‘There will be hundreds of fintech failures’
Jane Gladstone — who was named president of Promontory Interfinancial Network on Monday — has been a leader in fintech investment banking since 1993, when she created a fintech merger and acquisition and advisory practice at Morgan Stanley.
In 2005, she left to build a similar practice at the investment bank Evercore. As senior managing director leading Evercore’s financial services corporate advisory business, she played a key role in several recent large deals, including the $27 billion sale of Refinitiv to the London Stock Exchange, the $40 billion sale of First Data to Fiserv and PNC Financial Services Group's recent $14 billion sale of its stake in BlackRock.
Now, Gladstone will take the lead on sales, marketing and corporate development for Promontory Interfinancial. She'll report to CEO and co-founder Mark Jacobsen.
Gladstone spoke to American Banker just before she started her new job and shared her views on how community banks can innovate, which fintechs will survive and which won’t, and her experience as a female leader in a man's world.
You have been advising fintechs and banks on mergers and acquisitions, initial public offerings and raising capital since before fintech was a thing. How did you know that fintech would become a big deal? Were there specific clues you saw? Did you have an intuition about it?
JANE GLADSTONE: What I saw then, and it seemed super obvious to me at the time, is financial services is a completely digital product. The financial services world makes money, which is largely digital except for cash. At some of the largest financial services companies I was advising, their tech budgets were enormous; they were often measured in the billions. The potential for disruption in a sector where the product was already digital seemed patently obvious. So I started spending my free time, which meant nights and weekends, digging in and starting to get to know some of the pioneers in the fintech sector and meeting some of these folks, for instance at E-Trade and PayPal. It became even more obvious hearing from these pioneering CEOs that this was the future.
So I never looked back, and the sector has only grown since then. Now the local cab driver knows what fintech is.
When you say this was nights and weekends, do you mean you met with these people over drinks or golf?
No. Because I had a day job, I had to kind of work two jobs in the beginning. I'm going to go for a full career without ever golfing.
Me, too. I know I'd be horrible at it. You're a close observer of banks and fintechs. Are there any mistakes that you see banks and fintechs still making today when they try to innovate?
One of the recurring mistakes that I've seen over the year is that to be a successful fintech, you need the financial services part, the tech part and the innovation part. You can't have one without the others. Where a lot of companies have stumbled is they want to reinvent all of financial services, and the innovation is there, but they forget about regulation or the way market structure works and realize that it's a lot harder to reinvent a sector that's this fast, complex and regulated. Some haven’t done the work to really understand financial services.
Likewise we've seen traditional financial services companies try to compete with fintech companies and fail. The case study I've often pointed to is Citibank trying to compete with PayPal in the early days of PayPal. Citi had vast resources, much more significant than PayPal. Citi had AOL as a partner, which at the time was formidable. Citi cut price relative to PayPal, it had brand recognition and growth, and yet that was a failure that Citi ultimately shut down.
The lesson that many traditional financial institutions have had to learn over and over is it's a lot more expensive and harder to build this technology as a big financial institution with legacy technology. Many of these financial services companies have 30-year-old technology, and trying to lay new technology on top of that by definition is going to be a lot more expensive than for somebody who gets to start from a clean sheet of paper and build it from scratch.
In recruiting, we have an incredibly competitive market for programming in the U.S. and competing for that talent as a traditional bank versus a fintech that’s got a lot of buzz around it is very, very hard. And so, time and again, the product is just not as good. And the customer experience is just not as good. This is one of the things that immediately drew me to the opportunity at Promontory Interfinancial Network, because PIN allows these two ecosystems to come together in a really symbiotic way.
When you think about this challenge so many community banks have now, that they've got to offer as much as possible through a mobile app, through a PC, and they don't necessarily have development talent, they maybe have one or three IT people, what do you think are the best ways for them to work with fintechs to get these advantages you're talking about? Do you think that partnerships are the best way, or being customers of fintechs?
I think if you're a small community bank without access to star developers, outsourcing is probably the way to go for building your technology. There are great platforms out there, and that's a way of giving you the benefit of scale of companies that can afford to make investments that are really hard for a small community bank.
Some banks, like Cross River and The Bancorp Bank, are happy to operate behind the scenes for fintechs and have built businesses around this. But others don't want to turn their customers over to somebody else — they want to own the customer relationship and make it stickier and stronger over time. What do you think is the answer to staying competitive for those that don't want to give that up?
First of all, they do need to make sure that their technology is competitive. That’s where many will require outsourcing. Second, community banks are still great at relationships, and those will continue to matter in the local community.
Community banks have something really valuable in that they are in the community. The biggest banks are actively managing their branch footprint: They're ripping out branches in unprofitable places and adding branches to places that are more profitable. That's leaving the community banks very often the only game in town, and being local is still going to be important to a number of depositors, including municipalities and other local players who want their money to stay in the community.
Some observers have been saying for a long time that a lot of the fintechs, especially the online lenders, haven't really been tested by a crisis or a downturn and that they're due for a reckoning. We're certainly seeing this happen with OnDeck and LendingClub. What do you think of that idea? Do you think we might see some fintechs crash this year, or do you think people are being overly negative?
Any bank treasurer looking at that is thinking to themselves, I could've told you that funding was going to dry up at some point and get harder. That happens every single cycle. How many cycles have you seen where specialty finance companies see their access to the markets dry up or get constrained.
I absolutely believe that there will be fintech failures. In fact, I think there will be hundreds of fintech failures precisely because too many companies got funded. You might say there's been a bubble. There are hundreds of fintech companies that I expect will run out of money in the next year or so.
Are there specific sectors or types of fintech companies that are most at risk, in your view?
You mentioned the lenders, that’s an obvious one. Anything that was happening before COVID-19 has just been accelerated by the pandemic. You see that in all sectors, not just financial services. Before COVID, we were talking about empty shopping malls and how Amazon was taking over the world. Now, after COVID, Amazon's only got stronger and the shopping malls emptier.
That’s also true in fintech. For example, companies like PayPal and Stripe that are processing online payments are benefiting from the migration of cash to digital money. This is only going to accelerate with COVID. Cash had been in a kind of vegetative state and a coma for years where people were still using it. It wasn't growing, but it wasn't really shrinking. This has been the shot in the arm that contactless payments have needed in this country. It's actually become unsafe to transfer dollar bills.
Just before the pandemic started, there were stores in New York that were trying to ban cash and only accept debit and credit cards, because it could save them money to do that. And the New York attorney general established a rule that retailers have to accept cash because low-income people were unfairly disadvantaged, they couldn't necessarily afford or qualify for a bank account or a card, and they would have no way to buy what they needed. As we move toward more use of digital payments, there is a segment of the population that could get left behind. Do you have any thoughts on that?
It's an incredibly important point and I'm glad you brought it up. Philadelphia and New Jersey have similar laws that you must accept cash. It's a real problem because, sadly, as we sit here in 2020 sheltering in place, access to many things is dependent on your access to online shopping. The digital divide is a real problem. And, I do think that fintechs have done a better job at having a value proposition for the unbanked.
I know Dan Schulman, the CEO of PayPal, spends a lot of time thinking about and talking about the unbanked or underbanked, and companies like Acorns live and breathe the unbanked. But we've got to fix this digital divide. It's a big problem for our society, not just because it means people might not be able to feed themselves in a situation like this, but also, educating our children if they don't have access to online learning is a big, big problem.
You've been a woman working in a man's world for a while, and I wondered if you have any reflections on how far we've come. Do you think the financial industry is doing enough to be in harmony with this movement toward having more respect for people of color and treating all people fairly?
I think we should all feel as a sector that we need to do more. The proof is that we're talking about a lot of the same issues that we were talking about decades ago, some would say centuries ago. That's the evidence that there's a lot more work to be done and that is true for all sorts of underrepresented communities.
You asked about being a woman specifically in banking. The fact of the matter is women are still very underrepresented in the upper echelons of financial services. I’ve often been one of the very few women in the room. Being rare makes you more memorable, so it ups the ante on any weaknesses or shortcomings that you exhibit because you're more visible. I’ve always felt like I had to be twice as prepared or twice as good. ... And also, because many people in financial services just don't have extensive experience with women in power or Black people, nonbinary people, Hispanic people in power, they may assume certain things about you based on their very limited experience or even bias that might bear very little resemblance to who you actually are.
I'm hoping that this is a moment of reckoning where we’ll take a big leap forward. I hope that this is the epiphany that the U.S. needed to make real progress.
Being more visible also has its advantages to women, Black people and other underrepresented communities. I always felt that when I knocked it out of the park, people were more likely to remember that, too. So there's a lot of cause for optimism right now. This is not going to get fixed overnight. We didn't get here overnight. But I do believe that we will make some real progress in financial services and in this country.