FinTech Central: The 2nd Wave of FinTech

Canaan recently hosted our West Coast edition of FinTech Central (FTC) to discuss the current state of infrastructure in fintech. FTC, which launched in 2015, is our quarterly panel discussion about trends in the fintech ecosystem. At our first FTC, marketplace lending for XYZ and bitcoin were hot. Fast forward two years and we’ve seen a compression in global fintech investment. The data show that the first wave of fintech was focused primarily on consumer facing products, and after the panel, we now know that the underlying infrastructure of finance is horribly broken. The next generation of fintech products must take on the core of financial products, which, in turn, will improve the consumer experience.

At our FTC West Coast on April 6th, we were fortunate enough to be joined by a cross section of leaders to discuss the infrastructure refresh, including Zach Perret, CEO and Co-Founder of Plaid; Ben Duranske CEO and Co-Founder of compliance infrastructure startup CCOBOX; Sameer Gulati, COO of Canaan portfolio company, and fintech turned incumbent, Lending Club; and Victoria Cheng of Citi Ventures.

The consensus? Unsurprisingly, every panelist agreed about the scope of the opportunity in fintech infrastructure. When banks first created products, they weren’t thinking about the internet, or even the telephone. Products were built one after the other, creating modularity in the stack, both from a tech perspective, but also a people perspective. The payment system is separate from the software that stores customer data and these teams are also often separate and operate in different geographies. Sameer pointed out that the customer facing pieces have been largely solved, but the core remains broken. Zach and the team at Plaid found this early on and focused on making their product work for the developer first, and in turn the consumer.

The most challenging aspect of building a B2B fintech company is clearly the long sales cycles. Ben from CCOBOX recommended focusing on a very narrow problem within the financial institution to whom you’re selling (and if that doesn’t work, buy a few new suits and ties). According to Citi Ventures, APIs are a mechanism to facilitate B2B partnerships ultimately improving customer experiences.

Another point of consensus among our panel? A lot of teams out there are good at the tech but not the financial services. And those that are good on the financial services side sometimes haven’t paid enough attention to the tech, particularly with regard to encryption, scalability, security, or privacy controls. The good news? Startups strong on both sides of the spectrum clearly stand out.

The end goal for financial services companies is to make highly personalized recommendations and experiences available to everyone. Although not quite a reality today due to an archaic infrastructure, open development enabled by APIs can distribute these personalized products at scale. Ultimately, I think the fintech ecosystem life cycle will mimic Plaid’s own story. The founders initially started out trying to build a personal financial management app, and then quickly realized that the necessary platform layer didn’t exist, so they built one, for the benefit of the entire ecosystem. Zach’s parting advice for startups was to think about things in an entirely new way as opposed to trying to scale the existing stack. I’m looking forward to seeing who takes that advice — and what they do with it.

Thanks again to Ben, Sameer, Victoria and Zach for joining us at FinTech Central.