When Silicon Valley eats Wall Street

“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:

  1. 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?
  2. 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.
  3. 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 - Unbundling of a bank

CB Insights – Unbundling of a bank

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.



Dimitri Dadiomov, US

About

Dimitri Dadiomov is currently studying at Harvard Business School. Dimitri graduated from Stanford University and has worked and studied in the buzzing entrepreneurial centers of San Francisco, Seattle, Tel Aviv, Berlin, and now Boston, working on both the startup and the venture capital sides of the table. Dimitri loves to spend time drinking coffee, sitting around airports, and writing about himself in the third person.


  • Rahil Gupta

    Hey Dimitri – agree in general with your sentiments, but is Silicon Valley really “eating” Wall Street or just an added ingredient for Wall Street to eat more. Will this only embolden Wells Fargo, Goldman and Amex?

    On payments – for sure UI has improved and payments have become more frictionless. But has Silicon Valley really changed the payments infrastructure? Venmo is operated from your phone, but still runs on top of ACH – part of the old guard of the financial infrastructure. Apple Pay allows payments using your smartphone – but still leverages existing Mastercard/Visa/Amex payment networks and a large string of existing issuer/acquirer banks. Although interchange fees are now split with Apple, the idea is that interchange fees as a whole will rise emboldening the existing credit card networks. Ideas like Bitcoin could really change the payments infrastructure but find it hard to see how better designed apps running on top of old financial highways fundamentally changes the infrastructure.

    On marketplace lending – the algorithms that allow better matching of risk capital with a wide variety of loans and lower cost of originations is a game-changer in the delivery of financial services. Consumers can get better and potentially cheaper access to capital. But who is actually providing the capital on these lending marketplaces? Retail capital providers is one source in peer to peer transactions, but an increasingly large source is coming from institutional investors (hedge funds) and banks themselves. In this sense – is Silicon valley simply providing a better distribution channel for Wall Street instead of “eating” it as you suggest? Won’t Wells Fargo now have a cheaper more effective ability to distribute their loans?

    On investing – I think this perhaps the most prospective area for a replacement between SV and Wall Street to take place. A full human financial advisor may not be required for many and they can instead be effectively delivered to people via the their mobile. That doesn’t negate the fact that new investing firms will need to have access to markets, and if they trade as part of their investing strategy, will need to do so via the existing broker/dealers that exist within the financial system. For instance who does Wealthfront need to partner within the financial sector to offer their service?

    I agree with the total disintermediation of banking services which is illuminated by the CB insights graphic, but I would challenge you to question whether this will eventually embolden the existing players or eradicate them as you suggest?

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