Fintech’s $138 billion opportunity

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Source:   —  April 07, 2016, at 9:04 AM

How to connect the network Fintech is in the midst of a golden age of investment and innovation. According to KPMG and CB Insights, investments in fintech startups doubled between two thousand fourteen and two thousand fifteen, to $14 billion.

Fintech’s $138 billion opportunity

Ryan Falvey is the managing director of the Financial Solutions Lab at the Middle for Financial Services Innovation.

How to connect the network

Fintech is in the midst of a golden age of investment and innovation. According to KPMG and CB Insights, investments in fintech startups doubled between two thousand fourteen and two thousand fifteen, to $14 billion. However, comparatively tiny of this money has been focused on the $138 billion market opportunity to disrupt alternative financial services in the United States. This lack of focus is damaging America’s financial health. So why hasn’t fintech done more to meet this vast market need?

Portion of the reason is that many of the design methodologies that have become common practice in the latest decade — the “lean startup” ethos, rapid prototyping and rigorous a/b testing — are much harder to deploy in consumer financial services, where regulations and valid requirements are frequently interpreted as limiting innovation.

As Max Klein, co-founder and CEO of Float, a company that helps consumers manage their cash flow keep it, “We’ve proven we can invite and be engaged in users. That’s simple compared to getting set up with a bank partner to actually service those accounts.”

Those entrepreneurs who do attempt to tackle the financial services industry face the added burden of convincing a bank, business partners and investors that their new model isn't only viable, but also valid and scalable.

It’s this latest portion that's particularly challenging when many investors, who are frequently wealthy, have very small awareness of this critical market need. “It was easier to obtain onto the Steve Harvey indicate and pitch my product to millions of potential customers than it's to obtain some VCs to realize that this is a genuine market,” says Nicole Sanchez of eCreditHero, a company that helps consumers exact inaccuracies on their credit reports.

Beyond the more obvious deterrents, traditional accelerator models are frequently not sufficiently long enough — or focused enough — to give founders the time, resources and insight required to launch products and look them scale. This very dynamic was behind five hundred Startups’ recent launch of a financial services-focused cohort, and Techstars’ widely respected partnership with Barclays.

For those that lift capital successfully, the path from Series A through growth rounds gets number less challenging as entrepreneurs discover themselves dedicating significant time and money to valid and regulatory compliance, frequently rebuilding business processes in order to scale. Unique challenges exist in fintech that simply don’t exist in other markets. In financial technology, in order to construct the product so it can work, you've to work with the incumbents, with whom — by definition — you are competing.

CFSI and JPMorgan Chase launched the Financial Solutions Lab in two thousand fifteen to allow extra support for this ecosystem. Our first program, launched in June of two thousand fifteen, sought companies who'd solutions that could assistance Americans better manage household cash flows. One year in, the companies in the Lab have added well over 100.000 new users and raised more than $80 million in extra capital. Most importantly, consumers are benefiting: Across the user base of our companies, savings rates are up, credit scores are increasing and debt loads are declining.

This year we hope to chase on that success by supporting a new class of startups and nonprofits that are building the future of financial services. In particular, we’re interested in products that assistance consumers weather financial shocks — things that can assistance consumers foresee and manage the unexpected and expected shocks that all of us encounter, whether it’s a car repair, work loss, ride to the ER or long-term illness.

Think about it: Every car, eventually, breaks down. So why don’t we've insurance products or more accessible savings/credit instruments that foresee this eventuality? Durable goods purchases — things love a washer and dryer — are another example. There aren’t grand products that assistance people map and purchase these expensive items, particularly considering how small savings the average American has.

There is grand potential in insurance — private disability insurance, job-interruption products, even helping consumers better map and manage more conventional insurance. These are all areas of life where one could imagine a tech-based solution, and one where some solutions exist.

Cumulus Funding is pioneering the utilize of Income Share Agreements, so consumer payments go down when a large shock happens. Products like Activehours and FlexWage allow consumers to draw their earned income forward. Meanwhile, the team at APA Save is helping consumers stay on top of bills and more quickly pay off debt -– so they have more of a cushion to absorb life’s shocks. There is number shortage of ideas and capable entrepreneurial teams.

The same trends that are powering the explosion of consumer technology — mobile engagement, improved data analysis and new customer acquisition models — are also breaking down some of the historical barriers to entry in financial services and enabling totally new approaches to engaging and serving customers. A better future of consumer financial services is possible — one where providers compete on the skill of their products to make better the financial health of their consumers.

But for that reality to arrive to fruition, all of us in fintech — financial institutions, regulators, founders and investors — necessity to recognize the financial health problem American consumers are facing and work together to realize the innovation that’s possible.

Can we do it? That’s the $138 billion question.

Featured Image: Ismagilov/Shutterstock (IMAGE HAS BEEN MODIFIED)

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