With the year coming to a close, it is time to review how 2015 treated the fintech sector. Coming into the year, three areas that I believed were of important focus were digital based crowdfunding, robo-advisory and service based investing. A short while later, I suggested that arguably the most important trend for 2015 was marketplace lending. While marketplace lending lived up to the hype in 2015, and some other areas also proved to be promising, there were some that failed to generate much excitement.
2014 ended with the IPOs of both OnDeck Capital and Lending Club. The sector picked up where the previous year left off with continued deals in the sector. Among the most notable was the $1 billion in funding that was closed by SoFi, with the firm later revealing its plans to become a $30 billion business. In addition, although they are competitors, 2015 can be viewed as the year that big banks jumped on the marketplace bandwagon with notable firms such as ING, Santander, RBS and Goldman Sachs either partnering with lenders or creating their own initiatives.
At the heart of SoFi and other such lenders is their ability to compete against banks for both consumers and business customers by offering loans to those shunned by banks, quicker loan processes, and often better rates. Helping power these advantages are digital based platforms to collect borrower information and rely on big data processes to analyze non-credit score factors such as online reviews of business and social metrics to manage risk.
Robo-advisors were one of the big stories of 2015, as startups such as Nutmeg, Betterment and Wealthfront attracted billions of dollars of assets with low-fee long-term investment portfolios. However, the field has become more competitive with other low-cost financial providers such as Vanguard and Charles Schwab entering the market. Also, the barriers to entry have been lowered with firms such as NextCapital and SDK.finance creating solutions to help firms launch their own robo-advisory firms.
Robo-advisory has proved that there is plenty of demand for simplified long-term investment products. However, in 2015, the market appears to have become commoditized, and the question going forward is how will companies now differentiate themselves?
Equity crowdfunding – JOBS Act and liquidity
Within the equity crowdfunding sector, two major factors affecting the industry during 2015 are the JOBS ACT and the trend towards secondary liquidity for private deals.
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In can be stated that equity crowdfunding officially made it to the US this year with Reg A+ and Title III of the JOBS Act coming into effect. With these, private firms are able to raise funds from retail investors, which opens the market for equity crowdfunding sites. The new laws serve to update previous rules which had limited sales to accredited investors.
With the addition of retail funds to the growing list of angel investors who are backing startups, one of the biggest worries is that a lack of secondary liquidity will destroy large portions of investors. However, this is an area that during 2015 began to gain traction. During the year, CircleUp initiated plans to include a quarterly secondary auction for shares sold on their platform. Also, secondary listings could find their way onto exchanges that focus on smaller issues such as OTC Markets.
Service based investing
For lack of a better description, I coined ‘service based investing’ as an emerging fintech field for 2015. The theory is that low cost brokers such as Robinhood would attract developers to build subscription based investment services around the brokers.
During 2015 this theory played out as API based brokers attracted scores of partner developers. Leading the way was Tradier, whose Brokerage API allows any website or app developer to add trading to their product. Connecting to over 100 developers, Tradier was joined by Robinhood in November which finally launched the first phase of their partnership program. In addition, Tradable launched Tradable Embed, which aims to take the API model even further by allowing developers to easily add trading to numerous brokers at once.
In the payment sector, one of the most notable emerging fields is biometric based transactions. Apple arguably started the ball rolling when they introduced fingerprint recognition in their phones in 2014, which could be linked to Apple Pay.
But beyond fingerprints, there have been advancements in facial recognition software. Leading the way have been a collection of startups and global players. Among the larger companies introducing new technology are Mastercard which unveiled it was testing SelfiePay and Diebold, which partnered with Citi to test retinal scanner-based ATMs. Startups in the sector that are creating facial recognition software that can be licensed and used in payment and banking apps include IsItYou, RealFace and OneVisage.