Fintech is exploding.
It is a global industry, striving to change the future of finance.
…And the future is now. At Kurtosys, we’ve set out to cover exactly what’s happening in the financial industry the world over, one country at a time. With so many places contributing to the advancement of our digital world, each deserves their own time in the spotlight.
Having finally made it to the global fintech powerhouse that is the United States of America, it’s time to split its various hubs into separate sections and editions. This time around, we’re focusing on the Eastern seaboard’s most influential and growing hubs for finance and technological development: New York City, NY; Boston, MA; Charlotte, NC; and Atlanta, GA.
The USA’s coastal states are home to many of the country’s most famed historical and cultural landmarks: the original 13 colonies of Great Britain all lie here, as well as states owned by the Dutch, the French and the Spanish before the American War of Independence (1775-1783). Even still, New York City remains one of the world’s most diverse cities in a linguistic sense, home to 800 languages, with 4 in 10 households speaking languages other than English. As one of the world’s most recognisable cities, NYC serves as the cinematic background for such cultural American movie milestones as The Godfather series and Scorsese’s Taxi Driver. Mad Men: the series focusing on advertising executives in the 60s, gives an excellent snapshot too. It wouldn’t be an article about the East Side without mentioning New York’s 90s hip-hop heroes, including The Notorious B.I.G., Nas, Wu-Tang Clan and The Native Tongues collective: all great stuff. Elsewhere, Boston is home to the Yankee’s fiercest baseball rival, the Red Sox, and the location for the so-called Boston Tea Party, and Georgia is famed for its peaches. Not only that, but these cities’ fintech scenes are looking pretty peachy as well.
…let’s get a glimpse into the USA’s fintech scene as a whole before heading to its most successful Eastern regions.
According to country-spanning statistic experts Statista, the transaction value in the USA’s fintech market this year is $1,025,519 million, which is expected to show a staggering annual growth of 17.9%. This will assumedly amount to a transaction value of around $1,983,050 million by 2021, which is hardly a surprise considering the number of expected users being 288,000,000 in 4 years’ time! At the moment, the average transaction value per user is $3,794.48.
Without a doubt, as a country of immense power and wealth, the US’s fintech landscape is one of the world’s leading examples in the sector. The Digital Finance Institute outlines the fact that, on a private sector level, the USA is on par with another fintech giant, the United Kingdom. In 2015, around $7.3 billion was invested in the realm of fintech alone and US venture capital investment amounted to $1.3 billion in Q2 of 2016, the global total being $2.5 billion – almost half! Indeed, the USA is a hotspot for global banks (including Canadian institutions) to set up shop and drive technological innovation in their client services and products. However, the US is lagging behind the UK in terms of government fintech initiatives. TechCrunch notes, for instance, that two unidentified American fintech hubs rank last and second-to-last in terms of policy: regulatory regimes; government programs; and taxation. The article also suggests a lack of coordination between the government and innovative businesses, with the UKs FCA’s ‘sandbox’ model for flexible regulatory matters being batted around between two committees.
That’s not to say that regulatory matters aren’t being addressed by the States. US regulators are very welcoming of new fintech startups within the existing legal framework, whilst constantly looking to comply with new regulations. The term “responsible innovation” is probably the most accurate way to describe this; online marketplace lenders, in one particular instance, are privy to a loan servicing infrastructure which allows for the up-scaling in the event of an economic downturn. US regulations work at both federal and state level, focusing on money transmitting, licensing, consumer privacy and protection, data security and anti-money laundering protocols, as well as monitoring technological growth through RegTech. Whilst an extensive rundown can be found at this ICLG site, here are (in brief) the main players and initiatives in nationwide fintech regulation:
- The chief governmental regulator in the US is the Securities and Exchange Commission (SEC).
- There are currently no laws or regulations stopping fintechs from involving themselves with any other types of business.
- Capital can be raised for lending or investing in a company, with funding able to come from corporates, venture capital firms, hedge funds, high net worth individuals, or through publicly sourced crowdfunding.
- US capital markets are able to fund non-US businesses through private and public offerings of equity or debt. US & China-based online lending company China Rapid Finance was listed on the NYSE in April 2017.
- Whilst not being subject to a fintech-specific framework by a single regulator, there are federal and state licensing and registration requirements for fintechs. The complexity of these processes has drawn heavy criticism for hindering the growth of the US fintech scene.
- At a federal level, the Consumer Financial Protection Bureau (CFPB) has jurisdiction over providers of financial services to consumers.
- Fintechs need to register with the SEC and the Commodity Futures Trading Commission (CFTC), and could potentially need to comply with the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).
- The primary federal regulator for national banks is the Office of the Comptroller of the Currency (OCC). A special national bank charter for fintech companies that receive deposits, pay checks or lend money was filed in December 2016. Fintechs that apply are subject to the same laws and regulations that apply to national banks. This has also drawn criticism, begging the question: is regulation better accomplished at local levels?
- The CFPB’s “Project Catalyst” initiative increases governmental collaboration with fintechs to develop fintech policies,
- In March 2016, the CFPB’s data security action was brought in to fight “unfair and deceptive acts and practices”, under authority from the Dodd-Frank Act.
At state level, in March 2017, New York State Department of Financial Services’ effected their cybersecurity rules. Fintechs would need to be regulated by the state’s financial regulation and must establish and maintain cybersecurity programmes. Many technological issues were also brought to the fore with the voting and subsequent inauguration of President Trump. A thorough report by ITIF, released at the end of 2016, still remains a usefully prophetic glance at what the implications of Trump’s presidency means in terms of continued innovation, cybersecurity measures and regulatory policies. You can find the full report here.
Moving on to specific states then, and whilst there is a trend to move away from the more established (yet expensive) fintech startups – the top 5 destinations in terms of investment volume recently are Boston (more on that later), San Diego, Dallas, Detroit and Portland – New York remains one of the world’s most important fintech spots.
New York: The Fintech That Never Sleeps
The above graph, courtesy of the World Economic Forum, highlights the grandeur of New York as a fintech destination; its market size is just shy of the UK, and not in bad company with California which, we must remember, houses the tech nirvana of Silicon Valley.
Of course, Manhattan is the base of, arguably, the most highly recognised financial centre in the world and general economic powerhouse Wall Street, home to the New York Stock Exchange and NASDAQ, the two largest stock exchanges on the globe. What the accommodation of this financial monolith means is that it is the largest capital base with need for fintech corroboration. New York City is therefore a cemented hotbed of fintech innovation.
Deloitte ranks it 2nd on the list of Global Financial Centres (GFC), with a Global Innovation Index score of 4. One way in which fintech innovation develops so well in the city is through the Startup BootCamp, a global programme of 21 accelerator hubs. Startup Bootcamp New York exists in the heart of the city, offering a 3 month programme for 10 selected fintech startups who can benefit from collaborative office space, mentorship from 100 leading industry experts and access to investors from around the world. Similarly, the Fintech Innovation Lab New York works in a similar way, offering startups the chance to pitch their ideas to experts in the hope of landing vital funding. So far, this incubator has raised $463 million, and created 483 jobs for 47 companies. According to this holistic fintech infographic, New York has tripled its investments in accelerators and incubators, but it certainly seems to be paying dividends. On top of this, some of New York’s most prevalent fintech investment firms include Bain Capital (also based in Boston and Chicago), Nyca and Lightyear Capital.
Specific startup success stories (so far!) are Betterment – an automated investing platform – which has 120,000 customers investing $3 billion worth using its services. In 2016, it was valued at $700 million. LearnVest, established in 2007 was acquired by Northwestern Mutual – a Wisconsin based financial services organisation – in 2015 for $250 million. This is certainly a concrete example of traditional firms and disruptive technologies culminating to transform the fund management industry.
In fact, look no further than the KPMG Fintech 100 2016 report to see just how successful New York’s fintech focus is; a fair few of its top 50 global startups (and emerging stars) are from this city alone, and are as follows:
#3 – Oscar – A health insurance company which combines technology and healthcare experts. It is a platform managing care and processing medical claims looking to advance user experience for the US healthcare system, founded in 2013 by Mario Schlosser (CEO) and Joshua Kushner.
#30 – OnDeck – OnDeck uses technology to identify the financial health of small to medium sized businesses and deliver capital to a market underserved by banks. Its software aggregates data about a business’ operations, processed by an algorithm which determines loan eligibility. It was founded in 2007 by Noah Breslow (CEO).
#45 – itBit – Bitcoin trading services for institutions and trading professionals. It is allegedly the only company in the space which offers traders access to a global exchange and an OTC trading desk, founded in 2012 by Charles Cascarilla (CEO), Rich Teo (CEO Asia) and Andrew Chang (COO).
#49 – Payoneer – A cross-border payments platform connecting businesses and professionals across 210 countries. It provides easy, secure and cost-effective solutions for Fortune 100 companies as well as small businesses, with transfers using prepaid debit MasterCard cards, deposits to local banks and payments to e-wallets. It was founded in 2005 by Scott Galit (CEO), Yuval Tal (President) and Ben Yaniv Chechik.
Consensys – A venture production studio which builds decentralised applications and end-user tools for blockchain ecosystems, with a focus on Ethereum. Founded in 2014 by Joseph Lubin and based in Brooklyn.
Digital Asset – Builds distributed ledger tech solutions for the financial services industry. It uses blockchain technology to facilitate settlements between digital and traditional currencies, and was founded in 2014 by Blythe Masters (CEO), Sunil Hirani and Don Wilson. It’s website (upon opening) is fairly unique too!
Droit – A firm providing enterprise solutions for OTC derivative trading processes. It provides a robust infrastructure across asset classes, regulator and CCPs; their API assists decision making for traders from a regulatory perspective. Droit was founded in 2012 by Satya Pemmaraju (CEO), Anup Menon (CTO) and Brock Arnason (Head of Product and Strategic Alliances).
Lemonade – A technology-based property and casualty insurance company; the world’s first P2P insurance company powered by AI and behavioural economics. It was founded in 2015 by Daniel Schreiber (CEO) and Shai Wininger.
Boston (Fin)Tech Party
“Disrupting before disruption was a buzzword.”
A neat summary from Cinch Financial there, and not a wrong assumption. As mentioned before, Boston is one-to-watch in the sector, its combination of financial history and modern technological expertise leading to a climb up the US fintech ladder.
This article claims that Boston has been the “home for innovation since 1630”, its own birthplace being the proclaimed origin of the US financial industry, where its location as a port city made it a hotbed for international trade. Granted, 1784 saw the opening of the country’s second bank: Massachusetts Bank. As one thorough blog post notes, Boston financial services industry employs over 100,000 workers, and is home to some big names in the asset management industry (including Fidelity International), banks (State Street) and those in the insurance market. Modern day Boston is one of the most expansive and diverse financial areas in the country with a healthy portion of venture capital firms, mutual funds and private equity companies looking to invest in innovation.
That innovation is right on their doorstep, too. Boston is home to such world-leading universities as Boston University, Harvard, and the Massachusetts Institute of Technology (MIT). The latter example was actually used as a hub for defence during the Second World War, and established an Artificial Intelligence project in 1959 – an initiative way before its time. MIT, unsurprisingly but usefully, has a specific organisation – MIT Fintech – to further innovation in the field, run by a community of committed students and academics, with ongoing projects including the Digital Currency Initiative at the Media Lab.
Boston’s universities spend around $4 billion on research annually (which, in contrast to the Bay Area, is pretty hefty: that area invests around $1.3 billion on research). Hence, areas such as behavioural economics have roots in the Massachusetts city, and it is certainly big on technology sectors including life sciences, mobile and SaaS platforms and intelligence systems, such as AI and big data. The Boston Financial Services Leadership Council predicts that 120,000 big data jobs will become available by 2018, for instance.
So, fintech is likely to achieve a huge boost. More evidence for this can be seen in the fact that DCU’s Fintech Innovation Center lies slap-bang in the middle of Boston’s Financial District and the Innovation District – ideal! – and it is home to 8 “promising startups”. The Boston Fintech Meetup, started in 2014, has spearheaded the Boston Fintech Showcase: a meeting-place for all startups, investors and research analysts and Fintech Sandbox, opened in 2015 to offer free access to data, has been backed by some of the city’s largest financial services firms, data vendors and investors, which is great news.
Startup success stories include Kensho (whose $50 million Series B funding sent financial news into a frenzy), and Circle, Quantopian, EverQuote and Toast all raised over $20 million in rounds in 2016. According to Built in Boston, dedicated to breaking Boston’s fintech news and events, funding for fintech has amounted to $409.91 million, across 56 startup companies. Expect that number to rise in the very near future.
Charlotte: A Nascent Scene in North Carolina
One new up-and-coming fintech outfit is Charlotte, NC. Despite being the second largest city in the south-east (to Jacksonville, FL), it’s just about making its mark on the scene, being the third fastest-growing US city.
Charlotte is actually also recognised as the second largest banking centre in the US, which allows fintechs access to financially-savvy industry experts that know the market, and indeed have the suitable knowledge to innovate. Already, one accelerator in the city – Queen City Fintech – is paving a path for development, seen as one of the country’s leading programs to unite the financial industry, fintech investors and startups globally. Riding on the back of the technological revolution, this accelerator chooses 10 to 12 companies for development twice a year, providing them office space and $20,000, with a plan to raise a seed fund. Quite importantly, it partners with major institutions including Bank of America, Wells Fargo, Barings and AIG, with the Bank of America reportedly investing $1.5 million (along with 20 other groups) to fund the building of a Fintech Hub in Charlotte.
The possible reason for North Carolina’s fintech surge is similar to Boston’s: a firm research base and technologically advanced structure. Boston’s collection of universities is paralleled here by ‘The Triangle’ – more specifically the ‘Research Triangle’. This is made up of the North Carolina State University in Raleigh, Duke University in Durham, and the University of North Carolina in Chapel Hill. Unsurprisingly, out of NC’s 30 fintech companies, two thirds of these have their headquarters situated within this region, with popular startups including Spreedly, and PatientPay.
Given the further funding to improve North Carolina’s ecosystem, the East Side may gain another rival to New York’s fintech crown very soon.
Georgia’s “Transaction Alley”
To start off our look into Atlanta, GA’s fintech efforts, here’s a very bold statement as featured in Forbes:
“There are more fintech companies here than anywhere in the world” – Barry McCarthy, Exec VP at First Data and Chair of Fintech Atlanta
With its reasonable living costs, direct access to worldwide cities at the “world’s busiest airport” and linked to 80% of the country’s population within a 2 hour flight, Atlanta is becoming an attractive location for startup entrepreneurs.
Already, the state of Georgia generates around $72 billion worth of income from native fintech companies, which places it in third place in the country regarding State-wide fintech revenue. That’s why Atlanta is attempting to promote itself as one of the leading US fintech cities, under the guise “Transaction Alley”. Why? As a slightly tenuous take of ‘Silicon Valley’, it works as a name, but 6 out of the 10 largest payment processing firms are located in the state of Georgia, with over 60% of these being based in its capital, as reported by Atlanta-tech newsletter Hypepotamus. The sector employs around 30,000 workers, too.
The payments industry’s blossoming seems to be best outlined by the fact that the number of cheque transactions fell between 2000 and 2012, from 40 billion to 20 billion. More and more, Georgian natives used text to make transactions, and thanks to its inclusive, nurturing environment, startup payments companies have taken off, including First Data and NCR. The ‘Empire City of the South’ is home to over 100 fintechs. Between 2013 and 2015, companies invested over $208 million in fintech which created 1,570 jobs, according to the Georgia Department of Economic Development.
That’s not the only level of assistance: fintechs in the state are supported by the American Transaction Processors Coalition (ATPC): a trade organization advocating fintech at state and federal level; the Technology Association of Georgia; and the Atlanta Technology Development Center (ATDC): its own specific incubator. This institution gained a grant of $1 million from UK-based fintech giant Worldpay, whose US affiliate is (unsurprisingly) based in Atlanta.
As is proving to be a trend here, Georgia-based universities have increased their efforts to boost development and innovation: Emory University, Georgia Tech and the University of Georgia are equipped with fintech programs to increase the number of qualified developers, with the latter also hosting an approved business degree with a focus on fintech itself. Furthermore, Atlanta-based TTV Capital has raised $93 million for a venture fund to assist startups established at universities, whilst Georgia Tech and 10 Atlanta companies are assisting to boost the creation of these startups through Engage Ventures: an accelerator program looking to house 50 startups in the next 3 years. It has been aided by a $15 million funds and is championed by brands including AT&T, Delta Airlines, UPS and Home Depot, who committed $1.5 million each.
So, Georgia and Atlanta in particular are looking for global fintech recognition, and with the capital now posed to host the P20 conference in 2018, this could be the time for the city to gain acknowledgement as one of the best places for modern financial services.
Finally, here is Atlanta’s entry in the KPMG Fintech 100 2016…
#17 – Kabbage – An online, automated funding platform providing capital to small and medium sized businesses. It leverages real-time marketplace analytics on accounting data and online sales, and delivers flexible funding in real-time. Founded in 2008 by Rob Frohwein (CEO), Marc Gorlin, Kathryn Petralia (Head of Operations).
…and established others:
Cardlytics Inc. – A data intelligence software for financial institutions, retailers and advertisers for analysing consumer spending and to make marketing for relevant and measurable for target audiences. Founded in 2008 by Lynne Laube, Hans Theisen and Scott Grimes.
TradeRocket – A SaaS platform aiding buyers and suppliers with on-demand financing information (invoices and data management services), founded by Jim Eckstein in 2013.
Wow – it’s clear to see that these states and cities alone are providing unbelievable levels of competition for the USA, and the globe’s, fintech forerunner, and this is only touching the East Coast.
If you have any thoughts about fintech in the USA, let us know in the comments below, or you can tweet us.
Check back soon for more instalments of The Fintech World Series!