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From Mobile Wallets to Blockchain: How Fintech is Growing Up


The fintech sector has been evolving rapidly as new startups emerge and large financial institutions figure out how to adapt...or else get left behind. To understand where we are in the "three waves of fintech," we spoke with Jeff Gido, global head of the financial technology sector in Goldman Sachs' Investment Banking Division. "We're seeing much more two-way dialogue [between financial services incumbents and startups]. We're seeing much more cooperation, much more partnerships. And we're actually seeing a lot of investment by traditional financial services into these fintech startups."

This podcast was recorded on March 8, 2018.

The information contained in this recording was obtained from publicly available sources and has not been independently verified by Goldman Sachs. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the information contained in this recording and any liability as a result of this recording is expressly disclaimed. The recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording does not establish a client relationship with Goldman Sachs.

Copyright 2018 Goldman Sachs & Co. LLC. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This year's exchanges Goldman Sachs, where we discuss developments currently shaping markets industries in the global economy, on Jake, Seward, global out of corporate communications. Here at the firm, the fin tech sector has been evolving at a rapid pace as new start ups emerge and large financial institutions figure out how to adapt, or else get left behind, to understand today's key fin tech trends and what they can expect from next generation contact business models were joined by Jeff Kido Global out of the financial technology sector in the firms, investment, banking division, Jeff walk into the programme
thanks Jake. So let's start at just a big picture, a question: what are your investment banking clients focused on in the fin tax base right now? What's Evelyn Talkin about we're going on at least the six or seven year here in this vein tax, I call that we ve been going through coming out of the great financial recession and we're starting to see a couple. Different trends emerge. That's really taken up a majority of our dialogue with our investment banking clients. First, I would say there maturation overall of where we are late stage cycle and that has led to real or more in companies no longer being start ups anymore, their actual real companies with real scale and scale just coming from the number of active users they have or the eyeballs are getting there. in real money. They're, making profits are going public, so I think there is a class of companies separating themselves from the pack. Second, I think the traditional fin tech and comments are starting to
to get more tech, so their investing more in software there talking more about AP eyes. They realise that the world's going and they ve been kind of shown. The light. My allotted these emerging fin tech companies in the third thing, I would say, is just the financial services companies that we cover are clearly focused technology now, where they may have been distracted because of capital, irregular reasons over the prior five years is really been a critical part of their investment strategy, of their build strategy and obviously as part of their communication strategy. So it's a fascinating timer. and obviously blockchain and Bitcoin. Everyone wants to talk about that as well, so big secular changes in thin tech, including how consumers are making payments these days. a little bit about the impact of Omni Channel mobile wallet growth than those sort of phenomenon as their starting to get broader adoption Now, if you look over the last five years and you think, for example, how a more
phone was used in two thousand and eight verses. Two thousand a eighteen is dramatically different as far as just making phone calls verses. Now that, how we start our shop in experience so, whether its in shopping for financial services or shopping for retail services, commerce has fundamentally changed over the last five to ten years, and one there's just more form factors whether its mobile credit card to our codes. Key fobs tokens there's a number of different ways to pay in a number of different device types, and so that just brings complexity around payments where there was less five year. Go, and so it's an increasingly complex environment and then to your point, it's an army, general environment. So again, whether your shopping for financial services for grandma, there needs to be a brand for you and me there needs to be online banking generate yams and for our kids, there's gonna be mobile or whatever follows next. In the same thing in a red environment as well, and so right now, I think there's a burden
on traditional payments, companies, financial services, companies and retailers to kind of be everywhere for everyone, until they can sort out how they want to conduct commerce, the. U S was quick out of the gate on mobile. while a little China's gone way ahead and as some emerging economies It's gone on there now is really a fascinating the world and, I think part of the issue with some of the developed markets like the. U S was one. There was a of comments who wanted to be part of the mobile wallet. War. Our party and want to have their own solution, and there was a lot the economics or customer at risk and then said while there was a lot of legacy infrastructure here like point of sale at retailers or p m or other things that really don't exist when you go to markets like China and India, those consumers are going straight to mobile straight to Digital, think about personal reason, have a credit card reader. When you can turn off your phone, exaggerate exaggerate, and so I think those two trends have hit home
markets, like India and China, and that's why we're seeing widespread mobile adoption, widespread use of technology and digitization of financial services in those markets, so retail banking It's been a while, but it's going now through pretty rapid parity of disruption, partly because a regulatory pressures partly the rise of tech based lenders and our their spending more on tackling data now took us through a little bit of the dynamics, what we're seeing in the retail banking space. If you go back seven years ago, post the global financial crisis, retail banking, was in a difficult place. There was this regulatory burden that was not as evident as it was before there was performance issues. They were going through tough times. They needed more capital, so there was. of mine share or dollars think about technology or innovation, and at the same time there is this public perception that banks were broken or banks were wrong and so into this void. Came all these start. Ups with slick user interface,
says, there were more transparent. They were done in a mobile way where consumers could really when they want new versus having to go into a branch or talk to someone about their intimate financial background and health, and so it was into this void that these ups formed now that we're in much more of a benign environment. The regulatory environment is at least more stable than it was you finally starting to see banks react, and so one of the big opportunities we for banks now is actually carrying on two way: dialogue with a lot of the thin tech start ups, because the fin tech start up some of them have kind of got into a certain scale, got no a certain point where, without other step, they're, not gonna, get any bigger on their own and maybe they're fund raising this starting a dry up and so having to converse and with a large income and financial institution like a retail bank where they have customers they of brandy of distribution, but they don't have speech market when it comes round technology or this innovative start up culture
that's why we have seen much more cooperation, much more partnerships, much Martin investments by financial services in the retail banking landscape, gonna kick start their fin tech, dialogue and strategies. millennials office, you start to grow up in their start to save money, just the shifting demo f, exchanging the Wolf management business yet or is that still to come? I think it's store Lee Days, because obviously millennials are just entering the workforce and starting to build their wealth, so they're not as dramatic as the baby boomers and that demographic shipped, but overall, if you think, out how millennials want to interact with financial services, whether its wealth management, a retail banking, its prey, how they want to interact with any type of commerce. It's a mobile based tablet, based user interface, very slick, very easy, real time and very true baron and on their own time, if you think about the rise, Robo Advisory and wealth management. That's where we're
Millennials really gather that and I think then come at financial institutions like life, insurers and asset management firms, and now banks are flocking to that. Robot advisor acknowledged as a new channel, to get that millennium, our old product does the product after change or still give me serving up sort of the same types of things, which is a slicker interface. I think what were really soon. The asset management space is a rise of passive investing and I think, thing about millennials in what they're really focused on they value there every time they value choice, they value the ability to change their mind and that's where I think some of these robots advisory platforms that are built on passive eighty apps and pick from one of twenty five versus sit in front of a financial planter and go through your full financial. How often take advice, I think the role of slid into the kind of millennium culture and mindset- and so I think, will be very successful and we ve seen in comments developed channel because they want to access that. They want to be there when that millennium does get into a different wealth stage. Energy
Your by a home, are ready to buy life insurance that there there is well Jeff. You mentioned blockchain, that's an area that You got a lot of attention. Blockchain is the technology that underpins the cripple currencies, how's blockchain changing capital markets, just like the wealth managing side with noise this kind of early days and blockchain, but that doesn't mean it's not getting a lot of investment and focus because the fundamental problem that it's trying to solve for capital markets partition. And sent again it can be applied to mortgage or title insurance or anything that has that general ledger framework to it. Is this cost disadvantage now and whether that's because ongoing regulatory burdens, competitive conditions, Laval, Quality training environments. There's this desire to make our we better and the way they're going to do, that is to attack the cost side and blockchain specifically, when its embraced by a large consortia of market participants, has the ability to do that. So I would,
They right now it's kind of early days, but I do think there's a lot of focus, a lot of investment, a lot of smart minds, thinking about that in a consortium way. As far as how can we solve this industry, while our we crunch that consortia is basically this tablet financial, where's. It is because they bring the flow they bring the volume they bring the brand and the infrastructure, but what they are doing, picking a thin tech start up in the middle to kind of serve as the platform is again? A lot of this is about speed to market. Build verses by we might as well if they already heavy infrastructure and technology going in the blockchain, we'll just circle around that spend our doll we spend our volume and that will really become
platform and our industry wide solution going forward since the early days of the emergence of financial technology. This latest round of financial technology there's been a pretty healthy debate about how much of the market the upstarts we'll take right are the large banks in the credit card companies which have been around forever in a big customer bases, can enable crowd out the small players and adapt, or are some of these start ups going to get scale and sir display, the current industry, or is it too soon to tell the jury is still out but again, like I said at the beginning, we are starting to see some success stories where there really interaction, whether it's from a brand perspective or scale or profitability perspective. So I do think there is some disruption occurring. I don't think there's much disinter media
sure, but a step we have an impact in. You could see that because the income and financial institutions are talking about it and making investments and adding to their strategy their digital strategy. What I would say, though, is that these are such giant markets, if you think about the level of unsecured, consumer and small business credit in the United States, its like thirteen trillion dollars so for these fin tech start ups to be successful. These are such large total small markets that they really don't have to be all that successful from a market share perspective. The creation of a per cent is still decent visits, a huge win for them in their investors, and so I think success will be measured by regulation and by outcome for their investors, but we are starting to see some disruption, or at least some competitive reaction by the comments as well. You talked awhile back about three waves of thin Tang back in October. Twenty sixteen, you said: weren't intact,
Second wave your defined the waves and where we are today, we talk a little bit about the first wave, which was kind of post. The global financial crisis. Banks and income at financial institutions run their heels a little bit, and that was because of this regulatory change, this technology, change, this consumer adoption of things like social media and how they were conducting Omni Commerce, and so it was a conference of factors, basically a West coast, mentality of venture capital, people who were forming. Companies in the cloud were getting their companies to market very quickly. But when it came to financial services, it was still clunky or difficult or cost too much, and so we started to get this mindset out of West Coast Tack, basically saying it doesn't have to be this hard. There could be some disruption or potentially descent radiation in financial services, and that's when we saw the rise of these fin tech start UPS Phil, the void and that was kind of the first wave, which we called the disruption face and friendly. That was overdue.
some level virtually a lot of other industries have already been massively disrupted. It's really. The fear of regulation has kept some of the Silicon Valley. Folks out in this industry, that's right and again did see the rise of the big tech companies looking at financial services. But for that reason we didn't see them crossing the line to become a bank, because regulatory is hard and complex and can definitely have impacts on the other side of their business. But in the second way we saw the incumbents react. They react. And wave when the economic environment go a little bit better and some of the incumbent financial institutions got their sea legs back under need them. They started to do what competitive things to fight this fin tack on slots and part of Was innovation, labs, fin tech incubators? The return of the corporate venture arm, which we saw during dot com days in some of these consortium approaches that we saw as well, and it was again, let's bind together and go against this third party thread, these fin tech start ups and they started to build some of their own technology as well, because they had the capital deduce
and then we entered the third wave offend tack which were curly and now which is kind of this cooperation partnership way, which they talked about earlier, where from a thin tech start up perspective. Some of these businesses are in their maturity, their scale there fund raising cycle, and they haven't to the size or return that their investors want. At the same time, they still have great technology, great people, great innovative found for procuring culture that the bank's don't have on the flip side, the banks have them, customer brand. The customer scale the need for fin tack and digital strategy now, and so in much more dialogue. Two way dialogue were seen much more cooperation, much more partnerships and were actually seen alive. Investment by traditional financial services into these vanhecke startups, some of the other technologies people talking about a lot now, a big data, I obviously internet
things so possible that those combined to create another waiver, a new wave of innovation. We just saw big big sail in the space of any I base company to financial data firm. Could that be the wave pressure. I adding we're on the precipice of that. I would characterize this wave is really being focused, probably more operational. If you look at the prior waves, there were much more focused on the user experience in front and platforms and getting people comfortable with transit in financial services and kind of a mobile. Like way, I think those are table stakes now. If you look at this. Fourth if that were entering whether its aim internet of things blockchain, which we talked about? It's really again getting at the cost structure of underline financial services, embedding like a high and workflow processes to make banks better underwriters, better marketers retain customers better better at customer service risk that arrests, managers for sure- and so I think, that's where we are and I wouldn't label it as a fourth wave. So,
last year was a record year for venture capital back thin tech with sixteen point six billion dollars. deals in financing globally talk about the kinds of deals we saw last year in why investor appetite was so high. It was interesting year, because again, as I said at the start, we are definitely starting this year duration of the investments in the cycle Well, so it was a record year, but it was also a wreck dear for the number of large financing round. So there were actually thirty five rounds. Greater a hundred million into individual companies having twenty of those here in the U S the rest overseas, and we also saw start up investing in fin tack at its lowest level, since two thousand and twelve so down twenty three percent over the prior year, and I think that just speaks to kind of the cycle. The part of the cycle wherein, but it also is symbolic of people making bigger bats and bigger stories and more mature companies,
and, I would say, the more mature parts of fin tack, tech enabled lending and mobile payments are stolen, garnering alot of dollars. In fact, seven of the largest ten financing rounds last year went to tech enabled lending, even though that would be considered later stage fin tat the two hottest areas having we saw last year, was one blockchain which we talked about and then the second would be insurance technology, which five years maybe garnered about three hundred million of investment. Lasher was over two billion, so we see a lot of people going into insurance and looking at disruptive technologies. That area, the other interesting factor- and it goes back to this cooperation phase or wave that were in right now- is that almost twenty percent of all investments and found TAT last year made by corporate venture arms and so again the return of the corporate venture. Our making investments trying to get in touch with that technology side. That speed to market was an important part driving fundraising last year as well. So despite the
positive momentum. Globally, Asia Bc Money actually drop the little bit last year for the first time in the wild talk a little bit that yeah, I think, a lot of that was around China in just the shifting regulatory landscape over there, so obviously has been a market that has embraced within TAT, probably more than others, particularly in the p2p lending space and there's a vast amount of opportunities. We talked about a vast amount of white space over but there's still kind of a moving regulatory landscape there as they think about where that fits in the broader financial services system in China, citing the two
some of the regulatory changes there in some of the poor performance of the fin tech. Ip goes out of China at a smaller scale that can have led to a little decrease in volume, but so far already and twenty eighteen, we seen a pick up and there's a number of large entities over there that are really gonna push forward and whither go public or continue to raise money at high evaluations. Talk a little bit about what you expect this year. You discuss next generation fin tech models in urging what are the new marginal look like it's interesting because we're starting to see again, though successful fin tax as well some of the fin texts that have taken their based model as far as they go to think about. What's the second or third leg to their stool. So to that extent I was a robot advisory doing direct consumer. Now I may be doing something with businesses, small businesses- maybe I have a pension offering maybe for a higher fee. You can actually Skype or face time some are certified financial planner, and so there adding onto services. There's companies we're doing point of sale, payment,
now they're doing lending because they have all the merchant data in again we're starting them to see. You know morph into more traditional services, but the key theme is that they are continuing to do that in a very thin tech friendly way. There's been some recent market volatility in some of the start. Ups have had to adapt pretty quickly. There was some outages in some issues. What are some lessons that their learning along with deal, with this changing regulatory environment specifically in enable London was an area that has gone through a period of volatility and I think, will continue to evolve in this nine credit environment, as we think about a next recessionary environment, they're gonna have to be prepared, for that is interesting, because I a lot of the things that they have done or actually feeling more like a traditional financial services. Firm verses attack firm, so they have in credit
technology, incredible user interface, but their compliance and infrastructure was probably lacking verses where it should be, and so a lot of spend on those type of infrastructure. Actually a lot of infusing traditional financial services, talent, rous managers from large, whilst reader bolts bracket firms go into these start up companies and developing rest systems and mismanaged systems. I couldn't help them weather the storm, whether to the next credit crisis, whereas they continue on a ya fast growth pace. Let's stepped back finally, and take a look at the global scope of the industry to a lot of the big players, a rapidly expanding and Asia. What that markets are attractive in other any other regions of the world that are poised to become they hotspots hotspots, fin tech, yeah to be honest, I think you know you, you asked the question at the front about you know it
been banking dialogue and I would say there is more and more of our dialogue happening outside the EU. S. Obviously, developed markets are tremendous, great total addressed markets, but if you think about kind of the next layer, fantastic Stuffily happened in Asia, where again you just have large swathes of population. You have this great growth of middle consumer class, who is just starting engaging financial services, you have some level of regulatory or government support. You have people going straight to mobile devices. So all the kind of secular factors that you'd want to see are in power ass. The other area were seeing that tremendously. As in Latin America, where again even the economic environment in certain countries has been difficult more recently, you do see consumers kind of rushing into this technology, so prison Argentina, Colombia, Mexico, we see a lot of it, she's going on in these markets, and some of it looks a lot similar to what's going on in the. U S, but again you see them because they don't have the embedded in come in here like the? U S, because they don't have the embedded infrastructure and point of sale systems their due
in a much more innovative and digital way, whether online or through their mobile phone cell can a fascinating parts of the world so Jeff you ve, been in this space roughly speaking for sixteen years or so. What's most surprised you about how its change and what are some of the things that you never thought possible that were actually seen today. It's been a great sea too, when a watch, an industry developed, We're talking a lot about fin tech here over the last five years, like it something new. There is a great set of public companies, have developed over the last twenty years and create a great invest, bowl class of payment. companies and data companies and information services and software companies in the space that are truly going, driving the way we consume and cannot commerce every day. But again, I think the most exciting thing for me, has really been the last five years when we're really seen fin tech innovation, not just here, last, but really on a global basis and it seems, like were riding part that broader wave where she is changing the way we interact and consume and transact on a daily basis. I think, because of that,
analogy whether its mobile big data cloud, it's really good the ability to leap Frog, how we think about financial services and how we think about basic things like a payment transactions going forward, it's been a fantastic see, but it's also a really exciting time to be in base right now. Well, it certainly made it easier to pay my babysitters Jeff thanks for joy.
as I said in his through the evolution of the space appreciate. That concludes this episode of exchanges. Goldman Sachs thanks for listening and please join us again next time and if you join this podcast check out toxic. She s a new common podcast, where we interview people who come through Goldman interesting people from the world of culture, sports finance, business available on Itunes, sticker or wherever you listen dear Punkahs. This bought cast was recorded on March two thousand a team. The information contained in this recording was obtained from publicly available sources and has not been independently verified by Goldman Sachs,
Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording and any liability as a result of this recording is expressly disclaimed. This recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording does not establish a client relationship with Goldman Sachs,
Transcript generated on 2021-10-12.