Fintech has dominated the news cycle this year. Big exits (plaid, credit karma, personal capital) and venture capital investments were celebrated in bold headlines.
While the category has warmed up quickly, the sheer size of the fintech opportunity suggests that these exits are just the tip of the iceberg. In the next five years, Fintech will drive some of the largest VC exits.
In 2019, U.S. software companies raised $ 43.5 billion in an environment where global enterprise software spending reached $ 456 billion. In the meantime, fintech companies have raised $ 1
In 2018, U.S. banks reported nearly $ 2 trillion in market capitalization, with 22 individual banks having market cap in excess of $ 20 billion (see below). Nobody talks about bothering KeyCorp, but becoming the 20th largest bank in the U.S. would mean market cap at the time of the IPO going beyond Twitter, Snapchat, and Pinterest.
Fintech companies that seem to address arcane parts of our economy are large companies. Below I have listed some areas of the fintech ecosystem that are often overlooked but offer massive opportunities for disruptors:
Exchanges: The New York Stock Exchange is an iconic American institution. The parent company ICE has a market cap of over $ 50 billion. But it is not the most valuable exchange in the country. This award belongs to the CME Group, the world’s largest futures exchange with a market capitalization of $ 65 billion.
Payments: While the rise of Stripe in Silicon Valley plays a big role, keep in mind that Visa has a $ 385 billion market cap and regular profit margins of over 50%. Discover Financial has a market cap of $ 12 billion. No offense, but when was the last time you saw this card? There is clearly room for a jammer.
Infrastructure: Fiserv is a $ 70 billion company that provides banks with core banking, payment processing, and other commercial plumbing systems.
Data provider: Verisk ($ 25 billion), FICO ($ 10 billion), and Experian ($ 21 billion) may not be the most admired companies in the world, but companies in this category benefit from network effects and generate immense value, by collecting and monetizing consumer data and making predictions about risk across the financial system.
Mortgage / Insurance / Corporate Finance: Technology providers for certain financial areas have created significant companies. Guidewire, Applied Systems and Vertafore are valued at $ 10 billion across the entire insurance ecosystem. BlackKnight, the leading analytics provider for the mortgage industry, is a $ 11 billion company. Are you thinking about managing financial documents for your public company? You can contact Broadridge, which earns a pretty penny in this business and has a market cap of $ 13 billion.
While these are massive markets, it is not easy to disrupt established companies. A combination of regulatory hurdles, deep-seated behavior, low risk tolerance and the advantages of larger balance sheets has kept the upswing at bay for decades. As venture capital supports the ecosystem, modern technology is creeping into the sector (cloud, APIs), connectivity and data exchange are improving and consumers are getting tired of established companies.
This shift and the challenge of the status quo through fintech upstarts will have lasting effects. Even if established companies acquire their biggest disruptive factors, such as the takeover of plaid by Visa, innovations developed by these startups are integrated into the system and help to advance the industry. And it also leaves room for the next challenger to make his claim.
While I don’t expect any major ecosystem disruption soon, if VC-based disruptors can bite off a fraction of the value now owned by legacy companies, yields would easily outshine all other venture capital sectors.
Steve Sloane is a partner at Menlo Ventures.