Hundreds of Silicon Valley companies have hit venture capitalists' radar because of their ambitious goal: Invent ways to disrupt the banking industry as we know it.
It's about time.
Banking is one of few industries to have escaped disruption from the digital revolution.
Most of its infrastructure is decades out of date. People still use paper checks, debit cards require PINs, and money transfers take days to go through. Loan applications are filled out on paper and can take weeks to be approved.
Silicon Valley companies are working to solve these types of issues. The ideas emerging from the growing world of "fintech" will change how everyone banks - and will shake up the status quo.
The financial industry knows change is coming.
"When I go to Silicon Valley... they all want to eat our lunch. Every single one of them is going to try," JPMorgan Chase & Co. (NYSE: JPM) CEO Jamie Dimon said at the bank's Investor Day last year.
And we're tracking this trend now because at the rate money is pouring into these companies, they're on the way to being the next hot tech IPOs...
Silicon Valley Companies See a Pot of Gold
Silicon Valley companies are just following the money. Financial services is a $1.2 trillion market.
Venture capitalists also see the potential. Fintech startups raised more than $12 billion worldwide in 2014 - triple the amount raised in 2013.
"We have a chance to rebuild the system," prominent tech venture capitalist Marc Andreessen told Bloomberg last October. "Financial transactions are just numbers; it's just information. You shouldn't need 100,000 people and prime Manhattan real estate and giant data centers full of mainframe computers from the 1970s to give you the ability to do an online payment."
It's not going to be tech's biggest names that upend the financial industry. The marquee tech companies have taken seats at the table but so far have shown no desire to saw the legs off.
Just look at the mobile payments space.
Apple Inc.'s (Nasdaq: AAPL) Apple Pay, Google Inc.'s (Nasdaq: GOOGL , GOOG) Google Wallet, and Samsung Electronics Co.'s (OTCMKTS: SSNLF) LoopPay all incorporate a user's existing bank-issued credit cards.
Instead, the disruptive innovation in financial tech is coming from the startups.
For investors, that presents a challenge since most of these Silicon Valley companies are still private. But fintech-related stocks do exist. We expect more great opportunities to spring up over the next few years as some of the top innovators go public.
Here's a look at the best prospects in the fintech sector right now...
The Financial Tech Companies That Will Take Down Banking
Fintech is reaching into several broad categories of banking, touching everything from money transfers to wealth management.
One of the biggest fintech categories is transactional services. This includes such companies as Square, Stripe, and Dwolla. Square and Stripe are focused on mobile payments, while Dwolla's service lets people send, receive, and request funds. A Kenyan company, m-Pesa, has grown rapidly by providing payment services to the unbanked via mobile phones.
Kabbage makes small business loans. But instead of conventional methods, Kabbage analyzes business activity data to determine creditworthiness. It can approve a loan in just seven minutes, compared to weeks for a traditional bank.
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Kickstarter has gained fame for popularizing crowdfunding. People can use the site to raise money from the public for any kind of creative project.
Several Silicon Valley companies, such as Wealthfront and Motif Investing, offer fintech alternatives in wealth management. Wealthfront uses advanced software to manage an investor's assets based on their goals and situation. Motif Investing offers themes ("motifs") in categories such as housing or cybersecurity. The motif offers a set of stocks for each motif, but lets users customize it as much as they want.
Another fintech, Robinhood, is an online broker with a premise that's hard to resist: zero-commission stock trading. The company makes money by collecting interest from uninvested cash balances and interest from margin accounts.
Finally, we have Bitcoin. The foundation technology of Bitcoin, the blockchain, is a playground for fintech because it can incorporate any kind of data in addition to verifying transactions. Coinbase has become a leading Bitcoin wallet and payments company. BitPay enables merchants to accept Bitcoin as payment. BitPay removes the risk of accepting Bitcoin by immediately converting the payments to dollars. Meanwhile, goods and services bought with Bitcoin save the merchant from paying credit card fees.
2 Publicly Traded Fintech Companies
Investors who want to get a piece of the fintech sector today do have a couple of choices.
One fintech stock is Yodlee (Nasdaq: YDLE), which provides cloud-based financial data and software. The company had its IPO in October of last year. It closed Thursday at $13 a share, $1 above its $12 offer price. Yodlee has done a good job growing revenue, but has struggled to turn a profit. The one-year target price on YDLE stock is $16.70.
A better, more established option is SVB Financial Group (Nasdaq: SIVB), the parent of Silicon Valley Bank. This Silicon Valley company is not exactly a fintech, but it bankrolls the sort of companies mentioned above. Silicon Valley Bank CEO Greg Becker told FOX Business last October that his company banks about 60% of the U.S. venture capital-backed companies that have IPOs.
The company has had good luck with that strategy. SIVB stock is up 83% over the past two years, and is up 7% so far in 2015. SIVB closed at $124.27 Thursday. It has a one-year target of $132.13.
The Secret Way to Profit from IPOs: Putting money into an IPO is always a dicey proposition for retail investors. When promising companies go public, the big money is always at the front of the line. That means ordinary investors must buy later - and at a higher price - costing them profits. But there's a way to profit from Silicon Valley's steady stream of hot IPOs that Wall Street won't tell you about...
- Bloomberg: Andreessen on Finance: 'We Can Reinvent the Entire Thing'
- FOX Business: Silicon Valley Disrupts the Banking Model
Follow me on Twitter @DavidGZeiler.
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.