Anchoring Oak’s efforts out West

**This post was originally published on the Oak HC/FT website here**


Last month, I joined Oak HC/FT’s San Francisco team. I could not be more excited to help identify and partner with the next generation of entrepreneurs in FinTech, building on Oak HC/FT’s strong legacy of investors and operators who have built enduring companies for decades.

Over the course of the last ten years, FinTech has really begun to hit its stride. There are now nearly 40 FinTech unicorns globally (more than any other vertical) worth an aggregate value of nearly $150B. Not bad for a sector that didn’t have a ton of buzz when Oak first started investing in the space in 2002.

FinTech_CBInsights
Source: CB Insights

And this is just the beginning, there will be much more to come in the next 10 years. As I look to the next decade to come, I’m first and foremost eager to learn from the founders and entrepreneurs building at the fore-front of our industry. That said here are a few themes I have been thinking about deeply in recent months and am particularly excited about:

Vertical payments: We have already seen a few successful versions of this playbook including: Toast (restaurants), Flywire (travel & education) and PayIt (government.) But many more verticals could benefit from a bespoke, vertical-specific payments solution including pharma, logistics, manufacturing and more.

Next-generation commerce: Innovation in commerce in recent years has largely come in the form of new payments options (like Square, Affirm and Afterpay.) The next wave of innovation will enhance in-store commerce, logistics/ delivery/ returns, international commerce and buying via new mediums like voice, computer vision and mixed reality.

Intersection of FinTech + AI: Machine learning is already being used in financial services. Our portfolio company, Feedzai, uses machine learning to help banks and merchants fight fraud. In the years to come machine learning will stretch beyond risk and into underwriting, product discovery, predictive intelligence and a number of other use cases.

Middleware tools for developers: Stripe and Plaid have shown us that developers are the next big consumers of financial data and they require tools to access and use that data: be it payments meta-data, account information or piping infrastructure to connect with other financial institutions. As microservices and APIs continue to proliferate, developers will require more tooling to serve end customers.

Banking Applications: Many financial services incumbents suffer from manual-heavy tasks for workflows that have struggled to make the transition to digital. Our portfolio companies Kryon (robotic process automation) and Ocrolus (digitizing financial documents) are two examples of the new wave of companies focused on automation, software-enabled workflows and refined banking applications.

Back-office application software for SMBs: The software stack for most functions (e.g. marketing, sales, customer support, etc.) within an SMB certainly looks a lot better than it did 5 years ago when Oak first invested in Freshbooks. But the finance and accounting functions remain underserved. As SMBs demand better software for their back offices, new entrants will rise to the occasion, providing these businesses with a better way to close their books, pay their vendors and manage payroll.

Financial services for the underserved: Banking services have improved for many of us but there remain many demographics that are underserved. Oak has a history of investing in this category, dating back to NetSpend, which went public in 2010. I’m excited to see founders focus more on low-income Americans, immigrants, freelancers/1099s, older (and younger) generations, those with large sums of student debt, etc.

Future of real estate: Almost everything about commercial and residential real estate stands to be improved for both buyers and sellers. Moreover, the ecosystem players around them (e.g. brokers, agents, lenders, inspectors, etc.) are still mid-transition to cloud-based tools. New entrants in real estate will find ways to improve workflows for these ecosystem players or generate more economic value for buyers and sellers.

If any of this resonates with you, let’s get in touch. I’m focused on opportunities on the west coast (and that certainly includes more than just the Bay Area!) But even if you are outside the west coast, I still want to hear from you. Looking forward to finding ways to collaborate!

Matrix FinTech Index: 2018 Edition

The full overview of the Matrix FinTech Index 2018 edition is available on TechCrunch here.

At the end of 2017 we published the Matrix FinTech Index for the very first time. In what we hope will become an annual tradition, we are excited today to publish an updated index and set of supporting data.

There is no doubt that this has been another stellar year for fintech. In last year’s version of the Matrix FinTech Index, we predicted the crypto enthusiasm would be short lived and that the fintechs would be the more relevant disruptors in 2018. By most metrics this seems to have turned out to be true. A comparison of search interest in “fintech” vs. “crypto” is one clear indicator of this:

Figure 1.jpg

Definition: Matrix Partners considers “fintechs” to be venture-backed organizations that are (a) technology-first companies that leverage software to compete with traditional financial services institutions (e.g. banks, credit card networks, insurers, etc.) in the delivery of traditional financial services (e.g. lending, payments, investing, etc.) or (b) software tools that better enable traditional finance functions (e.g. accounting, point-of-sales systems, etc.)

Methodology & Results

As a refresher, the Matrix FinTech Index is a market-cap weighted index that tracks the progress of a portfolio of the 10 leading U.S. public fintech companies over the course of the last two years (beginning in December of 2016). For comparison, we have also included another portfolio of 10 large financial services incumbents (companies like JP Morgan, Visa and American Express) as well as the S&P 500 index.

With two years of data now in, the results are pretty clear — the fintechs continue to outperform both the incumbents and the S&P 500. 2 year-returns for the fintechs were 133% compared to 34% for the incumbents and 24% for the S&P 500.

Figure 2.jpeg

Updated Data Now Available

As we did last year, we are releasing an updated data package that anyone can download here and which has a range of other helpful information on both the U.S. fintechs and the incumbents. The updated package has much of what we had last year plus a few newer elements:

  1. Market cap and stock price data for the fintechs and incumbents
  2. Comp sheets with financial metrics
  3. Data on the 20 fintech unicorns
  4. Information on the fintech “Brink list” — companies that have raised over $100M in equity financing
  5. M&A & IPO activity in fintech this past year

As always we appreciate your feedback and thoughts on the process and methodology. And we look forward to sharing our thoughts again in 2019!

Enterprise Payments: The next frontier for payments innovation

Towards the end of 2017, we discussed the rise of the FinTechs and briefly alluded to payments as being a key area for further innovation. The payments ecosystem is an ever-evolving space froth with opportunity and plenty of buyers with deep pockets (see Paypal’s announcement a few weeks back). Furthermore, it is a deeply intricate ecosystem with challenging technical problems, shifting regulatory components and a variety of consumer and enterprise use cases. For all these reasons, it is worth a “double click” to explore further.

We have already seen huge amounts of innovation in payments over the last few decades. In the U.S., this innovation was enabled by a few important advances. The establishment (and operation) of ACH by the Federal Reserve Banks and EPN created a much needed electronic network for financial transactions. NFC technology and POS hardware enabled mobile payments. More recently, pay-out APIs and fraud management systems have allowed developers and those working in risk to manage feature build-out while also keeping an eye out for bad actors. And we are just beginning to see some applications of crypto in the payments space — such as this.

Despite these advances, most of the innovation has been focused on two areas: consumer-to-consumer payments (e.g. Venmo), business-to-consumer payments (e.g. Square) or new entrants that facilitate one of the two (e.g. Stripe). A third category, business-to-business payments, has not benefited from innovation to the same degree as the other two categories. This is particularly interesting given that the market size of B2B payments is 5–10x that of C2C or B2C payments. And yet, technology has been slower to transform the B2B payments world. Case in point, B2B payments made by the good ol’ check, as a share of overall transactions, leveled off around 2013 at a point significantly higher than C2C and have actually gone up slightly to ~51%.

Figure 1.jpeg

Existing Challenges

In the early days of C2C and B2C payments, there were many intricacies from a technical and regulatory perspective that had to be navigated very carefully. After all, real consumer money was at play so the stakes were high. The same is true in the B2B world, with a few additional challenges that make things even more hairy:

  • Transaction values are significantly higher: While the volume of B2B payments is much lower (some say in the 9:1 range compared to B2B + C2C), the value of these payments per transaction is much larger. This makes enterprise transactions prime targets for hackers, front-runners and a host of others with bad intentions. Beyond the actual financial risk, enterprises also risk having the banking information of their suppliers and customers exposed.
  • There is greater complexity: In the enterprise payments context there is significantly more complexity. Let’s take the simple example of someone in procurement trying to pay a supplier. Post RFP, legal review, etc., the buyer will need to first work with the various business units and other internal stakeholder to issue a purchase order. The supplier must do the same in order to provide an invoice to the buyer. The buyer must then send a request to the card issuing bank (via p-card or some other mechanism.) The buyer’s bank must then handle settlement with the supplier’s bank. This may happen via check, credit, debit, ACH or even cash. Post-settlement, the buyer and seller must ensure that both their internal financial systems and/or ERP systems are accurately updated. Imagine the complexity involved when doing this hundreds or thousands of times per day across many different payment types (one-off, recurring, up-for renewal, etc.)
  • Many people are involved with any given transaction: As a result of the greater complexity, many heads are involved on both sides of the transaction. Procurement, legal, finance and the BU may all be involved at various stages. B2B payments affect the workflows of a much broader set of people than C2C or B2C payments.
  • The life cycle of a payment is longer: As a result of the added complexity and multiple stakeholders, the duration of the payment is longer than in the C2C and B2C contexts. C2C payments in today’s world can clear in a matter of minutes. On the enterprise side, the payment life-cycle can have a duration of 60, 90 or even 180 days.
  • The life cycle of a payment is longer: As a result of the added complexity and multiple stakeholders, the duration of the payment is longer than in the C2C and B2C contexts. C2C payments in today’s world can clear in a matter of minutes. On the enterprise side, the payment life-cycle can have a duration of 60, 90 or even 180 days.
  • The U.S. is not well structured for top-down fixes to B2B payments: When Europe moved to the Euro, all the participating countries did a significant overhaul of their banking systems allowing them to make significant upgrades to the tech stack. In the process, they solved a number of the pain points above (including significant reduction/ elimination of checks). But in the U.S., the Fed does not have the authority to mandate unified standards. Lack of standardization is particularly tough in the U.S. as we have many more banks than Europe (including regional and community players) — creating a major interoperability problem with few bank-agnostic solutions. Meanwhile, the U.S. banks themselves have made little attempt to create a common solution to fix the antiquated system.

Key Opportunities

While these challenges are daunting (they most certainly are not for the faint of heart!), the good news for new entrants is that the banks and other FIs are unlikely to be the ones to fix enterprise payments. We believe FinTech startups are best positioned to make progress here, bottoms-up. More specifically, there is an enormous opportunity to capture value in enterprise payments($2.1T in payment revenue by 2026) across 5 specific subcategories: (1) capital markets, (2) procurement, (3) treasury management, (4) payment dev-tools and (5) blockchain.

Figure 2.jpeg

  • Capital Markets: Many parts of capital markets (e.g. HFT, commercial lending, etc.) send/receive very large transactions each day. Most of the time these payments are slow, expensive and require manual reviews to ensure they are valid. In the HFT world, for example, every minute matters when making a trade and fees add up. Payments solutions that focus on speed and automation, without sacrificing security will do well here.
  • Procurement: In procurement, enterprises and their suppliers face the problem of trying to integrate procurement software tools, with ERP systems and antiquated payment processes. This problem is particularly challenging with services and in the “long-tail” spend, where some enterprises have to pay tens of thousands of suppliers each year. Solutions that integrate with existing software solutions, simplify the enterprise’s workflow and get the money to the supplier faster (e.g. lower DSO) will have the most success here.
  • Treasury Management: Initiating and managing ACH payments to other businesses, auditing those payments and then closing the books at the end of the month is still not straightforward. Software tools that provide solutions for both the finance and the tech team to navigate this process have a shot at building a must-have for anyone trying to get a grip on treasury management. Particularly for SMBs who don’t have the luxury of simply throwing more people at the problem.
  • Payment Dev Tools: Companies like Stripe and Plaid have created great APIs and financial plumbing tools. But they are largely focused on C2C and B2C payments. B2B developer tools / APIs that work for the IT and risk departments of enterprises and address the complexity therein will do well. Certainly a hairy problem to figure out but there is a lot of spend here for the right solution.
  • Blockchain: In the short run, blockchains have enough technical issues (e.g. scaling, interoperability, etc.) to work through. But in the long-run distributed ledger technology can provide a single database of truth between two enterprises, eliminating the need for ledgers on both sides and making verification/ security a bit more manageable. The real question from a B2B payments perspective is not “if” but “when.”

At Matrix Partners we are deeply interested in backing the next generation of enterprise payments companies. We focus primarily on Seed/ Series A investing here in the U.S. Please let us know if you are building something interesting here — would be great to meet up and learn more!

FinTech: We’re just getting started

Global FinTech investment in 2017 was unprecedented with $16.6B of capital (+20% compared to 2016) deployed across 1,128 deals. Despite this, some have argued that FinTech’s days are numbered and that it is less clear how much opportunity still remains for future innovation. Proponents of this line of thought argue that most traditional financial services have already been unbundled and that large startups that dominate areas like payments, lending, and investing have even begun to re-bundle services. Moreover, despite the uptick in investment into the sector, the early-stage portion of overall financing dropped to a 5-year low which has further supported the belief that most of the innovation in FinTech has already happened.

At Matrix, we believe that we are still in the early innings of the financial services disruption. While FinTech startups have done very well in the last decade, there is still room for more great companies to be built. As a follow-up to our previous article where we introduced the Matrix FinTech Index, we have put together a corollary to that piece where we specify 7 tailwinds that have powered FinTech innovation for the last 10 years, discuss key drivers for future innovation, and identify the subcategories we believe are most promising.

Review of 7 important tailwinds for innovation in FinTech the last 10 years

  • Mobile has been leveraged as an enabler: Companies like Squareleveraged mobile as a way to reduce the cost of doing business for merchants by allowing for new features like secure payments via mobile applications.
  • The financial crisis created unmet demand: Incumbent’s unwillingness to lend to credit poor individuals and high-risk SMBs created a window of opportunity for companies like Lending Club and OnDeck to fulfill this unmet demand.
  • The payments infrastructure opened up to developers: APIs and developer tools made available by companies like Braintree and Stripeallowed developers to integrate payment processing into their websites without the need to maintain a merchant account.
  • Online banking penetration unlocked important customer data: Deeper penetration of online banking has made it possible for companies like Yodlee to allow users to see all their banking information on one screen and others like Credit Karma to provide credit monitoring services.
  • Core financial services have been unbundled: Many sub-segments traditionally handled solely by the banks have been unbundled. For example, SoFi is helping with borrowing, Xoom with money transfers and Mint with financial management.
  • The cloud provided a new distribution channel to serve SMBs: Companies like Kabbage, which provides loans to SMBs, can now justify serving lower life time value customers like SMBs due to the lower customer acquisition costs associated with the cloud.
  • Digital disintermediation provided greater value to consumers: Companies like WealthfrontBetterment and Robinhood all reduce the fees charged by brokerages and traditional investment managers providing greater alpha to retail investors.

Key drivers for innovation in the next 10 years

Many of these 7 trends will continue to play a role in FinTech innovation moving forward. But we have identified 3 additional drivers for innovation in FinTech going forward.

1. Incumbent failures are really coming into focus.

Traditional financial institutions are anachronistic. They serve their customers with antiquated products and are often slow to innovate due to both their size and regulatory burdens. Moreover, financial products have historically not been customer-centric, as banks devote most of their resources to optimizing their data and analysis and boosting their bottom line. Consequently, incumbents in financial services have largely failed to meet the needs of consumers, and the emergence of FinTech has put their shortcomings under the spotlight.

Figure 1

While financial services as an industry has been notorious for low consumer trust levels, consumer trust has plunged even further in the wake of fraud, scandals, and data breaches (e.g. Wells Fargo and Equifax). Additionally, poor customer experience has left consumers with limited loyalty to their financial services providers.

2. Millennials are emerging as the new source of spending power.

Millennials are the largest generation in American history consisting of over 70 million people born between 1980 and 2000. Millennials are digital-first users who grew up distrustful of banks and are generally more inclined to try FinTech applications. Furthermore, while traditional financial services has focused on large pools of wealth characteristic of older generations, FinTech innovation is making financial services and products much more accessible to younger generations.

Figure 2

3. Due to the transition of profit pools, incumbents are going to become a lot more acquisitive in the coming months.

Incumbents have begun to acquire FinTech companies as a means to compete against innovative startups and other acquisitive incumbents. Many of the acquisitions so far have been centered around automation of basic tasks. In the last 5 years, 18 FinTech startups have been acquired by banks, with 8 acquisitions occurring since the beginning of 2017. We believe that there is much more opportunity and incentive to acquire — especially for technologies that go beyond automation.

Figure 3

5 subcategories we are most excited about

Ultimately we believe the incumbents will continue to lose ground to the FinTechs and that there is plenty of opportunity for entrepreneurs to build enduring companies in the sector. Great companies will certainly be built across the entire financial services industry, but here are a few sub-categories within FinTech that we think are particularly exciting:

  • Payments: Even with all the innovation to date in payments, there continue to be pain points throughout the category and many customer demographics remain underserved. In order to be successful in this category, new entrants will need to build on-top of existing payment rails, serve large TAMs and go after new use cases.
  • Investing / wealth management: Despite recent innovation by players like WealthfrontBettermentRobinhood and others, wealth management remains dominated by the incumbents. This reality makes the category a ripe one for entrepreneurs as there are large TAMs, poor customer experiences and a new generation (i.e. millennials) that have unmet needs. Success here will require intuitive design, low fees and efficient customer acquisition.
  • Infrastructure Apps: Financial institutions suffer from bloated cost structures in the middle and back office for tasks like fraud/ risk management, collections, invoice management and customer support. There’s an opportunity for entrepreneurs to provide software tools that reduce costs and allow for more efficient work flows if they can manage the lengthy sales cycles and procurement processes.
  • SMB tools: Companies like Gusto and Namely, have begun to serve SMBs in areas like payroll and benefits administration. Even so, SMBs remain largely underserved compared to larger enterprises. FinTech companies that can acquire SMBs efficiently and provide enterprise-level experiences will be able to generate enough value to their customers to create large outcomes.
  • B2B Lending tools: On the consumer side, lending has become pretty crowded with some of the winners already declared. But on the enterprise side, the category is very ripe. The opportunity for entrepreneurs is in leveraging data at cloud scale combined with advances in machine learning to allow enterprises to better assess borrower risk and drive higher yield.

The author would like to thank Sreyas Misra for his contributions to this piece.

Revolutionizing wealth management with Jon Stein, Founder & CEO of Betterment

In this fourth episode of Focus on the Founder, Jon Stein, Co-founder & CEO of Betterment joins us to discuss his career journey, experience starting Betterment while in business school and thoughts on wealth management and investing more broadly.

Jon Stein (Founder & CEO, Betterment)

Achieving Personalization At-Scale

Betterment is a robo-advisor platform that provides investment advice and wealth management at a low price point. The wealth management space is fiercely competitive. Startups like Betterment, Wealthfront, and Robinhood as well as incumbents like Vanguard and Schwab have all entered the space, competing to provide personalized, low-cost advice to consumers.

Since Betterment launched in 2010, their assets under management have grown rapidly, reaching almost $12 billion earlier this month. During this conversation, Jon discusses his experiences growing Betterment, and how Betterment has succeeded in such a competitive environment through truly putting the customer first. As always, you can find the full podcast episode on SoundCloudiTunes, and Google Play.


Key Thoughts from Jon on…

The reasons behind founding Betterment:

While working for the First Manhattan Consulting Group, Jon advised some of the world’s largest banks and brokerages. In the process, Jon gained an insider’s perspective on how banks operate and serve their customers. His product-development engagements with banks typically involved working on the key aspects of their products such as default rates and internal transfer pricing. Notably, these larger players paid almost no attention to their customers during the product-development process, as they focused much more on optimizing their data and existing flows, which Jon found perplexing. While working in Australia, Jon encountered user-centric financial products not available in the US at the time, such as the mortgage-offset account which combines a traditional mortgage and deposit account.

These experiences helped frame the problem that Betterment aims to solve — that “the old way of managing money is broken.” Investment management should be held to a higher standard — one which focuses far more on consumers.

Building a team:

Jon committed to starting Betterment before starting his MBA at Columbia Business School. In the early days, building Betterment was a two-fold challenge — building the actual product and navigating the regulatory challenges of being an investment advisor.

Sean Owen, Jon’s roommate at the time, provided much of the early engineering expertise. Sean was a software engineer at Google who studied computer science at Harvard, and built the back-end of Betterment while Jon worked on the front-end. Jon eventually met Eli Broverman during a weekly poker game. Eli, who was then a securities attorney, provided the legal expertise and helped Jon navigate through complex regulatory landscape. Sean and Eli’s skillsets were diverse and congruent with the early challenges that Jon needed to solve.

The fundraising journey:

Betterment launched at TechCrunch Disrupt in 2010, where they competed against 500+ entrants, many of which had already raised some amount of funding. Betterment went on to win the competition, giving him crucial exposure to customers and investors. Immediately following the competition, Betterment signed up 400 new customers, who helped drive Betterment’s initial organic growth by way of referrals. The boost in credibility from the event made it easier to hire new employees, and helped Betterment rapidly grow from what was at the time a four-person team.

Just as important, preparing for the Disrupt presentation helped Jon and his team internalize their story and understand how to best pitch the idea. A month following the TechCrunch competition, Jon was able to raise $3 million from Bessemer Venture Partners.

How Betterment puts customers first:

Since the initial investment from Bessemer, Betterment has secured $275 million in funding and has grown significantly in employee count and AUM. In this period of growth, Jon doubled down on the theme of bringing the voice of the customer into every interaction. This focus has helped Betterment withstand the test of time and compete effectively against a host of startups and incumbents offering similar services.

Private Robo-Advisors in the Wealth-Technology Category

Source: CB Insights

Betterment puts the customer first by:

1. Personalizing advice

Betterment’s vision is to provide excellent financial guidance that is easy to understand and available to everyone. Betterment is unique in that it offers a spectrum of interaction-types: customers who prefer human interaction can receive hybrid-robo solutions through Betterment’s unlimited text messaging and premium telephone access services. By prioritizing the education of their end-user, Betterment offers a suite of solutions to improve consumer-access to financial markets.

2. Building trust

Financial services as an industry has historically had a low NPS. Betterment strives to build trust with its customers as both an ethical obligation and a means of differentiation. In addition to investment advice, Betterment publishes scores of articles helping consumers understand their personal finances, navigate through tax reform, and manage their expenses. Betterment also has no holdings of their own; thus, they eliminate many of the conflicts of interest present in most banks.

3. Combining responsibility with wealth creation

Betterment offers a way for consumers to hold well-diversified portfolios that are also socially responsible through their socially responsible investing (SRI) portfolio. Social responsibility doesn’t just afford Betterment an additional dimension of personalization; it also reflects well on their brand as an ethical investment advisor.

The future of investment management:

In this bull market, massive amounts of capital have been pushed into indices and ETFs, which represent a little over 10% of the global equity market capitalization. In fact, these indices and ETFs, spearheaded by firms like BlackRock and Vanguard, have outperformed an overwhelming majority of hedge funds.

Net flows into U.S.-based passively managed funds and out of active funds in the first half of each year

Source: Bloomberg, ICI

Jon explains that Betterment is here to stay even in increasingly likely bear market scenarios, as the same principles of minimizing cost and managing tax burdens that currently power Betterment’s platform still apply during downturns. Through careful risk-management, alternative investment strategies, and optimizing customer behavior to prevent market panic, Betterment aims not only to protect its customers in bear markets but also provide them competitive returns.

Bringing financial services to emerging markets with Shivani Siroya the Founder and CEO of Tala

In the third episode of Focus on the Founder, I sat down with Shivani Siroya, the Founder and CEO of Tala. Shivani’s background comprises a unique mix of experiences in global health at the UN Population Fund and traditional investment banking at Credit Suisse, UBS, and Citi. In 2012, Shivani started Tala, then known as InVenture, to address some of the economic challenges she observed in Africa and Asia while working for the UN.

Shivani Siroya (Founder & CEO, Tala)
Tala as a Solution to a Global Problem
Tala is a mobile-technology startup based in Santa Monica, CA that enables underserved people in emerging markets to access conventional financial services. Targeting an estimated population of 2 billion people, Tala’s smartphone-lending app delivers credit to borrowers with little-to-no financial history by using thousands of mobile data points to calculate an alternative credit score. The company has already disbursed over $225M in credit via 4.6 million microloans to borrowers across East Africa and the Philippines, and has plans to expand into Latin America and Southeast Asia.
Percentage of population (% ages 15+) with bank accounts, by country
Figure 1
In this conversation, Shivani discusses her experience growing Tala and the challenges and opportunities of bringing financial services to the underserved. YYou can find the full podcast episode on SoundCloudiTunes, and Google Play.

Key Thoughts from Shivani on the…

Reasons behind founding Tala:

Shivani created Tala to solve a real problem. While at the United Nations Population Fund, she helped develop costing models and conducted thousands of interviews across multiple countries in Africa and Asia. Over this period, she witnessed the same problem occur: large populations of responsible, hard-working people who were unable to take out a loan due to lack of any financial history. Her decision felt “almost unconscious” simply because this was a huge problem that someone had to solve.

Creation of a new market:

Because Tala attracts customers that are largely not covered by credit bureaus and lack access to traditional banking, Shivani explains that Tala’s Total Addressable Market (TAM) is about 2x that of a traditional lending company. Furthermore, by allowing borrowers to register with their smartphone and receive credit in a matter of minutes, Tala’s transformative user experience takes advantage of rapidly rising smartphone usage in emerging markets.

A Projected Upsurge in Smartphone Ownership in Emerging Markets

Figure 2

When choosing early adopter regions, Tala takes into account factors like political infrastructure, regulatory concerns and currency fluctuations — in addition to smartphone penetration.

Benefits and challenges of leading a distributed team:

Tala employs 165 people divided across three offices in Santa Monica, Manila and Nairobi. Because Tala has a global vision and is a customer-centric company, Shivani explains that Tala is required to have a distributed team to stay close to the customer. Hiring both engineers and customer-facing employees across all locations, Tala is able to track and serve the needs of an incredibly diverse user base. Proximity has proven especially critical to acquiring customers in close-knit communities. While Tala’s primary acquisition channel is digital (e.g. Facebook, Google AdWords, and Twitter), their organic traffic has been largely driven by referrals, radio, comment boards, and offline campaigns. Thus, a distributed team-structure has helped Tala achieve above 90% month-over-month growth in loan origination across all markets.

Leading a distributed team does not come without challenges. Research has found that distributed teams often suffer from communication barriers, differential knowledge bases, and inconsistent value systems. To overcome these hurdles, Shivani has:

  1. Instituted a core-set of founding principles that pervades across all three offices
  2. Required that all employees contribute to user research and be transparent about customer insights
  3. Conducted all final-round interviews to ensure a common cultural thread between all hires
  4. Made office managers travel quarterly to the other company locations

Split between balance-sheet and marketplace lending:

When Tala enters a new market, the company lends off of its own balance sheet as they gather customer data and develop and localize their credit models. As data is gathered and Tala’s models become more predictive, Tala moves more toward lending from a debt facility backed by traditional institutional investors and high net worth individuals.

Data-driven approach to Loan Financing:

Tala collects 10,000+ different data-points from a user’s smartphone to calculate an alternative credit score. Users are debriefed on how their data is utilized and can limit how much they share with Tala by toggling privacy options by data-category.

Shivani argues that tracking metrics as varied as financial transactions, social network diversity, and relationship stability, paint a more complete picture of a borrower’s riskiness compared to traditional credit-score inputs. Moreover, while some microfinancing options have been known to offer exploitative interest rates, Tala carefully customizes loan sizes and terms to their customer’s financial needs and risk tolerances. In addition, Tala differentiates on the speed dimension — approvals are instant, and most customers receive credit in less than 5 minutes. As a result, Tala has kept their repayment rates above 90 percent, and more than 95% of Tala’s first-time borrowers return for additional loans.

In addition to individual-level factors, Tala also considers macro-effects such as unemployment rates, purchasing power, GDP, and political instability.

Penetration of crypto-currencies and blockchain in the developing world:

Shivani explains that while the markets in which Tala is involved have not experienced much penetration by cryptocurrencies, Tala has started to investigate crypto as a means of currency exchange and moving capital. Furthermore, Shivani envisions that blockchain might play a crucial role in allowing Tala’s users to transition from a country-specific to a global financial identity.

 

The Rise of FinTech: Introducing the Matrix FinTech Index

The full overview of the Matrix FinTech Index is available on TechCrunch here.


Over the course of the last few years, FinTech as a category has really taken off. Five years ago the term ‘FinTech’ was not something most people had heard of other than a few early players in the startup ecosystem.

Today, FinTech is ubiquitous. In fact, the term has become synonymous with innovation in financial services — it’s hard to imagine a world without PaypalVenmoSquare and many others. The Google Trends chart below describes this explosion in FinTech interest best.

Definition: Matrix considers “FinTechs” to be (a) technology-first companies that leverage software to compete with traditional financial services institutions (e.g. banks, credit card networks, insurers, etc.) in the delivery of traditional financial services (e.g. lending, payments, investing, etc.) or (b) software tools that better enable traditional finance functions (e.g. accounting, point-of-sales systems, payments, etc.)


Methodology and Results

With an eye towards tracking the progress of disruption in the financial services space, we’re excited to release the Matrix U.S. FinTech Index today.

This market-cap weighted index tracks the progress of a portfolio of the 10 leading public FinTech companies over the course of the last year (beginning in December of 2016). For comparison, we have also included another portfolio of the 10 largest financial services incumbents (companies like JP Morgan, Visa and American Express) as well as the S&P 500 index.

As seen below, the Matrix FinTech Index shows a clear win for the FinTechs, who have collectively delivered 89% returns in the last 12 months. This is 60 percentage points higher than the 29% returns delivered by the incumbent portfolio and well above the S&P 500 Index.


Additional Data Now Available

Our hope in the coming months is to provide periodic updates to this Index. In addition, we are releasing a data package that anyone can download here that has a range of other helpful information on both the FinTechs and the incumbents. More specifically, the package includes:

  1. Market cap and stock price data over the last year for the companies in the index
  2. Comp sheets that include financial metrics on the public companies
  3. Summary data on private FinTech companies valued at over $1B

Finally, this index is dynamic — we fully anticipate that it will be tweaked and refined in the coming months. Please feel free to send us your thoughts and feedback as we refine the process and methodology.