June 18, 2014

Banking on the Future

by Ash Sethi, Associate


Twenty years ago few people thought we’d be using technology companies to handle our shopping, plan a vacation, watch movies, or order a meal.  But that’s exactly what happened.  First there was communication (Gmail, Skype), next came shopping and retail (Amazon, eCommerce), followed by travel and leisure (Expedia, Yelp, Uber).  After stubborn resistance from traditional players, entertainment began to follow (Netflix, iTunes, Spotify).  At last, one of the most high-stakes areas of our lives is finally giving way to disruption by technology and web-enabled devices: Financial Services.

It might sound like hype—after all, it’s one thing to pay for a haircut with a Square reader.  But trusting your finances to anyone other than grey haired men in large skyscrapers?  Actually, chances are that you’re already using technology products to manage your money.  Most Americans now use web enabled devices to pay bills, manage brokerage accounts, and transfer money.  Sliding checks into envelopes and looking through cluttered drawers for stamps is a distant memory for many people.

When a critical mass of people becomes confident in using technology to interact differently with their offline world, the nature of an industry begins to change.  Like how Apple replaced Sam Goody and Tower Records, technology companies too will soon begin to absorb significant portions of the financial services industry.  Startups like Xoom and M-Pesa have already undercut the near monopoly of traditional money-senders like Western Union that have large, expensive networks to collect and distribute cash.

Traditional banks have spotted the challenge from FinTech startups and have been trying to stay ahead of the curve by acquiring competitors and bringing innovative services in-house.  Global investment in FinTech ventures has more than tripled during the last five years – from under $930 million in 2008 to more than $3 billion last year.  This spring MergerTech advised Simple, a highly innovative Portland based firm that delivers consumer banking and financial services via smart-mobile devices, in its acquisition for $117 million in an all cash deal by international banking powerhouse BBVA.

This acquisition trend is going to continue for the foreseeable future.  The financial crisis damaged confidence in traditional banks, giving rise to a young generation of tech savvy people seeking digital products to help them manage their money.  In a world of tighter banking regulation and increased competitive pressure, banks will need to acquire technology firms that can help them reduce operating costs and attract a younger customer seeking an end-to-end digital product for managing their finances.