Hire Wire Feb 23 2012

Tech Start-Ups Take On Banks

By Joseph Walker

If financial workers didn't have enough to worry about with the European debt crisis, yet another threat to their job security is emerging from the technology industry and people like Brian Merritt -- the scruffy, unassuming 33-year-old director of engineering at Simple Finance Technology Corp.

Simple, a Portland, Ore.-based company, is building an iPhone and Web-based banking platform that deposits customer money at a third-party, federally-insured bank, but handles all aspects of customer service. The Simple application tracks savings and spending in real time, collecting its fees from banking partners rather than from overdraft and ATM charges, the company says.

Founded in 2009, Simple was formed before consumer backlash prompted Bank of America to rescind its plan to charge $5 for debit card transactions. But Simple's skepticism toward the financial industry has positioned it well to take advantage of consumer discontent. The company has over 100,000 people on its waiting list.

"The banking industry has been on a consistent path of treating their customers with less and less respect and failing to invest in technology and design," says Merritt.

Finance Hiring

If start-ups like Simple gain traction, they could threaten two areas of finance that are still hiring: retail banking and wealth management. The Bureau of Labor Statistics predicts the ranks of personal finance advisers to grow by 30% between 2008 and 2018, but new banking technologies could dampen those prospects. Venture capital firms put $934.8 million into business and financial services companies last year, 12.2% more than the year before, according to Dow Jones VentureSource.

"These start-ups can come in and leverage new, lighter technologies and in some ways almost leapfrog" the incumbent players, says David Schehr, research director for banking and investment services at Gartner, the IT research and consulting firm. "Unconventional competitors" like start-ups Betterment and WealthFront Inc. "represent an emerging disruptive element" to traditional wealth management firms, Schehr wrote in a note to clients last summer.

The core market for financial advisers currently consists of middle-aged and older clients who are reluctant to entrust their money to computer algorithms. The Internet generation, however, has "very different expectations, expectations set not by Merrill Lynch, but by Amazon," Schehr says. As this generation matures and begins to invest, Internet-based services will be increasingly attractive, Schehr says. "Ask Blockbuster, Borders or Kodak about the long-term threat from disruptive competitive models," he wrote in email.

Few of the established players are taking such predictions seriously. "In 1999, the pundits all predicted that self-directed, online trading would kill the traditional wealth management model based on human interaction," Morgan Stanley Smith Barney spokeswoman Christine Pollak wrote in an email. "Now, 13 years and billions of dollars of revenue later, reports of our death have been greatly exaggerated."

Targeting Tech People

Still, the start-ups see a growing market. WealthFront, which has raised $10.5 million, charges lower fees by replacing individual advisers with algorithms and eliminating proprietary investment products that pay financial advisers commissions. WealthFront can reduce fees by as much as 75%, says Andy Rachleff, the company's founder and chief executive.

The company is targeting technologists who have money to invest and could become very wealthy if and when their companies go public. These are prime early adopters to focus on, says Rachleff, 53, because they distrust "the suits" at traditional firms, and are naturally inclined toward sacrificing human interactions for computer processes.

One such client, ex-Facebook executive Tim Kendall, says that he invested money with WealthFront because the company is transparent about its fee structure. "The challenge I've had is getting really concrete information that I need from various money managers to make a decision," says Kendall, the former Facebook director of monetization. He keeps some of his money with traditional money managers, too.

To be sure, disrupting big banks with new technology won't be as easy as it was for Amazon to disrupt the bookselling industry. Not only does Goldman Sachs have more capital than did, say, a Borders Books, it also has a century of experience dealing with regulatory bodies and policies in an industry that is highly regulated. Ultimately, none of these technology start-ups are actually taking on the responsibility of holding onto client money; instead, they partner with third-party, federally-insured banks.

A Daunting Task

"The face of banking is changing, but not the inner workings of the banking industry," says Matt Fellowes, chief executive of Washington-based start-up HelloWallet, which makes a financial adviser mobile app for low- and middle-income workers.

The banking sector could end up partnering with or acquiring the tech start-ups aiming to encroach on their customers, says Elias G. Carayannis, a professor of technology and entrepreneurship at George Washington University who has studied the business-model disruption experienced by printed journals in the late 1990s.

Taking on the titans of finance, no matter how beleaguered, is a daunting task, admits Michael Sha, the chief executive of Nvest Inc., a 40-person San Francisco start-up that plans to double its headcount this year.

Sha, a former product manager at Amazon with a master's degree in computer science from Harvard, founded Nvest in 2007 with the idea of providing a crowdsourced investment research site called Wikinvest. But last year the company redirected many of its resources toward building SigFig, an automated wealth management product that helps customers lower the cost of investing their money.

"This isn't one of those companies where you can build a little Groupon clone and three months later have millions of customers; a lot more thought and care needs to go in to building products dealing with people's money," Sha, 31, says. Still, he sees "unprecedented ability for technology to build products and services that reach a global audience."

Write to Joseph Walker at Joseph.Walker@dowjones.com




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