Digital brings discontinuity to markets

April 30, 2014

Dramatic disruption from innovative financial technology is likely to occur within two to five years, according to Dave McClure, founding partner of 500 Startups and a panelist at “Disruptive FinTech: A Look at Markets in Five Years.” The discussion revolved around Bitcoin, mobile payments, credit cards, regulation, and security.  To help the audience differentiate Dave McClure from David Teten, a partner with ff Venture Capital, Teten remarked: “I’m the one with more hair.” The panel was moderated byJohn Carney, a “Heard on the Street” columnist for the Wall Street Journal. 

Interestingly, not one person on the panel owned Bitcoin. Teten was skeptical of the crypto-currency, calling it an asset “with no fundamental underlying value…. It looks like tulips to me,” he said, referring to Dutch tulipmania. “What scares us,” Teten added, “is that every other [venture capital firm] is hot for Bitcoin.” Laura Roden, the founder of Capital Formation Consultants, said wherever there is friction in the marketplace, money will find a way around the barriers, and technology “is the new playing field for this.”

McClure and Arjuna Costa of Omidyar Networks struck up an argument over what the next five years will look like in mobile payments. Costa provided his perspective on emerging markets and mentioned that mobile payments have become the de facto solution in those markets, which have no fundamental payment structure in place. In addition, people in emerging markets share a “deep distrust” of banks, which creates a “huge advantage” for new, innovative financial services firms to emerge. Costa viewed telecom carriers as the next innovative leaders in this space, but McClure disagreed. He pointed to Google, Apple and others as the next front-runners due to the “frequent user login, frequent transactions,” and low costs that their platforms provide.

Speaking about the innovation in payments and the changing dynamics of banking,Doug Atkin, senior managing director for venture investments at Guggenheim Partners, forecast that plastic credit cards will remain in people’s wallets for the foreseeable future. However, Atkin viewed the emergence of peer-to-peer platforms, such as Prosper, as the next stage in innovative lending. Roden also noted that Facebook is moving into banking because of the relationships Facebook has established with its users.

The addition of the social component to banking and payment systems could transform how people are scrutinized in their loan applications. Roden labeled the current credit review process as “primitive” and questioned why institutions continue to ignore the vast amounts of data that, if used correctly, can make the process more efficient. Atkin discussed how the emergence of peer-to-peer lending has slashed the time it takes to obtain a loan, and the addition of a “social graph” to existing credit check models has the potential to pare default rates.

On the investment front, Teten spoke about angel investing and said that of the 5.1 million Americans who are accredited investors, only 5 percent have made angel investments over the last few years. Teten also cautioned up-and-coming angels that while returns could be high, the chance of failure is significant and investors need to diversify effectively.