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Tech firms still want to dethrone the financial sector

Advisers should keep an eye on all their new fintech "partners"

Jun 21, 2018 @ 5:51 pm

By Ryan W. Neal

Wall Street embraces technology these days, but Silicon Valley still thinks it can take over the financial industry.

If there was one theme that stood out at the CB Insights Future of Fintech conference in New York City this week, it's that financial technology startups still believe they can "disrupt" traditional financial services firms and improve everything from banking and credit to financial advice.

"A real fintech company hasn't come to the fore yet," said Max Levchin, a co-founder of PayPal who is now CEO of Affirm, a lending fintech.

While the industry has made significant strides towards digital adoption, Mr. Levchin thinks the big questions — like how do people get access to credit? What do bank accounts look like? — are more or less the same today as they were 50 years ago.

"In the U.S., things that have always been this way are still being this way, and that's where the opportunities really are," Mr. Levchin said.

Consider the latest product from SoFi, which CEO Anthony Noto described as a "high-interest deposit account" to let users make payments, deposit checks, transfer funds and withdraw money from ATMs. In other words, the fintech company most known for student loan refinancing and, more recently, robo-advice, is launching an online bank. Mr. Noto believes it can outperform existing institutions.

"There's no reason it takes five or six days to approve a loan. It should take five or six seconds," he said. "There's no reason that it takes a month to do securitization. It should take an instant."

"We'll continue to iterate and innovate around fast," Mr. Noto added.

(More: SoFi to add human advisers to its digital wealth management platform)

Robinhood co-CEO Vlad Tenev was frank about his lack of concern with traditional brokerages like Charles Schwab lowering fees and developing mobile technology to compete for millennial investments. And Wealthfront CEO Andy Rachleff, never one to pull punches with the traditional advice industry, didn't hesitate when asked whether he considers human financial advisers to be overrated or underrated.

"Underrated," he said.

Though Mr. Rachleff extolled Vanguard as a company, calling them "the only financial services company we know that always puts the client's interest first," he said.

Wealthfront can compete with the firm on cost and outperform them in user experience.

"Vanguard doesn't have any designers," Mr. Rachleff said. "They have the best index funds on Earth, but if you look at service that combines all those things, it looks like 1997."

He believes this will attract digitally native investors to fintechs instead of traditional financial firms in the long run. Mr. Rachleff's vision for Wealthfront is a single platform where millennials can deposit paychecks, automatically pay bills, top off emergency funds and invest their remaining income towards financial goals. He also teased an upcoming feature on the digital advice platform that will help young people set aside money to better afford taking time off from work, whether to raise a child or to return to college.

(More: Robo advisers are stepping up their financial planning)

The drive to upset the status quo is nothing new, in fact it's an entrenched aspect of the Silicon Valley ethos. But it may come as a surprise to financial advisers who were beginning to see robo-advisers and other fintech startups as partners rather than competitors.

After all, Betterment now has its own staff of human advisers and makes a white-label version of its technology available to advisers. Other techs have been acquired by large firms, while others have pivoted to a business-to-business model instead of trying to compete directly in the retail market.

Meanwhile, the traditional firms are trying to be more like technology companies. Wall Street firms are relaxing dress codes, embracing mobile communications and introducing their own digital advisers. About half of the job openings at Goldman Sachs are in technology, said CB Insights co-founder and CEO Anand Sanwal.

But many firms still shrug off emerging companies coming from the Bay Area, falling back on platitudes like "we're a highly regulated industry" to convince themselves they are safe from the same forces that have reshaped retail, telephones, entertainment and transportation. Firms do so at their own peril, Mr. Sanwal said.

Fintech growth is only going to accelerate from here, Mr. Sanwal said, and disruption that was gradual will soon become sudden.

"Don't miss the upstarts. Acknowledge their existence," he said, recommending financial institutions embrace data-driven decision making and look outside their own company for innovation.

And one final piece of advice:

"For the love of God, stop it with the consortia," Mr. Sanwal said.

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