I’m asked with some frequency which startup sectors are booming. Mobile messaging and big data are knee-jerk reactions at this point. But these days I often respond “financial services.”
In the last two years, financial services startups have been innovating impressively quickly and challenging some of the fundamental ways in which capital and credit are distributed. I count seven major categories of innovation to date:
Math Based Currencies/Payment Networks - Bitcoin might be the most well-known and best publicized math-based currency, but there are a handful of others in the market, like OpenCoin and LiteCoin. Math-based currencies are novel ways of enabling instant settlements, low cost transactions and foreign exchanges. The promise of these startups is to create new payment networks and more efficient ways of transferring value.
Consumer Credit - After the crash of 2008, bank lending collapsed. This created the opportunity for new forms of consumer lending like peer-to-peer lending championed by Prosper, Lending Club and many others. These services offer consumers credit at better than market rates, while offering investors rates of return exceeding the public equity or bond markets. The next wave of innovation in consumer credit seems to be the use of social signals as determinants of creditworthiness.
SMB capital access - In addition to consumers' feeling the tightening of the credit market, small and medium businesses suffered as local and regional banks' pursestrings contracted in tandem. Companies including Capital Access Network, Kyriba, The Receivables Exchange, Biz2Credit, C2FO, Axial and others provide access to capital at scale to these enterprises. Similar in nature to innovations in consumer credit, startups providing loans to small and medium businesses aggregate investor capital seeking higher returns than can be had in the public markets and lend to businesses at lower than market rates.
Mobile first banking - The Durbin amendment to the Dodd-Frank Bill regulated interchange fees, reducing the profits payments companies generate on credit card swipes. This is a boon to merchants whose payment fees shrank. But payment providers sought new lines of revenue to replace what had been legislated away. Banks have resorted to charging greater fees on checking and savings accounts and imposing additional fees on consumers for overdraft charges. There to seize the opportunity are startups like Simple and MovenBank which look to become mobile first banks, reducing operating costs by eliminating the need for ATMs and physical presences.
POS reinvention - Retailers are reaping the rewards of the reinvention of the point-of-sale terminal for retailers. Apple, Square, PayPal, Revel, Erply and others have built portable, inexpensive touchscreen-based point-of-sale systems on by iPad and tablets that offer a better customer experience and a lower cost of ownership than the systems Micros and NCR can offer.
Crowdfunding - Kickstarter and Indiegogo have led the crowd funding wave. An alternate form of loan, crowdfunding is being used for everything from financing vacations to hardware development. These services enable customers to vote with their dollars and support projects of all different shapes and sizes. Social networks' distribution enables fundraisers to find “investors” who share their interests.
Developer payment platforms - Companies like Stripe, Braintree and Balanced are dramatically simplifying the developer experience when integrating payments into web and mobile products. By reducing the time to market and the complexity of payments integration, these companies enable many more businesses to charge for goods and services on the web.
Financial services innovations like these have the capacity to profoundly change the way we do business because they reduce transaction costs, making commerce of every kind easier and smoother. It is breathtaking to watch the pace and the magnitude of change.