“There is an old joke that Wall Street has a river at one end and a grave yard at the other. Yet, this is strikingly incomplete. It omits the kindergarten in the middle.” Fred Schwed, Jr.
The magic of Silicon Valley is not only that entrepreneurs take on ambitious startups—it’s that they often take on ambitious startups they know little about. They pick opportunities that seem promising even if they are outside of their own personal core competencies, and they figure it out. Move fast and break things. Throw ideas on the wall and see what sticks. Stay scrappy and iterate. Iterate. Iterate.
In an environment with such ample experimentation, it really matters whether the incumbents are fierce and agile competitors or if they’re slow-moving, docile giants. And the 2008 financial crisis pushed the big banks into an uncomfortable, over-regulated, slow state that has allowed a bevy of ‘fintech’ startups to flourish—and flourish they have.
Fintech has had an amazing run these past few years, in large part because the incumbents—the big banks—are not only refusing to compete but oftentimes virtually giving business away to competitors to shed units that do not fit into the Stress Test / Basel / Dodd-Frank regulated vision of themselves. There are now companies processing billions of dollars in payments, loans, and investments on behalf of clients that previously would have gone to the banks. And, unusually for most Silicon Valley disruptions, the incumbents are often perfectly happy with that.
Emerging winners in each of these three categories will not only be standout successes for their early investors, they will also become iconic Silicon Valley companies the likes of which we’ve seen emerge in semiconductors, personal computers, search, social media, and other areas. These companies change the way we live our lives, and for that reason the fintech activity is worth paying attention to. Three categories are especially profound:
- Payments: long overdue, consumers are starting to see and understand the original PayPal vision and use their mobile phones to deposit checks, pay their friends, and check out items at the counter. Apple Pay, Apple Watch, Venmo, retail apps like the Starbucks app, and others are going to change the UI of payments and with it replace the existing payment infrastructure. Given that you already have a mobile in hand, shouldn’t that be all you need to be able to pay everywhere?
- Marketplace lending: rather than process loans in skyscrapers stacked with well-paid people in suits, websites are able to connect lenders to borrowers and process loans rapidly online. Companies like LendingClub and Prosper are leading the charge in enabling this sort of lending for personal loans, but the change will come to each and every corner of banks’ lending operations including mortgages, business loans and more. This is, after all, what the web is good at.
- Investing: the first wave of online trading allowed for stock and bond trade orders to be placed online, but new services such as Wealthfront are reorganizing the entire value proposition of online investment sites to become more of a financial adviser than simply an execution engine. These recommendation systems—a la Netflix and Amazon—take your goals in mind and create the perfect personalized experience. Isn’t the web made for that?
Look back, and you’ll see that each decade of innovation gave birth to a few Fortune 500 giants in a wholly new sector.
The 1970s gave us Intel and Microsoft and Apple.
The 1980s gave us Dell and Cisco and Qualcomm.
The 1990s gave us Amazon and Netflix and Google.
The 2000s gave us Facebook and Twitter and Uber.
Will the 2010s give us a bunch of companies that replace Wells Fargo and Goldman Sachs and American Express? There sure are plenty of candidates.
CB Insights put together a fascinating chart showing startups attacking different parts of the Wells Fargo homepage. The Wells Fargo CEO said in an interview in early 2014 that when he got into the industry in 1975 there were 14,500 banks in the US. Today there are 7,000. Perhaps when Silicon Valley has eaten Wall Street, there will only be a handful of online companies providing banking services—and those will likely be the iconic companies that will emerge from this decade of innovation.