Why the Fintech Game Has Just Begun

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FT Partners CEO Steve McLaughlin talks about the opportunities in fintech.

Steve McLaughlin is the founder, CEO and managing partner of FT Partners, one of the leaders in raising capital and advising CEOs on critical M&A transactions in the financial technology (fintech) space. He was earlier a senior banker at Goldman Sachs covering fintech and financial services for more than 20 years. McLaughlin was recently named Investment Banker of the Year by The Information, a digital media publication. “Fintech does not feel like it’s played out,” he says in this conversation with Knowledge@Wharton, which was conducted at the FT Partners’ office in San Francisco. “I still think we’re in the first or second innings.”

Following are edited excerpts from the interview. (Listen to the full podcast using the player above.)

Knowledge@Wharton: Let’s go back to 2002. After working for a long time at Goldman Sachs, you founded FT Partners as the only investment bank focused on financial technology, or fintech as it is now called. What was the opportunity that you saw back then and how does it compare to the fintech market today?

Steve McLaughlin: The opportunity was several-fold. No. 1, I saw a budding sector about to explode over the next 15 or 20 years, so it wasn’t an overnight kind of thing. No. 2, I saw a need for an independent investment bank that was highly focused on that one area because these companies are very specialized. And I saw the larger banks treat them more generally, either like financial services companies or like tech companies, but not really like the hybrid. Last but not least, I thought that quality in investment banking and the middle market was lacking. I thought bringing the kind of vigor that a Goldman Sachs would bring to its largest clients would make a real difference. So a lot of different things came together to make it happen.

Knowledge@Wharton: How does that compare with where you see fintech today? How do you view the market and its different segments? Which ones do you find most interesting and why?

McLaughlin: Well, it’s evolved over time. When I was at Goldman, it was more the dot.com boom, so everything in traditional financial services was just starting to go online. So online banking, online insurance, online brokerage and the like over the course of time — you saw technology just explode whether [it was] mobile devices, data, the interconnectivity of everything, the globalization around the world… That’s created an infinite amount of possibilities. But with the infinite amount of possibilities, I still think we’re in the first or second innings. It does not feel like it’s played out.

I had people over the course of time ask me, “Do you think fintech is all played out? Everything that can be invented has been invented in fintech.” And I look around and I see nobody I know whose life is completely in order financially and I still see massive inefficiencies all over the place. You know, certain sectors got very efficient very quickly. Online brokerage used to cost $140 and you had to walk down the street to your Smith Barney guy to trade a stock. Now it’s $7 or $4 or free if you’re using someone like Robin Hood and it happens instantaneously. So certain segments have become extremely efficient extremely quickly and it’s always going to be that way. Now there is more innovation going on.

“I still think we’re in the first or second innings. It does not feel like it’s played out.”

Once they’ve gotten to that, it’s just: what’s the next leap that you can have? How do you trade your stocks? How do you make money? How do you save money? But I look at the opposite end of the spectrum and I look at insurance. For the most part, everybody I know buys insurance the same way they did 10 years ago. And I look at the underbanked community out there and they are massively underserved and they get fewer and fewer quality products. And so, a lot of the fintech I see today is changing old established sectors, but it is also helping people. The part, believe it or not, that gets me most excited is helping people. If we’re helping our clients, that’s great. But also, our clients are creating new technologies, which are creating more and more transparency, more and more efficiency in the market. To me, that’s the trend that’s going to keep financial services and financial tech going forever.

Knowledge@Wharton: Could you speak more about the relationship between fintech and financial inclusion, which you just mentioned?

McLaughlin: Well, first of all, when I think about fintech, I think very much globally. It’s around the world. You know, the things that are going on in China or Africa are, in some respects, way more advanced than what you’re seeing in the U.S. because they didn’t have the traditional infrastructure. Everything they did in some respects emanated from the mobile phone or smart phone or other types of technologies that made it critical for them to go faster than everywhere else in the world. In some of those countries where they are not just underbanked, they are no-banked, and they may not even have money to start a business or to eat. Getting money across the country from family member to family member, being able to pay your bills or be able to take a micro loan can make all the difference in the world to some people.

So financial inclusion goes to the farthest ends of the earth, but also, right in our backyard here in San Francisco, where we have a lot of underbanked folks, believe it or not. You’ve got your [Mark] Zuckerbergs and Jack Dorseys, but you also have the rest of the world. I believe that that part of the economy is generally underserved and has been and has been taken advantage of by predatory lending or lack of insurance, whether it’s health insurance or life insurance.

And so, I think [it’s important] to bring the cost of these services down, to distribute them widely through smartphones, the Internet or other technologies or offer traditional retailers [the ability] to provide the service. One of our clients is able to provide a lending cloud form at low rates of interest through regular banks to people that can’t get a bank account. So you can walk into a Compass Bank as an underbanked person with no bank account and actually get a loan from a product called Lendify at low, fair rates of interest, as opposed to your alternative, which would be to get a title loan or a pay-day loan where you’re paying 1,000% interest. So we’re seeing it here right in front of our face and we really lean towards clients that are helping people. If you’re not helping someone in some major way, then we’re probably not going to be the bank for you.

Knowledge@Wharton: Going back to what you said earlier about the global view, which parts of the world do you find most interesting in terms of fintech right now? China, of course, is its own thing, but what do you think of what’s happening in South Asia, in India, Sri Lanka, for example?

“If you’re not helping someone in some major way, then we’re probably not going to be the bank for you.”

McLaughlin: Every single one of these regions around the world is booming in some different way. The U.S., people think, is far advanced, and like I said, it’s probably one of the farthest behind, in some respects. You look at Singapore, there are thousands of startups in Singapore spreading throughout Southeast Asia, excluding China, because China is hyper competitive and it’s hard to do business in China these days if you’re not from there. So I think what they’re doing is they’re replicating a lot of things that they see here, but they’re also innovating a lot different things that they don’t see here because it’s a global economy and they’re more affected by the global economy.

So more international effects and trade — supply trade finance, things like that. But it’s all this typical stuff that you have here, as well, whether it’s wealth management or online trading or managing receivables or payables. You see the same stuff. But I am also very impressed with what you’re seeing with micro-insurance, a company like Bima in Africa. We’re working on four deals in Brazil with companies like Stone, which are bringing cheaper, faster, better payments, products to SMBs (small and medium businesses) and consumers across the country.

So we’re fascinated everywhere we look in the world. It’s everywhere, which is nice.

Knowledge@Wharton: Going back to what you said about working with clients that help people, I was impressed by one of your clients, who was I think written up in Forbes recently — David Zalik, CEO of GreenSky, who reportedly raised $50 million in financing and at a valuation to $3.6 billion, making it the third-largest fintech company in the U.S. I wonder if you could tell us about the growth of that company as a metaphor for what’s happening in fintech in terms of innovation?

McLaughlin: GreenSky Credit has been effectively around in the business for five years. It’s grown to be one of the largest, most profitable fintech companies in the world. And it probably has the highest growth. If you look at profit and growth, the combination of those two, it’s probably No. 1 outside of Alipay. But, in any event, they created the Uber-ish fintech company, where they’re not a balance sheet company, they’re not a payments company, per se, they’re not lending any money and they don’t have direct relationships with consumers.

They have put together what I call “the Holy Trinity” of merchants, banks and consumers. They’re enabling merchants to allow consumers to purchase their products and they link banks to get very high quality loans. They are the glue that makes it all work together.  It’s kind of hand-in-glove working with merchants, working with banks, working with consumers, where, literally, everybody wins. The banks do what they do well, which is have capital and actually make loans. The merchants do what they do well. It enables them to do their jobs and sell more products.

And for consumers, it’s a very low interest or no interest loan for some period of time. So it’s win-win-win. I think what you see there is very different from what you see in a lot of other businesses. The model is not so much competing with banks, but working with banks. Not competing with merchants, but working with merchants. Not trying to gauge the consumer, but giving the consumer a great product. It’s one of the most value-creating businesses I’ve seen. And the funny thing is, they can create value for all those constituents, and create an incredibly valuable company for themselves. That’s just an incredible model.

You see a lot of people that try to go up and fight banks or fight insurance companies. They realize you can’t just fight these big giants and win overnight. You’re going to have to exist in the ecosystem. Ultimately, they can crush you over the course of time or they’ll buy your competitors and compete with you. So learning how to work with the banks, with the insurance companies, with the government and some of the big bodies that are out there is very important.

The other approach is the Uber approach, where you just go out and fight the government, fight the cab companies and do everything else and that seems to have worked mostly well for them until recently. So it’s a lot of different approaches.

Knowledge@Wharton: When you think about these innovators in fintech, in which areas are they truly disruptive? And in which areas is the change they are bringing about incremental?

McLaughlin: You know, I think disruptive is a tricky word, because you can change something and make a lot of money and build a nice business doing it. But disruptive is quite a big word.

Knowledge@Wharton: That’s the Uber end of the spectrum that you were just describing.

McLaughlin: That’s right. Uber, for example, has in fact, disrupted the cab industry. It’s one of my favorite companies. Outside of some of the nasty things that they do, the service itself is actually excellent. I have not seen a ton of incredible disruption in the U.S. in fintech. I see a lot of incredible companies. I see them disrupting parts of the landscape, to some extent, but not as disruptive as what Google did to the advertising industry or what Facebook did to the connectivity side of things. You honestly haven’t seen very many fintech companies get to the size and scale with which you could say they are really truly disruptive.

“You can’t just fight these big giants and win overnight. You’re going to have to exist in the ecosystem.”

The highest market cap companies are out there in the $5 billion to $10 billion range, when you start thinking about Stripe, and Square and some of those kinds of players. I think even PayPal is $50 billion to $60 billion in value. But (you cannot) say that it has been overly disruptive. I think it’s been incrementally beneficial, but I don’t think it’s taken down MasterCard and Visa. It’s not saved anyone any real money on MasterCard and Visa fees. So I am really looking forward to things becoming more disruptive.

But in China, you look at Alipay. I think that has been very disruptive. Or how WeChat works, and how people use WeChat to pay for everything. So, not to discount some of the amazing accomplishments that have happened in fintech, you just haven’t seen someone take down a Wells Fargo. Despite Wells Fargo having terrible press, consumers hate them and everything else that could go wrong has gone wrong, but they are still there, they’re still standing, they’re still doing quite well, actually, and so is JPMorgan Chase and other folks.

Over the course of time, these banks should look out. But I think one of the problems — and this is not a question that you asked me, but I’ll say it, anyway — is that a lot of entrepreneurs seem to be satisfied making a few hundred million dollars, whereas, Mark Zuckerberg, had he sold Facebook for a few hundred million, it might have crashed and burned in someone else’s hands. A lot of folks want quick money. The people that I expect more [from] are turning down those kinds of offers and have confidence in the future, raising money and really changing things. I’ll throw a GreenSky into one of those kind of buckets or a Square — where they went out and easily could have sold along the way. Instead, they decided to go build something and change something. So there is a lot of disruption out there; it’s maybe with a small “d.”

Knowledge@Wharton: You published an interesting report recently about wealth management, another area that has been disrupted by financial technology. Where do you see the biggest opportunities and threats in wealth management? How are companies like Addepar disrupting that industry?

McLaughlin: So there’s wealth tech and robo advisors. There are all these different terms that I have thrown around out there. I think there is disruption — again, still with a small “d,” soon to be hopefully a big “D” in all these areas. But wealth management is the one that I think that the big firms have taken a closer look at than, say, in the banking and insurance side. You have seen a lot of disruption — I think with a big “D” over the course of time in wealth management. I think what the mutual fund industry did to the investment industry was huge.

The next wave could be a combination of robo advisors and human advisors. But we’re still in the infancy. There is a massive lack of transparency as to what people are investing in, where to put your money, how to put it there. That is a big challenge.

I look at companies like Addepar. Addepar is one of my favorite companies in the space, up there with companies like Novus and Riskalyze and others that are sort of the arms dealers out there to the advisors and the high net worth managers. But you take some of those companies and they can get on top of all of the performance data across the earth and look at the managers and the segments and the slices of the pies that are doing incredibly well and then be the ultimate source of truth across, you know, who is managing money well and who is not.

That can create a massive amount of efficiency in wealth management. Again, things are happening very, very high at the institutional level, at the consumer level with great companies like Personal Capital, Wealthfront, Betterment. And then you’ve got the B2B guys, as well. So I think, again, these businesses are terrific. They are making waves. But I look for some of these companies to merge over the course of time to create bigger value propositions. If you can create the next Vanguard or the next Fidelity or the next Schwab, that’s what we are looking for in the next 10 years.

“A lot of folks want quick money. The people that I expect more [from] are turning down those kinds of offers and have confidence in the future.”

Knowledge@Wharton: Does that mean you expect more M&A to happen in this space over the next 12 to 18 months?

McLaughlin: You know, I would say there is starting to be more M&A. We just sold a company called Swift Capital, which is a great lender to small businesses, to PayPal. And that was one of the first M&A deals we’ve seen in the alternative lending space. You haven’t seen Prosper or Lending Club or SoFi do a lot of M&A or see a lot of M&A come their way. And part of that is because the banks are a little hamstrung right now, because of regulatory issues, they can’t really acquire companies. The regulators just won’t let them do anything outside the straight and narrow. I think with the onslaught of capital that’s gone into these businesses, you are starting to see a lot of winners and a lot of moderate winners and some guys at the bottom of that spectrum.

I think you are going to see some of the people who are at the top of the spectrum buy people at the bottom of the spectrum to expand products, markets, capabilities, built teams and things like that. So I think the wave is probably going to be more in the next 12 to 36 months than 12 to 18. When you see companies like PayPal buy companies like Swift, you know that is going to start shaking things up. Amazon is getting into the lending game. Alibaba is getting into the lending game, coming across the border, buying MoneyGram. So I do think there’s a lot more to come in that space, but I don’t think it’s going to be a tidal wave just yet.

Knowledge@Wharton: One of the hottest areas in fintech right now seems to be cryptocurrencies. I wonder how you see that space. What are the big opportunities and the big threats?

McLaughlin: Look, we love the long-term play in the crypto space. I think there’s a place for it in this world, but I think that right now, we’d be more a fan of backing some of the arms dealers. I think making a bet on any one currency or putting a client into any one currency right now is probably a little too risky a proposition for an advisor. It’s not to say I wouldn’t invest my own money, because maybe I would.

But I think the block chain has a major role to play long term in the financial services space and the movement of assets around the world and information and documents. But I don’t really marry necessarily up the block chain and the currency side of things. To me, they are two different parts. One is a technology and one is a currency.

Knowledge@Wharton: By arms dealers, you mean…

McLaughlin: By the arms dealers, I mean exchanges, mining, things like that or API-driven businesses helping different corporates connect to one another and build out the network.

Knowledge@Wharton: One last question — if you look into the future over the next few years, what are the most important things or trends in fintech to which people should be paying attention?

McLaughlin: I think probably the most important is financial inclusion. I wouldn’t call it purely financial inclusion, but efficiency. And I think that really revolves around big data and I think that is going to revolve around deep learning and machine learning. You know, one of the most impressive companies we have seen is a company fighting fraud with machine learning called Feedzai. This company didn’t exist a few years ago and now it’s growing into probably one of the fastest companies in the space. And it could completely change the way that fraud is seen in this world.

Some of these companies are just taking all the technology that has been put around the world over the past 15 to 20 years, all the availability of data, all the interconnectivity, the geo-location data — if someone can pull all that together and go way beyond where the human mind or any kind of algorithm or if/then statement could take you and then change the decision-making, that’s very impressive. If you can do that with insurance policy comparisons, wealth management, it’s the machine learning side of things that I think is going to be huge. And I think companies like Feedzai are going to be eventually in all of those sectors. So who is going to really be the machine learning of financial services? The Google of financial services is kind of what we are looking for.

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