How to Survive the Fintech Onslaught

The concept of what defines disruptive technology, a term coined by Harvard business professor Clayton Christensen, is controversial. But the power of high-tech innovation, of course, is not.

Do traditional financial firms face the kind of threat today that taxi drivers face from Uber and others? That’s the topic that venture capitalist Jon Sakoda tackled late Thursday during the Hearsay Social Innovation Summit 2016 in San Francisco.

Speaking to several hundred financial services professionals, the general partner of New Enterprise Associates – which has invested in Hearsay Social, Financial Engines, Braintree and others – said today’s environment “feels like things are happening differently and faster than ever in financial services.”

In other words, Sakoda explained, “There are waves of disruption with peak amplitudes.” And that means disruption basically surrounds the industry.

The four pillars of disruption, he points out, are new platforms, big data, favorable (meaning less) regulation for disruptors, and millennial behavior. “Remember, millennials are OK with sharing data online,” the venture capitalist said.

The main force driving disruption in financial services is the “unbundling” of these services by firms largely concentrated in Silicon Valley, he adds. For instance, there are financial firms that focus on car insurance by charging by the mile (Metromile) and no-fee trading applications (like Robinhood).

“The new normal is to hyper-target customers with lower cost products and differentiated services,” Sakoda explained. And these clients are being pursued by “dozens and dozens of firms” – many referred to as fintech enterprises — rather than just a limited number of large organizations such as the big banks and insurance firms.

Future Shock?

Will these new armies of fintech firms overpower the traditional entities? “There should be healthy skepticism about any one of these companies putting a Merrill Lynch or State Farm out of business,” the tech specialist said.

This is because some 90% of new firms fail. “Of those that are funded by VCs, about 50% make it” long term, he stated.

Those figures don’t deter venture capitalists.

According to CB Insights’ research cited by Sakoda, the yearly funding of fintech firms was $13.8 billion (for 653 deals) in 15 vs. $2.1 billion (for 298 deals) in 2011.