Fintech investors like ‘stodgy more than sexy’
BOSTON — A good chunk of the money being invested in wealth management and banking technology is going toward funding artificial intelligence-driven tools.
But forget the popular concept of conversational, British-voiced computers, chatbots or even cute robot assistants greeting customers at branches; the applications that investors want in on are focused on improving operational efficiency.
“I like stodgy more than sexy,” says Jack Klinck, managing partner of Boston-based Hyperplane Venture Capital.
The industry's current methods of handling compliance issues, back-office processing, clearing and settlements, he says, are ripe for reinvention.
“The workflows and the systems that are in global custodians, in many cases, are 30 to 40 years old,” Klinck says. His Boston-based firm closed two funds with a combined $50 million raise, according to data from Crunchbase.
Fintech investments have toppled 2017 highs boosted primarily by an influx of venture capital investments in artificial intelligence.
Total investments in U.S. companies hit $8.8 billion in the second quarter of 2018, up from just $2.8 billion over the year-ago period. VC investments reached a new high of over $3 billion in the second quarter alone, according to The Pulse of Fintech 2018 study by KPMG.
The big winners included a $363 million Series D investment in the personal finance firm Robinhood and a $250 million Series E investment in the business network Tradeshift, according to the study.
But, early stage fintech companies attracted solid amounts of capital as well — five of the top 10 deals in the second quarter were seed or early stage investments.
Other venture funds are following fintechs that boost productivity.
“It’s an interesting space because a lot of money changes hands,” says Sarah Fay, managing partner at early stage VC firm Glasswing Ventures. “What a lot of AI applications are addressing, and allowing for, are big upticks in ROI,” Fay says.
Her Boston-based firm closed on an AI-focused fund, which raised $112 million in June, and has already invested upwards of $20 million in at least seven fintech companies from blockchain to cyber security, according to Fay.
“It’s what the human brain can do, but better and faster,” Fay says. “There are a lot of people that can be eliminated in the process which is great — but maybe not so great for manual labor.”
On a scale of one to 10, Fay rates most companies AI readiness at a two.
That’s backed up by a new survey from global IT nonprofit ISACA, which found that only 40% of tech professionals are confident in the security of their organization’s AI deployments.
Cross-communication is another looming problem for incumbents trying to track data over an entire enterprise — especially legacy firms that are mainly structured in silos, she says.
“A lot of big companies — banks, for example, and some of the best — don’t really know who their customers are from division to division,” Fay says. “They don’t just have one data pool that can be applied and that’s where technology can help incumbents solve these issues.”
One fintech, the Cambridge, Massachusetts-based Zylotech, is developing a platform it claims can act as the brain of large corporations, where all data can be stored centrally, she says.
According to Klinck, the incumbents in financial services aren’t willing to take as much risk, leaving the more nimble firms to drive innovation.
“To them innovation is with a little i,” Klinck says. “Doing something on the margin and have a parade and celebrate. It’s not with a big I. The big companies are too risk adverse to do that and thank god because, that’s why we’re here. The big companies have ceded the ground to the little companies to come up and do it.”