beginning of a fintech revolution whereby innovation won’t be led by the JP Morgans of the world.  The traditional banks and financial service firms will certainly try to position themselves to play a key role by partnering, acquiring, and emulating innovative fintech companies.  But the true revolution will be led by some of the thousands of companies that have been attending fintech conference Money2020 the last several years as well as some companies that have yet to be formed.

Financial disruption?

Technology has transformed many industries in recent years. For example, Amazon reported stellar 2015 holiday sales, while total retail sales grew by only 3%, according to the NRF. Can fintech do to traditional banks what Amazon did to brick-and-mortar retail? Probably not in the near to medium-term.

First, many services that Fintech startups are focused on rely on traditional financial institutions – think credit card issuing and acquiring, loans and bank accounts. Lending startups offering more direct competition to traditional finance are still relatively small. For example, credit marketplace Lending Club arranged $9 billion in loans, compared to the $885 billion total US credit card debt.  Additionally, the financial services industry is highly regulated and that could slow the growth of some high-flying fintech startups enough for the bigger institutions to catch on.

Better for everyone

While fintech is not likely to put Wall Street leaders on a leaner diet, it is likely to improve the financial services industry.  Fintech competitors will force banks to innovate faster and utilize technologies such as big data, risk algorithms and blockchain which will lead to better service and lower fees.

Unlike Wall Street, fintech is not hampered by legacy IT systems, existing business that they need to protect (such as bank branches) or overbearing regulation. By innovating and running lean, fintech can thrive on lower fees while providing better service. For example, fintech startups have taken notice of banks’ high margins on international transactions and started offering cross-border money transfer for a fraction of the cost.  Some startups are testing blockchain as the backbone of their foreign exchange platform.

Fintech startups also understand user experience and the power of simplicity. New platforms use clever design as a tactic to simplify complexity. Robinhood, for example, makes stock trading uncomplicated by using a simple mobile app to do research and trading. Unlike traditional competitors, who might charge the investor commissions exceeding $60 per trade, Robinhood doesn’t charge any commission.

Fintech companies also appear to be better and more efficient at assessing risk. New machine learning and deep learning algorithms leverage big data in order to minimize fraud and assess risk better than humans can. Payments companies develop state-of-the-art algorithms that can detect transactions with high likelihood of being fraudulent and decline them, saving online retailers billions in potential fintech startups that can pare down from days to seconds the time required to assess the risk of credit underwriting for individuals and small businesses. It’s big data to the rescue to assess their risk.

Silicon Valley is moving to Wall Street — and it is probably going to be better for everyone. Armed with more cash on hand, fintech startups will take their technology, data and user experience know-how to make traditional financial services more consumer friendly, less risky and more affordable.  With P2P and Lending Club’s recent stumble, don’t buy into the recent assertions that fintech is overhyped – the fintech Revolution has just begun.