Meteoric Rise of Startups Evident at Fintech Demo Day

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The recent boom in fintech investment was neatly summed up by Maria Gotsch, co-founder of the FinTech Innovation Lab.

"Five years ago, we had to explain what fintech was," Gotsch said at the Fintech Demo Day in New York this week. "Now it's one of the hottest areas."

Investment in U.S. fintech companies is six times higher than it was five years ago, she pointed out. It jumped from $1.64 billion in 2010 to $9.89 billion in 2014. And some big transactions in the last year, such as the sale of LearnVest to a major insurer and the initial public offering of OnDeck, have boosted the confidence of investors in early-stage companies.

"If you look at the general level of new investment in private companies, not just tech, it's up by almost double over the last year," pointed out David Reilly, chief technology officer of Bank of America, in an interview at the event, which he hosted at the bank's tower overlooking Bryant Park.

Public offerings have become less popular as some IPOs have underperformed, but "the attraction of raising money privately is higher than it was a year ago," Reilly said. "So fintech would get a benefit with all the boats rising with that tide."

Banks are at least partly behind the rise of fintech, he said.

"There's a recognition that margins are squeezed, that there are problems and opportunities around data and analytics, around security, around mobile," Reilly said. "Some of these innovators are seeing that they could direct their solutions in the financial services space, there's still an addressable market and a real, changing and growing need."

Bob Gach, managing director of Accenture Strategy Capital Markets and co-founder of the FinTech Innovation Lab, pointed out that over the last 10 years, most large banks have been spending 70 cents on the dollar on compliance and regulation.

"We've gotten to this point where the banks recognize they need to return to growth through innovation," he said. "It's very hard to do that internally. At the same time, innovators are able to build things faster and cheaper. That confluence of events is why we've seen this geometric progression."

When it launched five years ago, the FinTech Innovation Lab was something of a novelty. Each summer, a small number of fintech startups are chosen to be mentored by senior executives at 20 financial services firms for 12 weeks. This year, 150 startups applied for the program, a 50% increase over last year. The program culminates in the demo day, at which the startups demonstrate their products before hundreds of bankers. Attendance at the event has about tripled; it was standing room only in Bank of America's auditorium Thursday.

The Startups

This year's group of seven offer a wide range of commercial and consumer services.

Several provide products that can be pitched to banks, such as: Digital Asset Holdings, a blockchain technology company; EverSafe, which helps monitor seniors' accounts for suspicious activity; and SocialAlpha, which helps clients analyze social media traffic.

In introducing Digital Asset Holdings, Cristobal Conde, the former chairman and CEO of Sungard who is now on the executive advisory committee for the FinTech Innovation Lab, made a strong case for modernization.

"In finance, why is it so difficult to build new or even upgrade core infrastructure?" he said. "Despite billions in investment, the backbone of the financial industry is still as old as Fortran."

Conde implied that Digital Asset Holdings' blockchain-like technology could help.

"Shared, replicated ledgers have reimagined accuracy and speed in the financial industry," he said.

He introduced the company's CEO, Blythe Masters, to the crowd as "ruthlessly confident," a nod to her celebrity status in the industry as the creator of the credit default swap and a longtime high-profile executive at JPMorgan Chase.

"Why would I leave that world to join a startup?" she asked. Because of the large opportunity, she answered herself.

"The front end of financial markets move at warp speed, in nanoseconds. Yet the back end of financial infrastructure hasn't progressed," she noted.

Some leveraged loans, for instance, take 20 days or more to be completed. Digital Asset Holdings is using the distributed ledger technology behind the bitcoin blockchain to speed up settlements, eliminate counterparty risk and improve efficiency, she said.

EverSafe's software monitors bank senior citizens' accounts for signs of suspicious activity, and alerts the customer and trusted associates such as caregivers or relatives. CEO Howard Tischler told the story of how his blind mother, who does not drive nor hold a driver's license, was tricked into buying auto insurance. EverSafe's software could have raised a red flag. The service could help banks acquire and retain clients, he said. The company signed an alliance agreement with Fidelity Investments on Thursday.

SocialAlpha showed software that helps banks filter through social media messages to identify influential voices and understand market sentiment.

Why Some Make It

Several executives involved with the FinTech Innovation Lab were asked to share what it takes for a fintech startup to make it.

An ability to work with large banks is critical, B of A's Reilly said.

"The ones that work for us are enterprise-focused," he said. "It's very hard to focus on consumer and the enterprise. I can't think of one company that's done it really well. The sales cycles and requirements are different." They have to be able to integrate with legacy technologies and listen to the client company and meet its needs.

A narrow focus is also critical, he said.

"What we really like about some of these companies is they are cheerfully focused in one area and going deep in it," Reilly said. "That myopic focus is a real asset. We like the fact that you're not trying to be all things to all people. The temptation to do that must be incredible, to grow the addressable market."

And the ability to listen and take direction is important, the innovation lab's Gotsch said.

"We spend a lot of time coaching them up front: do not sell, do not market. You have a unique opportunity to ask all those questions you've always wanted to ask and find out do they really like [your technology]," she said.

Her staff sometimes reinforces the criticism the bankers offer. "Sometimes we say, 'Stop doing this,' " she said. "I would love somebody to come up to me and say, 'That thing you do, stop doing it.' "

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