As consumer trust in the banking system falters, a growing number of tech startups are poised to steal away up to $4.7 trillion worth of business, according to a recent study from Goldman Sachs.
In 2014, global investment in financial technology companies tripled, to more than $12 billion. The trend continued in 2015, when $10.49 billion was invested in the first three quarters.
From payments processors and alternative lending firms to automated investment services (also called "robo-advisers"), fintech startups have become attractive for a number of reasons. They're easy to use, and often marginally cheaper than what the competition bills.
Companies like Lending Club have popularized fintech as an attractive industry. The startup went public in 2014 for an $8 billion valuation, though founder Renaud Laplanche recently admitted that it's been a trying year.
Other companies, like Wesabe and BitInstant, have burned out completely. One industry challenge is predicting the longevity of such business models. Analysts have noted they typically require a ton of working capital, and may struggle to become profitable in the long term.
Security is another common concern with fintech. Alternative lending firms often collect hundreds of data points to underwrite clients.
TransferWise, a London-based peer-to-peer money wire platform, is processing as much as $750 million in personal global transfers each month. Co-founder and CEO Taavet Hinrikus says it's common to assume that security concerns of non-bank providers have been a barrier to the uptake of fintech.
Still, "[a]s people become used to trusting tech companies such as Google, Amazon, and Facebook with their personal information, they will also start trusting startups," he said.
As we head deeper into 2016, here are eight emerging fintech startups to keep on your radar:
A New York City-based startup that provides automated investment services and personalized advice, Betterment had a record year in 2015. The company charges an interest rate between 0.35 and 0.15 percent, depending on the size of one's investment.
Headed by founder and CEO Jon Stein, Betterment grew its AUM (assets under management) by 200 percent last year, from $1 billion to $3 billion.
It also rolled out a new, automated 401(k) tool for businesses that gives employers personalized advice on their assets. Participants receive a portfolio of ETFs (exchange-traded funds) and are given the option of opening taxable investment accounts, IRAs, Roth IRAs, and trusts, all of which the tool will manage for them.
Jane Bryant Quinn, a prominent financial journalist and retirement expert, recently sang the company's praises: "I love these automated financial advisers, and not just for Millennials," she said. "Betterment is the only one that has an automatic plan for dealing it [your money] out over your retirement. The others will probably get to that eventually, because you really need both kinds of automatic planning."
WePay is a San Francisco startup that processes credit card payments online, on platforms such as GoFundMe or CrowdRise, taking a fee of just 2.9 percent plus 30 cents per transaction. It originally started as a group payments processor, but co-founders Bill Clerico and Rich Aberman decided to shut down that portion of the business in 2013 to focus on crowdfunding.
In 2014, WePay brought in $24.9 million in revenue, and was on track to do $75 million as of October of last year. It ranks No. 62 on the 2015 Inc. 5000, and is reportedly worth $220 million.
Launched in 2013 by Max Levchin, the high-profile investor and co-founder of PayPal, Affirm offers installment loans to help users finance large e-commerce purchases. Late last year, it announced that it would partner with coding schools, including General Assembly, Bloc, and Kaplan, to provide loans to students.
The company's interest rates, it's worth noting, are pretty steep, ranging from 6 to 20 percent.
Affirm has $275 million in equity funding, largely to expand its lending programs.
"Whether you want to call it fintech or marketplace lending, it's really moving from the margins to the mainstream," notes David Klein, founder and CEO of CommonBond, an alternative lending firm based in New York City.
CommonBond is another notable upstart hoping to fix the $1.3 trillion student debt crisis in the U.S. The company more than doubled its headcount in 2015, raised $35 million in a September funding round, and expanded to serve graduates of more than 2,000 schools.
CommonBond has refinanced more than $100 million worth of student loans, and projects doing more than $1 billion by the end of 2016. It evaluates potential clients using factors beyond the FICO score: employment history and savings accounts, for example. (The average FICO score for a CommonBond client is 770.)
While the company is not yet profitable, Klein is proud of the fact that no borrower has ever defaulted on a loan. He projects that it will be profitable within the next two years.
This small-business lender came in at No. 36 on the 2015 Inc. 5000, booking $40.2 million in annual revenue. It uses a number of complex data points to underwrite loans for businesses.
Kabbage is unique for two reasons: Its loans have a comparatively short payoff period, and the sizes of those loans are large. Consider, too, that 70 percent of the company's clients are the small guys, from nail salons to local clothing retailers, says co-founder and COO Kathryn Petralia.
While the APR on loans is pretty high--42 percent, on average--it's worth noting that Kabbage won't tack on an origination fee.
6. Orchard Platform
Led by co-founder and CEO Matt Burton, Orchard is a financial data startup that connects investor clients to roughly 130 lenders in the marketplace. It also sells its services to third-party lenders, including Lending Club, Prosper, and Funding Circle.
The company has attracted interest from major investors, such as former Citigroup CEO Vikram Pandit, and Nigel Morris, the co-founder of Capital One.
Since launching in 2013, Orchard has raised $44.7 million, including $30 million from a recent September funding round.
Headquartered in London, TransferWise is the brainchild of Kristo Käärman and Taavet Hinrikus, Skype's former director of strategy. The two Estonian expats launched the company to provide a cheaper, more efficient platform for foreign exchange, now claiming to save users $34 million in hidden bank fees each month. (Rates vary, depending on the users' location, but TransferWise typically charges 0.7 percent on U.S. transfers.)
One year ago this month, the company expanded into the U.S., which--the co-founders tell me--is by far its most promising market.
TransferWise has raised $91 million in funding to date, from high-profile investors including Richard Branson, Peter Thiel, and Max Levchin.
While the majority of fintech startups pit themselves directly against banks, a small firm based out of Reykjavik, the capital city of Iceland, says that's precisely who it wants to help.
Meniga licenses its money management software to banks, partnering with 25 of them across Scandinavia and Western Europe, charging a subscription fee. In November of last year, Meniga inked a deal with Santander, the Eurozone's largest bank, which controls about 1.3 trillion euros. The deal should help grow the six-year-old startup's revenue by 30 to 50 percent. It brought in $7.5 million in sales last year, founder and CEO Georg Ludviksson recently told Business Insider.
The co-founder likens his software to a Facebook-style news feed, depicting account transactions and credit card activity, for instance.
Ludviksson's take on the rapidly evolving sector is simple. "The big banks are much less afraid of the banks next door than they are of tech companies," he said in a statement.