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.
Continuing our cross-country tour of the USA, it’s now time to focus on the ‘centre’. The geographical centre certainly, but the ‘central hub of fintech’? Perhaps. Featuring the ‘Silicon Prairie’ and the financial mega-hub of Chicago, the Midwest is becoming the latest cost-effective talent pool for fintech startups challenging the East Coast and Silicon Valley’s more heavily reported success.
What could describe the gateway to the United States of America better than the historic Route 66, which begins in Chicago? It also happens to be the birthplace of Walt Disney, Wayne Campbell (of fictional Wayne’s World fame) and the Twinkie. In fact, the Midwest is home to much of the USA’s innovation in sectors other than food and cartoons: Henry Ford’s Model T debuted in Michigan, a flagship model in the history of assembly lines and automobile manufacture; the 1903 airplane was invented by Ohio natives the Wright Brothers; and the consistently innovative multi-instrumentalist and flamboyant performer Prince grew up in Minnesota. Indeed, as New York City’s music scene has gone down in history, so too will various regions of the Midwest; Omaha, Nebraska’s 311 are perhaps overlooked but a staple of 90s alternative rock, and the Jackson family are originally from Indiana, with Michael Jackson one of the world’s most renowned musicians of all time. Detroit was also home to Oscar-winner Eminem and Motown, and Smashing Pumpkins are from Chicago – writers of Siamese Dream, the greatest album ever produced (just sayin’). This innovative characteristic transcends into the region’s fintech, a key initiator in joining together traditional banking systems and disruptors.
For a more holistic view of the state of fintech in the USA as a whole, please see the previous edition of this series. For now, here’s a focus on the Midwest’s efforts.
“California is the eighth largest economy in the world. The Midwest is the fifth. The Midwest is also bigger than Brazil, Russia, and India, each of which had recently caught many a venture capitalist’s eye.”
An assertion here from Venture Beat which really sets the tone early for the Midwest’s fintech glory, as we shall see.
Indeed, as the article asserts, the number of entrepreneurs establishing billion-dollar companies in the Midwest is growing exponentially, particularly in the last few years. A pre-conceived idea of stasis that usually characterises this region is finally being swept away, like the cobwebs that also don’t exist there anymore. In fact, it’s more being redesigned as the area with the highest quality well-paid jobs, affordability of living and SmartAsset ranks six of the area’s cities as being in the 10 best US cities to be for graduates. Due to the increased desire to move here, it’s no wonder why in 2015, 900 Midwest companies have positions on the 2015 Inc. 5000 list, and 268 are ranked in the Fortune 1000.
Even before the working life, the Midwest’s university system is becoming world-renowned. The Midwest’s research budget is something to behold, as it receives 25% of the country’s money for research purposes. For the industry of fintech, a region couldn’t really do much better than here, considering the fact that it has more computer science graduates than any other region on the planet. In Ann Arbor, Michigan, 296 startups have already been established, with The University of Michigan’s location being a hotbed for innovation. A few hundred seed-stage companies are known to be brewing here and TechCrunch also highlights that this university has been ranked the number one in US Public Research by the National Science Foundation. It has spent roughly $1.3 billion. But not just to toot Michigan’s horn: Ohio State University is also known to have birthed 30 startups since 2014, and Illinois’ Northwestern University has a whopping 90 school-based research centres.
Chicago: The Fin-dy City
Speaking of Illinois… it houses the Midwest’s biggest epicentre for fintech: Chicago. As Deloitte’s annual global fintech hub report for 2017 shows, the Windy City is home to 20,000 financial institutions (!), the basis for its Global Financial Centre ranking of 8, as well as its Global Innovation Index Score of 4. This means that Chicago tops such financial services centres as Shanghai (119), Paris (76) and even Hong Kong (22), and included in the top 5 worldwide cities specifically advancing fintech development. Much like the aforementioned advantage of Ann Arbor, Chicago’s business universities represent 2/5ths of those in the US, with 6% of Chicago’s total workforce based in the financial ecosystem. It also acts as a perfect ‘centre’ for this USA Fintech series, as the city is placed at the centre of the fibre optic cable connections between NYC on the East Coast and California on the Pacific side.
Many financial institutions that have grown into worldwide corporations were birthed in Chicago, included Chicago Board Options Exchange, Chicago Mercantile Exchange, Citadel, J.P. Morgan Chase, and Northern Trust. With a clear client servicing focus, it’s no wonder that financial inclusion is of the top priority here; World Business Chicago writes that a collaborative effort from public, private and non-profit stakeholders has been going for decades to provide access for all Chicagoans to the local economy, whether that is through banking or wealth management and financial planning services. On top of that, the digital age has meant that these services are increasingly looking to fintech entrepreneurs to further this effort; expanding capital and financial education for the sidelined population will help Chicago become one of the most inclusive financial environments in the world for both the banked and underbanked. In 2016, 20 Chicago fintechs saw venture capital investment of around $450 million.
Chicago is also a centre for developing fintech collaboration through accelerators and government initiatives, which are as follows:
- 2 Fintech roundtables to discuss regulatory issues have been hosted by Illinois Department of Financial and Professional Regulation (IDFPR).
- In November 2016, IDFPR announced its Illinois Blockchain Initiative to integrate blockchain into government operations.
- Mayor Rahm Emanuel started the economic development arm, World Business Chicago
- ChicagoNEXT, a group committed to the attracting venture capital and empowering fintech innovation, has established Fintech Council, providing growth strategies and collaboration for entrepreneurs and startups.
- ChicagoNEXT also supports FinTank – a 20,000 square foot innovation space specifically for fintech startups.
- This organisation also supports 1871’s Chicago Bitcoin Center initiative and the programming developed by Illinois Technology Association and the states’ top universities.
- FinTEx Chicago has opened Currency in 2017, a “centre of excellence” in the field of fintech, to develop an innovation-friendly regulatory stance for startups.
- Some key investors in Chicagoan financial sevices include JumpCapital, Chicago Ventures and CME Ventures.
Finally, two of Chicago’s fintech startups were featured in the KPMG Fintech 100 2016:
#8 – Avant – An online lending platform featuring low costs for borrowing. Avant has offered over $1 billion in loans. The platform uses big data and machine-learning algorithms to mitigate risk and fraud, founded in 2012 by Al Goldstein (CEO), John Sun (CCO) and Paul Zhang (CTO).
‘Emerging star’ – Rippleshot – A cloud-based tech solution utilising big data and machine learning/AI to distinguish fraudulent activity for payment transactions. It can provide banks with tools to update fraud detection rules, reducing over 25% of fraud losses for banks and merchants. Rippleshot was founded in 2013 by Canh Tran (CEO), Yueyu Fu (CTO) and Randal Cox (Chief Scientist).
Possibly one of the globe’s fastest-growing fintech areas is the now no-longer-forgotten ‘Silicon Prairie’ area. Much like the North Carolina’s ‘Research Triangle’ as covered in our last article, this fintech space is also a triangle, its points located in Omaha, Nebraska, Des Moines, Iowa and Kansas City, Missouri. Indeed, the mindset here is one of fostering young talent by experienced mentors; the financial “old guard” and tech investors are these gurus, with one notable experienced tech investor (surprisingly?) being comedic actor Ashton Kutcher, who invested in one of the area’s most significant success stories, Dwolla: an e-commerce founded in 2008 in Des Moines. This city is also famed as the birthplace of 9-man metal juggernauts Slipknot. Two varied tales of stardom, but both notable.
In fact, it was Dwolla’s hitting-the-big-time moment that arguably famed the ‘Silicon Prairie’ region; the company serves 100,000 people and moves $30 to 50 million in transactions every month. Not just that, but Silicon Prairie’s affordable cost of living has placed it in fintech’s top bracket, as well as companies such as TreeTop Ventures placing $12 million into its startups, which mainly focus on tech spaces such as mobile payments and online banking to assist retail banks. Even Microsoft is working with the University of Nebraska-Lincoln’s Jeffrey S Raikes School of Computer Science and Management on mobile banking projects.
As this article notes, the region’s tech innovations may have been as a result of the US Air Force relocating to south of Omaha in the 1950s. When the infrastructure followed, tech specialists were brought to the area. Much of the business here relies on the continuing build of local resources, with more focus on establishing a scalable and profitable business plan to attract investors rather than the more glossy ‘Silicon Valley’ startup culture and brand awareness. The aforementioned companionship and linking of startups with experienced moguls stretches to a customer-centric mentality. The Minnesota-North Dakota friendliness epitomised in the Coen Brothers’ sensational Fargo does not, therefore, seem misplaced.
Here are the vast region’s most prominent cities on the fintech map, as highlighted by Inc.:
Des Moines, Iowa
Besides Dwolla, Des Moines features SmartyPig (an online savings and social network) in its roster and StartupCity Des Moines. It is also ranked 9th in a list of the 14 best startup cities.
Kansas City, Missouri
A place where computer skills has been found to be the top discipline by LinkedIn, possibly due to being 1 of 8 places housing Google’s gigabit Internet speeds. It also features a top 10 downtown scene ranked by Forbes for its vibrant community to enjoy.
St Louis, Missouri
Its notable financial services players include ITEN, Capital Innovators and T-REX, which was ranked as the best Silicon Prairie co-working space. Similarly, co-founder of Twitter and Square Jim McKelvey has established the Launch Code program in the city to pair aspiring coders with experienced developers.
A city with one of the lowest unemployment rates, home to notable investor network Nebraska Angels, making it an ideal startup ecosystem.
Home to the influential Silicon Prairie News and the Straight Shot accelerator.
Another Midwest state of note in Kansas, being home to around 5,500 community banks and 6,000 credit unions. However, only 15-20% of these institutions can offer customers an online account – step in fintech support!
This interesting Fortune article highlights one of the state’s most remarkable collaborations between banks and fintech disruptors: how an old-school CBW Bank in Weir, Kansas has been rebranded as a place for innovation. And similarly, here are the state’s most notable fintech advancements, courtesy of Chute:
BATS Global Markets – Founded in 2005 to create an alternative trading venue and introduce competition to US equities market. It is now one of the largest operators and operates markets globally, recently brought into the public eye once again due to the Winklevoss Twins’ Bitcoin ETF scenario.
Blooom – A 401K automation processing platform that has been named as one of the world’s 10 most innovative companies by Fast Company. It uses a proprietary online tool to analyse 401k plan and gives ongoing advice on how to allocate funds, and was the fastest robo-advisor to reach $300m in AUM. It has also received press coverage from Forbes, WSJ and Business Insider.
C2FO – One of the first capital markets in the world, founded in 2008. It is an online marketplace where buyers and suppliers negotiate. It was added to Forbes’ Fintech 50 list in 2015 and has raised $100 million.
DST Systems – This introduced the first online mutual fund shareholder accounting system in the 1960s. It is now a global provider of tech solutions in various industries.
Federal Reserve Bank of Kansas City – A bank with a fast-growing technology team to develop big data, business intelligence, software development and UX.
With multiple different hubs spanning many states, the Midwest is the USA’s not-so-hidden gem, finally bursting onto the scene with some world firsts and an undeniably sound ethos around the nurturing of startups. It may not be long before the vast metropolises of New York and San Francisco feel the intense competition from their mid-country neighbours.
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!