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.
Our cross-country escapade covering the USA is finally at the end of its journey, finishing up on the Pacific Coast. Here, we of course see the monolithic technology powerhouse of the world: Silicon Valley, housing some of the globe’s largest tech unicorns. And yet, the West Coast boasts similar hotspots such in Washington, Oregon and the Bay Area’s geographical rival SoCal. Indeed, the West has much else to offer alongside the USA’s already gargantuan regional fintech ecosystems.
The state of California seems to have an almost mythical status to the rest of the world, housing the dreamland of Hollywood and Los Angeles being the focal setting for much of Hollywood’s historical output. Whilst Orange County and the rest of the state’s southerly region has garnered an infamous reputation of being pretty laid-back (a generalisation to be disproved shortly), it seems their northern neighbours are regarded as the back-breakers, particularly in the field of technology. Silicon Valley has become synonymous with the tech industry, and has spawned a hit HBO TV show which comedically presents the life of startups that flock to the illustrious hotbeds of innovative businesses; well worth a watch. California is certainly a diverse place of metropolises, shark-roamed beaches and even desert music venues such as Coachella, but it’s immediate states are just as world-leading in their own right. In Washington, Seattle is home to the grunge genre and four of the most iconic bands of the 90s in Nirvana, Pearl Jam, Alice In Chains and Soundgarden, as well as being the birthplace of TV’s Frasier, Jeff Bezos’ e-commerce giant Amazon and coffee tyrant Starbucks. Portland, Oregon on the other hand have a basketball team called the Trailblazers: does that translate here for its fintech revolution? Let’s take a look at how these cities are aligning themselves with Silicon Valley’s already recognisable fintech dynasty.
“Going Back To Cali”
Let’s start with the big dogs of the Bay Area.
When I say ‘Bay Area’, I certainly mean it to be used in inverted commas (as shown). In fact, the area which makes up “Silicon Valley” is fairly vague. From the pulling together of many sources, it could be deduced to be the Santa Clara Valley (mainly), with an expanded living space of innovative minds to roughly 30 cities (with Santa Clara, Palo Alto and Redwood City being but a few) and 5 universities. These are Stanford – as has been made very much (in)famous due to Philip Zimbardo’s Prison Experiment, yet famous for its educational esteem, Northwestern Polytechnic, Carnegie Mellon, San Jose State and Santa Clara. Considering the high density of students already in this corner of the world, the talent pool is deep with many successful swimmers, hence why it continues to remains top of the tech, and the indeed fintech, world. It is also home to the USA’s most millionaires – I suppose there’s a cause-and-effect here…
How did this start? Here’s a brief timeline which could be titled The Making of Silicon Valley.
- In the 1950s, the area became the birthplace for the Silicon-based transistor.
- In 1951, Stanford University set up the Stanford Industrial Park, which was the first university-based technology park of its kind. It leased much of the property to tech corporations, with some of its most recognisable early tenants being Hewlett-Packard (HP) and General Electronic. Tesla Motors is one of its current residents.
- Now referred to as Stanford Research Park, the idea for it was spearheaded by Professor Frederick Terman.
- Terman and William Shockley, a physician and inventor (key in the design of the semiconductor), are referred to as the “fathers of Silicon Valley”.
- Eight of Shockley’s employees split from his company to found various other successful tech companies, including Intel Corporation.
- Around a similar time in the 1960s, San Francisco became a centre for development when the US Navy attached itself to the location.
- The area was first nicknamed Silicon Valley by Ralph Vaerst, whose mate Don Hoefler used subsequently as a term in articles for Electronic News in 1971. This was a landmark time for the technological industry.
- In the 1970s, the now-household-name Xerox Corporation opened the Palo Alto Research Centre (PARC), ever since a key institution for innovative technology, including the personal computer, Ethernet, and the graphical user interface, amongst others.
- Such alumni of the area include the late tech CEO-giant Steve Jobs. It’s no wonder why some of the world’s biggest companies such as Apple can be affiliated with the area, as well as Google, Facebook, eBay, Symantec, AOL, Yahoo! And Netflix.
- Many Stanford engineers instantly became part of Silicon Valley’s business fabric, thus the economic and real estate boom that it has experienced for decades. It used to have cheap rent! But alas…
It’s also a relatively funny fact that Silicon Valley was previously nicknamed the Valley of Death due to a fear of computers replacing jobs. Then again, it is fairly concerning how unbelievable the advancement of Silicon Valley technology has come – perhaps the Valley of Death moniker may resurface…
Other quite funny and more bizarre/unknown facts about the area can be found here.
Onto its fintech landscape more specifically then, the Deloitte ‘Tale of 44 Cities’ Fintech Report outlines the fact that Silicon Valley fintech definitively has the majority share of venture capital and executive leadership. It is regarded as the 6th financial centre globally, with a Global Innovation Index of 4. Whilst lending and loan companies and P2P payments companies are its most successful currently, there is a growing trend in the area towards InsurTech and RegTech – two huge areas of expertise particularly relevant to traditional financial players such as retail banks and asset managers, as well as the disruptor services that are becoming all the more prevalent. It’s also a widespread belief that Silicon Valley’s main tech and social media companies could branch out more into financial services. Take, for example, this year’s deduction that Facebook is essentially already a bank, and with companies such as that and Google just being so humungous and acquisition-hungry, the financial industry could quite scarily be governed by these technology giants. Google Ventures is the brand’s own venture capital arm, although much of Silicon Valley’s noted corporate VCs include Citi Ventures and Wells Fargo, alongside Propel Ventures (formerly known as BBVA), Sequoia Capital and BNP Paribas’ L’Atelier (a consultancy and acceleration programme).
As is made apparent by the World Economic Forum, California’s market size is greater than other such fintech behemoths as Germany or Singapore, and world leading in both investments (£3.5 billion) and number of staff, with the majority of the 70 to 75,000 workers probably located within Silicon Valley, which is ridiculous. That’s one US state surpassing even some of the biggest European financial powerhouses.
Quelle surprise! Featuring in the KPMG Fintech 100 2016 are a record breaking 13 companies representing California’s fintech prowess. Here they are.
SoFi (#9) – A lending and wealth management platform for student loans, personal loans, mortgages and refinancing. It primarily caters to early-stage professionals. It is based in San Francisco, and was founded in 2011 by Mike Cagney (CEO and Chairman) and Dan Macklin (VP of Community and Member Success). It has been valued at around $1.3 billion.
Square (#13) – A mobile payments company committed to digitalising commerce. It works as one service for sellers providing analytics, small business financing and marketing tools, and simplifies payments for buyers. Square Cash, Square Order and Square Capital are other services for transactions, paying for food and small business lending respectively. Founded in 2009 by Twitter-man Jack Dorsey and Jim McKelvey, with its HQ in San Francisco. It has been valued at around $4.3 billion.
Affirm (#19) – Affirm offers instalment loans to consumers at the point of sale. All pricing is based on data which prices risk in real time, and generates risk scores for every transaction. Also with its HQ in San Francisco, it was founded in 2012 by Max Levchin (CEO).
Stripe (#21) – Stripe offers tools and APIs to accept online payments and make card transactions direct to banks in mobile apps. It processes billions of dollars a year from companies of every size. Developers can integrate payment processing into their websites. It works across 25 countries. It was founded in 2010 by John and Patrick Collison, with its HQ in San Francisco. It has been valued at around $5 billion.
Collective Health (#22) – A healthcare-based software and services companies whereby companies can design and transform health benefits for their consumers through technology. Founded on Halloween in 2013 by Ali Diab (CEO) and Rajaie Batniji (Chief Health Officer) with its HQ in San Francisco.
Wealthfront (#24) – Automated investment services offering investors a customised portfolio of index funds. It has also extended its features to robo-advisors, and has over $3 billion in assets. With its HQ in Redwood City, it was founded in 2011 by Adam Nash (President and CEO), Andy Rachleff (Executive Chairman) and Daniel Carroll (Chief Strategy Officer).
Credit Karma (#25) – A personal finance company for users to monitor credit and get recommendations on how to save and manage their money and improve their financial health. It helps over 60 millions consumers with its free tools to better educate about personal finance. Founded in 2007 in Ken Lin (CEO) with its HQ also in San Francisco. It has been valued at around $3.5 billion.
Lending Club (#26) – The world’s largest online credit marketplace for borrowers to access low interest rates loans through online and mobile platforms. There is no branch infrastructure, making for a transparent marketplace for borrowers and investors. Founded in 2007 by Scott Sanborn (CEO), it is based in San Fran. It has been valued at around $4.7 billion.
Prosper (#27) – The USA’s first marketplace lending platform whereby borrowers ask for loans between $2,000 and $35,000 and individual lenders can invest as little as $25 in each loan listing. It has over 2 million members, with $7 billion + in funded loans. It is based in San Francisco and was founded in 2006 by John Witchel and Chris Larsen. It has been valued at around $1.9 billion.
LendUp (#37) – An online lending platform. Loan decisions are instant and users can receive money in as little as 15 minutes. It considers itself a “socially responsible lender” for Americans not accounted for by traditional banks due to low credit or income. Founded by Sasha Orloff (CEO) and Jacob Rosenberg (CTO) with its HQ in San Francisco.
Motif Investing (#40) – An investing platform whereby users can purchase a “motif” – a portfolio built around a concept or economic trend – in single transactions or $250 minimums. These can be shared on the Motif Social Platform, and over 75,000 motifs have been created by 100,000+ customers. Founded in 2010 by Hardeep Walia (CEO), based in San Mateo.
Coinbase (#47) – A digital wallet and platform for crytpocurrencies. Merchants and consumers can trade and buy with bitcoin and ethereum. It was founded in 2012 by Brian Armstrong (CEO) and Fred Ehrsam, with headquarters in San Fran.
Emerging star: Point – A home equity marketplace whereby institutional investors can purchase fractional interests in properties. Homeowners can ‘sell’ fractional equity in their home, changing the way a house’s equity can become a tradable asset class. Founded in 2014 by Eddie Lim (CEO), Eoin Matthews (CBO) and Alex Rampell (Board Member) and based in Palo Alto.
And now, here’s some brief encounters with the Pacific Coast’s emerging fintech players.
Not to overdo Anchorman references, next stop in our Pacific Coast Party is San Diego. The coastal city, one of the US’s gateways to neighbouring Mexico, is the eighth largest in the country, but one of the most densely populated with 1.4 million inhabitants.
San Diego’s yearly funding is always on the up; between the first quarters of 2015 and 2016, investment in startups has risen by over 100%, placing it amongst some of the other successful fintech cities we have covered before, including Boston and St. Louis. Similarly, between the winter months of the same years, venture capital for financial services in “America’s Finest City” grew by roughly $22 million.
It’s hard to believe, therefore, in its past reputation as being a haven of “slow startups”, as noted by Huffington Post. The statistics prove the rate of change, and San Diego is achieving this is for two reasons:
Firstly is the most stark difference between Silicon Valley and its up-and-coming challengers: costs. This city boasts far more acceptable living costs, whilst also having less competition for talented developers and entrepreneurs compared to the Bay Area. Whilst there is a more notorious, corporate outlook in the North of the state, San Diego instead has a culture of loyalty whereby turnover is minimal. It’s easier to stay in companies, to grow and to become a success whilst the city’s scene really gets underway. There is also a trend to live in San Diego simply for the fact that it’s a lovely place to work. Boasting some of the most consistently great weather in the country, and lively beach and downtown scenes, it’s an attractive place for young startups. As the article referenced before notes: “Life never gets stale in San Diego.”
Secondly, these fintech savants start their networking opportunities at schools and universities. The city is famed for its interest in the development of creative schools to lead to further careers in creative businesses. San Diego State University, in particular, is famed for its culture of talent acquisition. The talent pool remains local as colleges have communication programmes in place to connect young entrepreneurial minds. On top of this, non-profit tech incubators such as EvoNexus are particularly pivotal in supplying and immediate entrance into startup-hood, as well as linking startups to investment professionals.
Whilst biotechnology is a large part of San Diego’s innovative action (especially at The University of California), more prevalent to financial services and the fintech space is its focus on cybersecurity. The city has around 51,000 workers in the sector, for companies such as ESET and iBoss. One company – Harvest.ai – utilises artificial technology to detect threats and breaches on companies’ data and secure documents, and was quietly acquired by Amazon this year for a reported $19 million.
Make It Rain (Digitally)
As this title infers, Seattle is known for its British-esque rainy weather, yet that has never dampened the spirits of its tech development. It acts as the 15th largest metropolitan area in the United States, with around 1,890 startups: a healthy talent pool therefore. Tech workers amount to around 250,000, a figure which increases at a rate of about 10% a year, according to Pymnts.com. The total funding for the sector is around $1,932,630,474.
It’s no wonder why startup spirit in the tech and fintech space is so strong in Washington. Boasting Amazon, Tableau and Google as some of its “tech residents”, the city of Redmond (just east of Seattle) is the headquarters of Bill Gates’ Microsoft (heard of it?) leading to it being dubbed ‘The Microsoft City’, alongside ‘Emerald City’, ‘Jet City’, and ‘Coffee Capital of the World’. Amazon and Microsoft’s cloud computing software and data storage has even led to it being dubbed Cloud City by one local Seattle Times journalist, not to be confused with the floating mining colony on Bespin in Star Wars. With its close proximity to British Columbia (another fintech hotspot) and Asia, and with a lower barrier for overseas transaction through the mid market, it bodes well for Washington’s startup scene.
Most notably, the field of digital payments has historically had massive success in this very state, as stated here. There’s a high ease-of-access to micropayments here, and its adoption of modern payments systems has in turn led to a spike in funding for small Washington-based businesses that were previously scarce. The reason for Washington’s propensity to allow digital currencies (a space which seems divisive worldwide) is that the Washington State Department of Finance Institutions (DFI) regulates such form of payments, giving them the same controls as all other forms of legal tender. Even more fascinating is the state’s development of contemporary ATM transaction methods too; the Spitfire Bar in Seattle became the first site for a bitcoin ATM, with the second being installed at the University of Washington in October 2014.
It’s easy to see the knock-on effects from Washington’s tech past and present glory to influence its future in fintech development.
Whilst not so much a major fintech hub (for now), Portland, OR, does have a chance to grab a piece of the pie, and has an affinity with Silicon Valley and Seattle’s payments focus.
The ‘industrial corridor’ between Beaverton and Hillsboro is referred to as ‘Silicon Forest’ (classic) – or indeed it’s state-wide tech scene, possibly due to Oregon’s beautiful leafy landscape.
Amongst Portland’s fintech successes is Vesta: an online payments giant which, having been founded in 1995, processes more than $3.5 billion in payments annually. Another prolific venture is Simple, a banking service and disruptor looking to take on retail banks, whose visual mobile tools aid in the tracking of spending and setting of financial goals. You can read about their story here.
The key thing to take from Portland’s current attitude towards fintech is that it is embracing payments much like Washington. Funnily enough, Silicon Valley’s very own Square has become a popular payment method in Portland’s eateries.
To round us off then, it’s clear to see the tech history of Silicon Valley, its current venture capital investments and continually strong talent pool of expertise is leaking to various parts of the USA’s Western areas. With further investments in such places as San Diego, Seattle, and Portland, even the East Coast’s big-hitters such as Boston and New York may be getting a (home) run for their money.
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!