Silicon Valley is taking on Wall Street right where it lives: in financial services that big banks either have ditched or haven't latched onto yet.
Tech-focused venture capital firms poured some $12.2 billion into financial services start-ups in 2014, more than triple the amount in 2013, according to numbers from Accenture and CB Insights that Wall Street brokerage Convergex cited in a note Monday.
The "fintech" interest is broad based, from mobile payments to peer-to-peer lending to cryptocurrencies and a handful of areas in between. At the root of the interest is an effort to capture the way millennials want to do banking in the future.
Surveys repeatedly have shown that this cohort, generally identified as those who came to young adulthood around the turn of the century, is avidly looking for alternatives to traditional banking. One in 3 would switch banking in the next 90 days, according to a survey from Viacom's Scratch. Earlier this year, SNL Financial reported that 1 in 4 millennials changed banks solely because of an institution that offered a better app.
It's all led to money sniffing out opportunities in the burgeoning $75 trillion shadow banking industry.
Tighter regulations and increased costs have pushed traditional banks out of some services. In other instances, banks simply have been slow to respond to changing customers demands.
"Financial services will dramatically evolve over the next 10 years as millennials age and use more banking services compared to the last 50, enabled by advancements in technology. No doubt traditional banks remain entrenched and there's a plethora of regulatory hurdles standing in the way of this industry and new entrants," Convergex said. "Numerous startups, however, have created more efficient, cost effective, and tech-savvy versions of the verticals currently on offer."
Consequently, investors including Google Ventures, Andreesen Horowitz and Sequoia Capital have become players in exploring new opportunities. Convergex analysts identified seven key areas:
1. Money transfer: Dominant players are TransferWise and World Remit. TransferWise has raised $90.4 million, while WorldRemit has picked up $147.7 million.
2. Mobile payments: "Stripe is the success story in this space," Convergex said, citing its $190 million in cash raised. Boku also has pulled in $73 million.
3. Peer-to-peer lending: Probably the most buzz-worthy of the list, several high-profile initial public offerings, particularly from LendingClub and On Deck, have gathered interest, but there are a slew of other companies on the way up. Prosper has raised more than $350 million.
4. Personal finance: "Startups under this category range from helping people save money to accessing credit scores more cheaply," Convergex said. Big players are Expensify and Credit Karma.
5. Cryptocurrency: The bitcoin buzz has subsided quite a bit, but companies like BitPay and Coinbase continue to raise money to support their digital currency ventures.
6. Trading and robo advisers: Companies such as Wealthfront and Robinhood have set up services that include online brokerages and automated financial advice. Celebrities including Snoop Dogg and Jared Leto have participated in the more than $100 million in fundraising by Robinhood.
7. Student loans: Sofi has originated more than $2 billion in education financing and others are expected to pour into the space that Convergex describes as "the largest headwind for millennials."
These activities have spurred some interesting developments.
The Treasury Department, for instance, issued a notice last month for "public input" on the new offerings in financial services, requesting "(i) the various business models of and products offered by online marketplace lenders to small businesses and consumers; (ii) the potential for online marketplace lending to expand access to credit to historically underserved market segments; and (iii) how the financial regulatory framework should evolve to support the safe growth of this industry."
Analysts, though, interpreted the move as a thinly veiled attempt to find out whether the new industry was opening doors for money laundering and other illicit activities (bitcoin in particular has been identified as a playground for drug dealers and the like).
Also, major firms like Charles Schwab have recognized the threat from robo-advisors and started its own operations.
And Wall Street banks are reacting as well, coming up with competing efforts or investing in some existing ones as a way to participate in the new developments. Goldman Sachs and JPMorgan Chase, for instance, are working with Motif Investing, identified last year by CNBC as No. 4 on a list of 50 disruptors.
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Multiple other banks have gotten involved with what Convergex described as "accelerator programs, or innovation labs in tech hubs around the world to improve their technological capabilities."
"Tech hubs from Silicon Valley to London are challenging traditional financial services, and more big banks than you may think are not only taking notice, but jumping on the bandwagon," Convegex said. "Why? It offers a large addressable market—namely millennials—that is eager for change and will alter the industry for the rest of the population."