Innovation under the hood will rev the engines of a fintech revolution

Comment

Image Credits: Valerie Everett (opens in a new window) / Flickr (opens in a new window) under a CC BY-SA 2.0 (opens in a new window) license.

Matt Heiman

Contributor

Matt Heiman is a partner at CRV.

More posts from Matt Heiman

When the internet was first created in the 1970’s and 1980’s with the introduction of the ARPANET its early years were focused on the development of infrastructure and protocol — beyond the knowledge and far away from the consciousnesses of the general public.

The establishment of that foundational protocol allowed for a subsequent wave of application layer innovation in the late 1990’s and early 2000’s that has come to dominate the public consciousness (e.g., Google, Facebook, Amazon, etc.). Even though technology at the protocol layer created a ton of value, the application layer has ultimately captured most of the mindshare and the value.

Meanwhile, the television industry has seen a different, but related, phenomenon play out. For many years, cable operators and telcos served as intermediaries between consumers and content. They bundled packages of cable networks and sold them as monthly subscriptions. But with the proliferation of high-speed internet in the household, companies like Netflix began to instead sell and deliver content directly to the consumer, avoiding cable distribution entirely. This has become known as “over-the-top” television and is increasingly driving an unbundling of content.

The same patterns are emerging in financial services. New consumer-facing financial applications are being built on top of old banking infrastructure, while other startups are going around financial infrastructure altogether. Together, they are unbundling the roles of banks and other financial incumbents.

In recent years, financial services architecture has opened up in a way that we have never seen before. Data APIs like YodleePlaid, and Quovo now make it easy for developers to pull user financial data. SDKs like Card.io make it easy to onboard payment cards into mobile apps, financial market APIs like Xignite pull live stock prices, and payments APIs like Braintree and Stripe make it simple for developers to accept payments.

The combination of this development at the infrastructure layer, with what my partner Sarah Tavel notes as the growing distrust of traditional financial institutions, has created an opportunity for fintech startups similar those in internet and television: to create application layer companies with massive mindshare and value capture without having to innovate at the infrastructure layer themselves.

And while some of these startups may piggyback on open financial architecture, others avoid traditional pipes altogether and go completely “over-the-top”. In fact, the next billion dollar fintech startup may not look like a traditional fintech company at all.

Here are a handful of areas where I expect we’ll see these patterns play out:

P2P money transfer

Transferring money between two parties was one of the earliest problems to plague peer-to-peer commerce on the web. Paypal was the first breakout success in this category when it created a payment system that enabled transactions on eBay, and it remains an important part of financial infrastructure today. With the advent of mobile, a new crop of startups emerged to enable p2p money transfer beyond commerce: Venmo in the US, Verse in Europe, and Toss in Korea, to name a few.

These applications have not only created sticky social networks, but have also habituated consumers to exchanging value back-and-forth via mobile. In doing so, they have created an opportunity for a third wave of innovation within social finance.

For example, Tilt enables users to collect money from friends in a simple, friction-less way. Tilt didn’t have to rebuild the financial piping it was able to build on top of Stripe and focus its innovation on user experience and social functionality.

Splitwise allows individuals to split expenses and exchange value via a shared cloud-based ledger. Splitwise takes p2p money transfer over-the-top: like Bitcoin, it enables users to exchange value with bits (debits and credits to a ledger) instead of financial pipes, and unlike the p2p money transfer apps can be global from day one.

But what about settling into real money? Rather than rebuild payment pipes, Splitwise allows its users to settle via its integrations with Venmo and PayPal, which are increasingly open architecture themselves.

Wealth management

moneywaiter

In the past, creating a new wealth management offering required some heavy lifting: new entrants would have to build a clearing firm, connect to market exchanges, build and become licensed as broker-dealers, and then establish relationships with RIAs to secure distribution for the product.

But recently this ecosystem has been vastly simplified and startups no longer need to develop the entire stack themselves. Apex opened their clearing firm and onboarding tech to other broker-dealers, enabling startups like Robinhood and (our portfolio company) Wealthfront to launch new financial offerings.

And now there is a second wave of infrastructure development simplifying the wealth management stack even further: broker-dealer APIs. Companies like Tradier and Third Party Trade enable startups to avoid building the broker-dealer altogether and focus on developing a differentiated customer experience.

Another example is Trigger, an app that sets “if this then that” rules for trading. Interestingly, Trigger doesn’t have any financial infrastructure at all— it’s a rules engine that sits on top of brokerage accounts, yet it is quickly becoming a primary trading window for its users.

Insuretech

insurance

Among financial service verticals, insurance stands out in its ability to resist change. Yet even here there has been an opening of the industry architecture that has begun to allow for a new wave of innovation.

For instance, re-insurers like MunichRe and SwissRe have begun to partner with startups using Managing General Agent (MGA) structures. In an MGA the re-insurer maintains the balance sheet while the startup focuses on customer acquisition, experience, and product design. Such structures have enabled the emergence of startups like Ladder in life insurance, Hippo in home insurance, and Jetty in renters insurance.

On the other hand, several startups are utilizing p2p networks to, at least partially, go over-the-top of traditional insurance balance sheet providers altogether. Lemonade here in the US and Friendsurance in Europe are examples of this approach. By doing so, they create greater alignment of incentives, reduce fraudulent claims, and save money for their policyholders.

Bitcoin

bitcoin

The most striking example of over-the-top fintech is Bitcoin. By design, it is a system of record that avoids intermediation by traditional financial institutions and instead allows for value transfer directly between two parties.

But Bitcoin itself is a protocol that, as my partner Reid Hoffman points out, could enable an entirely new wave of innovation in the years to come. Just as users of Facebook or Google don’t need to know anything about TCP/IP or HTTP, users of Bitcoin in the future may not have to think about it to benefit from it.

One early example is Abra, which enables money transfer between any two mobile phones in the world by utilizing Bitcoin on the back end. Users of Abra never need to know they are using Bitcoin to send money to friends and family.


2017 is a unique time to be a founder in fintech. The opportunity to improve financial services has always existed, but founders today can get to market much more quickly by leveraging existing infrastructure or circumventing it altogether. It’s no surprise that I am seeing so many talented entrepreneurs flock to fintech and I’m confident there is more to come.

 

More TechCrunch

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine

IndieBio’s Bay Area incubator is about to debut its 15th cohort of biotech startups. We took special note of a few, which were making some major, bordering on ludicrous, claims…

IndieBio’s SF incubator lineup is making some wild biotech promises

YouTube TV has announced that its multiview feature for watching four streams at once is now available on Android phones and tablets. The Android launch comes two months after YouTube…

YouTube TV’s ‘multiview’ feature is now available on Android phones and tablets

Featured Article

Two Santa Cruz students uncover security bug that could let millions do their laundry for free

CSC ServiceWorks provides laundry machines to thousands of residential homes and universities, but the company ignored requests to fix a security bug.

13 hours ago
Two Santa Cruz students uncover security bug that could let millions do their laundry for free

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

TechCrunch Disrupt 2024 is just around the corner, and the buzz is palpable. But what if we told you there’s a chance for you to not just attend, but also…

Harness the TechCrunch Effect: Host a Side Event at Disrupt 2024

Decks are all about telling a compelling story and Goodcarbon does a good job on that front. But there’s important information missing too.

Pitch Deck Teardown: Goodcarbon’s $5.5M seed deck

Slack is making it difficult for its customers if they want the company to stop using its data for model training.

Slack under attack over sneaky AI training policy

A Texas-based company that provides health insurance and benefit plans disclosed a data breach affecting almost 2.5 million people, some of whom had their Social Security number stolen. WebTPA said…

Healthcare company WebTPA discloses breach affecting 2.5 million people

Featured Article

Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Microsoft won’t be facing antitrust scrutiny in the U.K. over its recent investment into French AI startup Mistral AI.

15 hours ago
Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Ember has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts.

Embedded finance is still trendy as accounting automation startup Ember partners with HSBC UK

Kudos uses AI to figure out consumer spending habits so it can then provide more personalized financial advice, like maximizing rewards and utilizing credit effectively.

Kudos lands $10M for an AI smart wallet that picks the best credit card for purchases

The EU’s warning comes after Microsoft failed to respond to a legally binding request for information that focused on its generative AI tools.

EU warns Microsoft it could be fined billions over missing GenAI risk info

The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after a United States Trustee filed an emergency motion on Wednesday.  The trustee is asking…

A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’

U.K.-based Seraphim Space is spinning up its 13th accelerator program, with nine participating companies working on a range of tech from propulsion to in-space manufacturing and space situational awareness. The…

Seraphim’s latest space accelerator welcomes nine companies

OpenAI has reached a deal with Reddit to use the social news site’s data for training AI models. In a blog post on OpenAI’s press relations site, the company said…

OpenAI inks deal to train AI on Reddit data

X users will now be able to discover posts from new Communities that are trending directly from an Explore tab within the section.

X pushes more users to Communities

For Mark Zuckerberg’s 40th birthday, his wife got him a photoshoot. Zuckerberg gives the camera a sly smile as he sits amid a carefully crafted re-creation of his childhood bedroom.…

Mark Zuckerberg’s makeover: Midlife crisis or carefully crafted rebrand?

Strava announced a slew of features, including AI to weed out leaderboard cheats, a new ‘family’ subscription plan, dark mode and more.

Strava taps AI to weed out leaderboard cheats, unveils ‘family’ plan, dark mode and more

We all fall down sometimes. Astronauts are no exception. You need to be in peak physical condition for space travel, but bulky space suits and lower gravity levels can be…

Astronauts fall over. Robotic limbs can help them back up.

Microsoft will launch its custom Cobalt 100 chips to customers as a public preview at its Build conference next week, TechCrunch has learned. In an analyst briefing ahead of Build,…

Microsoft’s custom Cobalt chips will come to Azure next week

What a wild week for transportation news! It was a smorgasbord of news that seemed to touch every sector and theme in transportation.

Tesla keeps cutting jobs and the feds probe Waymo

Sony Music Group has sent letters to more than 700 tech companies and music streaming services to warn them not to use its music to train AI without explicit permission.…

Sony Music warns tech companies over ‘unauthorized’ use of its content to train AI

Winston Chi, Butter’s founder and CEO, told TechCrunch that “most parties, including our investors and us, are making money” from the exit.

GrubMarket buys Butter to give its food distribution tech an AI boost

The investor lawsuit is related to Bolt securing a $30 million personal loan to Ryan Breslow, which was later defaulted on.

Bolt founder Ryan Breslow wants to settle an investor lawsuit by returning $37 million worth of shares

Meta, the parent company of Facebook, launched an enterprise version of the prominent social network in 2015. It always seemed like a stretch for a company built on a consumer…

With the end of Workplace, it’s fair to wonder if Meta was ever serious about the enterprise

X, formerly Twitter, turned TweetDeck into X Pro and pushed it behind a paywall. But there is a new column-based social media tool in town, and it’s from Instagram Threads.…

Meta Threads is testing pinned columns on the web, similar to the old TweetDeck

As part of 2024’s Accessibility Awareness Day, Google is showing off some updates to Android that should be useful to folks with mobility or vision impairments. Project Gameface allows gamers…

Google expands hands-free and eyes-free interfaces on Android