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Silicon Valley Tried to Upend Banks. Now It Works With Them. Silicon Valley Tried to Upend Banks. Now It Works With Them.
(7 days later)
SAN FRANCISCO — In 2011, Brett King was promoting his book, “Breaking Banks,” and creating a start-up that he hoped would do to the banks what Amazon did to the retail industry and Facebook did to media.SAN FRANCISCO — In 2011, Brett King was promoting his book, “Breaking Banks,” and creating a start-up that he hoped would do to the banks what Amazon did to the retail industry and Facebook did to media.
“We had grand ideas of being the Facebook of banking, and being a new form of bank account,” Mr. King said recently.“We had grand ideas of being the Facebook of banking, and being a new form of bank account,” Mr. King said recently.
Six years later, his company, Moven, has opened only 60,000 of those new bank accounts. Mr. King has now transitioned to selling his software to the banks he once scorned, who use it as a component of their mobile apps.Six years later, his company, Moven, has opened only 60,000 of those new bank accounts. Mr. King has now transitioned to selling his software to the banks he once scorned, who use it as a component of their mobile apps.
“We realized that if you want millions of users as a bank, it is a very different proposition than building a social media network,” he said.“We realized that if you want millions of users as a bank, it is a very different proposition than building a social media network,” he said.
Silicon Valley has upended a growing number of industries, and it had seemed not too long ago that Wall Street would soon be next. A flurry of financial start-ups rose quickly and grabbed billions of dollars in investments.Silicon Valley has upended a growing number of industries, and it had seemed not too long ago that Wall Street would soon be next. A flurry of financial start-ups rose quickly and grabbed billions of dollars in investments.
Mr. King is just one of the many technology entrepreneurs who have since recently run into the enormous moats that surround and protect the existing financial industry.Mr. King is just one of the many technology entrepreneurs who have since recently run into the enormous moats that surround and protect the existing financial industry.
The venture capitalists who have invested billions of dollars in this wave of new financial technology — think Venmo and Bitcoin — have been left waiting for a breakout star that actually looks like a threat to even a part of the big banks’ business.The venture capitalists who have invested billions of dollars in this wave of new financial technology — think Venmo and Bitcoin — have been left waiting for a breakout star that actually looks like a threat to even a part of the big banks’ business.
“A lot of people set out saying, ‘We are going to displace the banks,’” said Sheel Mohnot, a venture capitalist at 500 Startups who focuses on financial technology. “We realized along the way that you really have no choice but to work with the banks.”“A lot of people set out saying, ‘We are going to displace the banks,’” said Sheel Mohnot, a venture capitalist at 500 Startups who focuses on financial technology. “We realized along the way that you really have no choice but to work with the banks.”
And the difficulty of denting the influence and power of the big banks is only likely to get harder under the Trump administration.And the difficulty of denting the influence and power of the big banks is only likely to get harder under the Trump administration.
President Trump has said he wants to encourage innovation and new business by cutting back on regulations of all sorts, including financial regulations.President Trump has said he wants to encourage innovation and new business by cutting back on regulations of all sorts, including financial regulations.
Yet it was the regulations passed after the financial crisis that forced the big banks to reduce their risks in many areas and provided an opening for start-ups like Moven, which were willing to take more risks.Yet it was the regulations passed after the financial crisis that forced the big banks to reduce their risks in many areas and provided an opening for start-ups like Moven, which were willing to take more risks.
Mr. Trump’s plan to dismantle those post-crisis regulations is widely expected to give the big banks more free rein and close the window of opportunity for newcomers.Mr. Trump’s plan to dismantle those post-crisis regulations is widely expected to give the big banks more free rein and close the window of opportunity for newcomers.
“The degree to which banks have been caught under the yoke of regulatory obligations is very likely to lighten up under Trump,” said Arjan Schütte, the founder of the venture capital firm Core Innovation Capital, which focuses on financial technology.“The degree to which banks have been caught under the yoke of regulatory obligations is very likely to lighten up under Trump,” said Arjan Schütte, the founder of the venture capital firm Core Innovation Capital, which focuses on financial technology.
Mr. Schütte has been moving his firm’s investments away from bank disrupters and toward start-ups that are set up to partner with existing financial institutions.Mr. Schütte has been moving his firm’s investments away from bank disrupters and toward start-ups that are set up to partner with existing financial institutions.
Even if there has not been a disruption of the big banks, basic financial services available to consumers are changing rapidly, nonetheless.Even if there has not been a disruption of the big banks, basic financial services available to consumers are changing rapidly, nonetheless.
Americans are now able to send each other money instantly from their phones, thanks to Venmo, and can get approved for a loan in minutes, also from their phone.Americans are now able to send each other money instantly from their phones, thanks to Venmo, and can get approved for a loan in minutes, also from their phone.
The consulting firm McKinsey estimated in a report last month that digital disruption could put $90 billion, or 25 percent of bank profits, at risk over the next three years as services become more automated and more tellers are replaced by chatbots.The consulting firm McKinsey estimated in a report last month that digital disruption could put $90 billion, or 25 percent of bank profits, at risk over the next three years as services become more automated and more tellers are replaced by chatbots.
Much of this change, however, is now expected to come from the banks themselves as they absorb new ideas from the technology world and shrink their own operations, without necessarily losing significant numbers of customers to start-ups.Much of this change, however, is now expected to come from the banks themselves as they absorb new ideas from the technology world and shrink their own operations, without necessarily losing significant numbers of customers to start-ups.
Venmo, for, instance, has captured the wallets of many young Americans, but the largest banks have all begun their own versions of the service and some of them say that they already process, as single banks, more instant personal payments than Venmo.Venmo, for, instance, has captured the wallets of many young Americans, but the largest banks have all begun their own versions of the service and some of them say that they already process, as single banks, more instant personal payments than Venmo.
The large banks are also teaming up to start a cross-industry mobile phone application, Zelle, that will take Venmo head-on in 2017.The large banks are also teaming up to start a cross-industry mobile phone application, Zelle, that will take Venmo head-on in 2017.
PayPal, which bought Venmo in 2009, is still trying to find a way to make money from the business, which is currently offered primarily as a free service. Venmo, which was acquired by PayPal, is still trying to find a way to make money from the business, which is currently offered primarily as a free service.
Financial start-ups are not facing the same challenges everywhere in the world. In China, the technology company Ant Financial has grown to 450 million users since spinning off from the e-commerce giant Alibaba in 2014. Ant Financial now processes a majority of online payments in China.Financial start-ups are not facing the same challenges everywhere in the world. In China, the technology company Ant Financial has grown to 450 million users since spinning off from the e-commerce giant Alibaba in 2014. Ant Financial now processes a majority of online payments in China.
Ant Financial has used its position as an electronic, phone-based wallet to grab lots of other financial business from Chinese consumers, offering online loans, insurance and investment advice to its hundreds of millions of customers.Ant Financial has used its position as an electronic, phone-based wallet to grab lots of other financial business from Chinese consumers, offering online loans, insurance and investment advice to its hundreds of millions of customers.
China has four of the five most valuable financial technology start-ups in the world, according to CB Insights, with Ant Financial leading the way at $60 billion. And investments in financial technology rose 64 percent in China last year, while they were falling 29 percent in the United States, according to CB Insights.China has four of the five most valuable financial technology start-ups in the world, according to CB Insights, with Ant Financial leading the way at $60 billion. And investments in financial technology rose 64 percent in China last year, while they were falling 29 percent in the United States, according to CB Insights.
In Africa, the financial industry has been shaken up by the rise of new forms of mobile phone-based payment systems like M-Pesa, in Kenya, which was started by the local mobile phone operator rather than a bank, and has risen to become the dominant form of payment in the country.In Africa, the financial industry has been shaken up by the rise of new forms of mobile phone-based payment systems like M-Pesa, in Kenya, which was started by the local mobile phone operator rather than a bank, and has risen to become the dominant form of payment in the country.
The obvious reason that financial start-ups have not achieved the same level of growth in the United States is that most Americans already have access to a relatively functional set of financial products, unlike in Africa and China.The obvious reason that financial start-ups have not achieved the same level of growth in the United States is that most Americans already have access to a relatively functional set of financial products, unlike in Africa and China.
Some start-ups looked at becoming banks, so they could offer deposit insurance — among other things — but they generally found that getting a bank charter required more time and money than is available to even the most successful start-ups. This left most start-ups reliant on banks to hold and move any money they collected from customers.Some start-ups looked at becoming banks, so they could offer deposit insurance — among other things — but they generally found that getting a bank charter required more time and money than is available to even the most successful start-ups. This left most start-ups reliant on banks to hold and move any money they collected from customers.
“Operating in America, you needed to get a gatekeeper to approve your access to the networks,” said Josh Reich, who sold his banking start-up, Simple, to the Spanish banking giant BBVA. “If we wanted to touch their money, we needed to be part of the banking system.”“Operating in America, you needed to get a gatekeeper to approve your access to the networks,” said Josh Reich, who sold his banking start-up, Simple, to the Spanish banking giant BBVA. “If we wanted to touch their money, we needed to be part of the banking system.”
Online lenders were particularly ambitious in trying to take on the banks from outside the system. Lending Club, which makes personal loans, and OnDeck, which focuses on small business loans, initially grew swiftly and went public, but both companies have run up against the limits of how fast a lending business can grow without being a bank.Online lenders were particularly ambitious in trying to take on the banks from outside the system. Lending Club, which makes personal loans, and OnDeck, which focuses on small business loans, initially grew swiftly and went public, but both companies have run up against the limits of how fast a lending business can grow without being a bank.
The online lenders have struggled with the high cost of acquiring new customers through marketing, which is not as necessary in other industries that have been disrupted by technology.The online lenders have struggled with the high cost of acquiring new customers through marketing, which is not as necessary in other industries that have been disrupted by technology.
At a more fundamental level, online lenders realized how hard it was to fund the new loans they wanted to give out without having access to cheap deposits, as the banks do.At a more fundamental level, online lenders realized how hard it was to fund the new loans they wanted to give out without having access to cheap deposits, as the banks do.
The shares of both Lending Club and OnDeck are now trading far below where they were on the day they went public.The shares of both Lending Club and OnDeck are now trading far below where they were on the day they went public.
One notable success among the new lenders has been SoFi, or Social Finance, but even it has captured only about 250,000 customers, as compared to the 160 million users of Snapchat, the social network that was founded the same year.One notable success among the new lenders has been SoFi, or Social Finance, but even it has captured only about 250,000 customers, as compared to the 160 million users of Snapchat, the social network that was founded the same year.
Start-ups focused on improving payments have had more success — the most valuable recent American technology start-up is Stripe, which helps new companies accept online payments.Start-ups focused on improving payments have had more success — the most valuable recent American technology start-up is Stripe, which helps new companies accept online payments.
But Stripe and other payment start-ups like Square are all built on top of the existing credit card and banking infrastructure and have not posed any type of fundamental threat or challenge to the existing giants.But Stripe and other payment start-ups like Square are all built on top of the existing credit card and banking infrastructure and have not posed any type of fundamental threat or challenge to the existing giants.
“We are explicitly not a threat to the banks,” Tim Drinan, a spokesman for Stripe, said. “From our perspective the banks and card networks have built something pretty good and pretty hard to replicate.”“We are explicitly not a threat to the banks,” Tim Drinan, a spokesman for Stripe, said. “From our perspective the banks and card networks have built something pretty good and pretty hard to replicate.”
Perhaps the most ambitious recent project aimed at upending the banks was Bitcoin, which promised a new way to hold and move money, totally outside the existing banking system.Perhaps the most ambitious recent project aimed at upending the banks was Bitcoin, which promised a new way to hold and move money, totally outside the existing banking system.
The virtual currency has not taken off as a way to hold and spend money on a day-to-day basis, as many of its enthusiasts had predicted.The virtual currency has not taken off as a way to hold and spend money on a day-to-day basis, as many of its enthusiasts had predicted.
At the same time, in a pattern that has been repeated elsewhere in the financial industry, the big banks have been making big investments aimed at harnessing the technology underlying Bitcoin — known as the blockchain — for their own purposes.At the same time, in a pattern that has been repeated elsewhere in the financial industry, the big banks have been making big investments aimed at harnessing the technology underlying Bitcoin — known as the blockchain — for their own purposes.
Tim Swanson, an early Bitcoin follower and analyst who now works with the blockchain consulting firm R3, said that Bitcoin wasn’t able to fulfill the marketing promises that were made for it back in 2012.Tim Swanson, an early Bitcoin follower and analyst who now works with the blockchain consulting firm R3, said that Bitcoin wasn’t able to fulfill the marketing promises that were made for it back in 2012.
“It may take some time, but if there is anyone that has the capital base and the developer base to see this through, it’s the banks for sure,” Mr. Swanson said.“It may take some time, but if there is anyone that has the capital base and the developer base to see this through, it’s the banks for sure,” Mr. Swanson said.