From Wall Street Banking, a New Wave of Fintech Investors
By Liz Moyer for the New York Times
Finance is where they built their careers. Now some of banking’s former stars are pouring millions of dollars — and in some cases staking their careers — into new technologies that are shaking up everything from lending to payments to investing.
The list of investors is practically a Wall Street who’s who: Vikram Pandit, former chairman and chief executive of Citigroup; John J. Mack, a former chief executive of Morgan Stanley and Credit Suisse First Boston; Jon Winkelried, former president of Goldman Sachs; and J. Christopher Flowers, a former Goldman Partner. From the payments industry, Hans Morris and Joseph W. Saunders, both former chief executives of Visa, are among the prominent names.
They are part of a wave of investors who sank $17.8 billion into financial technology, or fintech, in the first nine months of 2015, an 88 percent increase from the same period in 2014, according to a new report by Accenture. The three top technologies were cloud, mobile and analytics, the report said.
A separate analysis by Citigroup put total fintech investing for all of last year at $19 billion, up from $1.8 billion in 2010.
In many ways, the investors are filling a void where the financial industry left off. Traditionally banks have invested heavily in technology, but that activity fluctuates with the fortunes of the industry.
Bank tech investing dropped off immediately after the 2008 financial crisis because the banks had to focus on other issues. Regulatory changes since then have forced banks to cut back on riskier ventures, such as trading, as well as the technology investments, like data analytics and electronic systems, that go with those activities. That opened the door to start-up development and the creation of products and services that threaten to upend the way traditional banks work.
Former finance executives say that they are bringing their experience to start-ups to steer them on the right path.
“We’re not trying to ruin the banking system,” said Mr. Morris, the former Visa chief and ex-Citi executive, who is now a managing partner at the fintech investment firm Nyca Partners and a board member of Lending Club, Payoneer and CardWorks. “We help some of the new tech companies understand exactly what the opportunities are and what they aren’t.”
Today’s generation of fintech companies are different in that many of the start-ups aren’t developing technology to sell to the financial services industry — as has been the pattern in past fintech booms — they are taking their products directly to consumers through easy-to-use mobile apps.
The public, particularly younger Americans, has taken to these technologies after the financial crisis eroded its trust in the traditional banking system, says Bruce Wallace, chief digital officer at Silicon Valley Bank. Millennials, especially, are “more receptive to buying a financial product or service directly from a tech company.”
One concept that has captured a lot of attention is peer-to-peer lending, popularized by online sites like Prosper and Lending Club, which connect ordinary people who want to borrow money with ordinary people who are willing to lend it to them, cutting banks out of the process. The lending sites flourished as banks curtailed unsecured and riskier lending.
Sophisticated investors, including banks and hedge funds, however, quickly caught on that there was money to be made by investing in these peer-to-peer loans. Mr. Morris, along with Messrs. Pandit, Mack and Winkelried, all back the relatively new online firm Orchard Platform, which helps those institutions make those investments.
Mr. Pandit has also backed the student lending platform CommonBond, the small-business lender Fundbox, and NerdWallet and FeeX, services that help consumers sniff out bargains and hidden fees in their financial dealings.
Another site that specializes in educational, personal and home lending,SoFi, or Social Finance, got the biggest fintech investment to date last September, raising $1 billion from the SoftBank Group of Japan as well as previous investors, including the hedge fund manager Daniel S. Loeb’s technology investment arm, Third Point Ventures.
SoFi brought in Anshu Jain, the former Deutsche Bank co-chief executive, as a board adviser this year and Arthur Levitt, the former chairman of the Securities and Exchange Commission, last year.
Communication and payments are another area of development and investor interest. Mr. Pandit and Mr. Mack back Dataminr, which analyzes posts on Twitter for information that could be useful to investors seeking an edge in the market. Other Dataminr investors include Goldman Sachs and Fidelity Management and Research, the fund company; the hedge fund manager Noam Gottesman; and the billionaire Nicolas Berggruen. Mr. Mack also sits on the board of Lending Club.
Mr. Saunders, the former Visa chief executive, joined a San Francisco fintech investment firm, Green Visor Capital, in 2013. He sits on the board of Kash, which makes technology that enables people to use their mobile phones to buy items in stores.
The firm also invests in Simpl, which makes technology to ease the checkout process for online shoppers, and Two Tap, another online shopping tool that allows users to buy items outside a retailer’s website, by tapping twice on an image of the product on their device.
Silicon Valley’s edgy appeal also attracted the former Morgan Stanley finance chief Ruth Porat, now chief financial officer of Alphabet (formerly known as Google). The former Goldman executive J. Michael Evans joined the Chinese e-commerce firm Alibaba in 2014, and a fellow former Goldman banker, Anthony Noto, became finance chief of Twitter earlier that year.
More recently, the former JPMorgan Chase commodities head Blythe Masters went to the blockchain technology firm Digital Asset Holdings, which just announced a $50 million investment from Goldman, JPMorgan and other banks. And the former card company executives Amit Parikh (Discover) and Gail Hodges (HSBC) joined Apple Pay.
Traditional banking isn’t likely to be completely displaced by fintech disrupters, however, said Mr. Wallace of Silicon Valley Bank; the industry is large enough to have room for more firms. “There can be multiple winners,” he said.