Fintech, the category that encompasses any technological innovation in the financial sector, is an industry that moves a lot of money.
A recent report from CB Insights shows that since 2012, the top ten U. S. banks have invested a total of $3.6 billion to 56 fintech companies. Worldwide capitals of fintech are, understandably, places known for their strong emphasis on business and finance, such as London and New York City. And Silicon Valley, of course.
"I think we have all the right ingredients to be successful in Fintech.”
As for how the Boston fintech ecosystem ranks, the short answer is really well. As for the long answer, it's evident that Boston has the people, pipeline, companies, money and resources - an ecosystem's essential ingredients - to compete with London and New York City on the global fintech stage.
Let’s start with a little bit of history. During the last few years, the Boston fintech ecosystem has shown numerous positive changes, according to Doug Nelson, a former fintech venture capital associate and author of the Medium post Taking Stock of the Boston Fintech Landscape in 2017. “Boston’s traditional strength is in enterprise software for the buy side — e.g., companies like Charles River, Interactive Data, Linedata, Eze Castle, Intex, etc,” Nelson wrote in an email.
“The second wave of Boston fintech has seen a flurry of new companies outside this sector, with particular strengths in payments and insurance technology," he added. "Non-profits and meetups" — like the Fintech Sandbox, MIT Fintech, the Boston Fintech Meetup and Insurtech Boston — "all started over the past three years, and have injected a much-needed sense of energy and excitement into the Boston fintech scene.”
The Ingredients
Jack Klinck, a former management committee member of State Street and fintech angel investor, is bullish on Boston's fintech ecosystem.
“I think we have all the right ingredients to be successful in fintech,” said Klinck, who is currently managing partner at Hyperplane Venture Capital.
To Klinck, the city has five core ingredients that have helped cement Boston as a leader in and hub for the space.
First, Boston has excellent universities, which generates lots of ideas, talent and technologies. Second, Boston elected officials support entrepreneurship and immigration: The city has “a government, a mayor, a governor and other officials who are very embracing of entrepreneurship and immigration, and all the things we need to keep talent in place,” Klinck said.
Third, the city hosts a large number of big players, such as banks, insurance companies, money managers, and hedge funds. Number four, there are startups and incubators. Lastly, there’s the money.
The Universities
It's probably no surprise that some of the Boston area's universities, including MIT, are offering resources to help young fintech startups get started. At the Martin Trust Center for MIT Entrepreneurship, for example, the Sector Practice Leaders program help students address the unique challenges different industries present, including fintech. The Center, which recently launched its MIT delta v program, for the first time offers students the opportunity to travel to New York City in case their business falls within the category of fintech (or fashion, or real estate). MIT students interested in fintech also have their own group, MIT Fintech.
However, MIT is not the only player in this landscape. Elsen co-founder and CEO Zac Sheffer, for example, said that he started working on his company while he was a mechanical engineering student at Northeastern University. Elsen, a platform-as-a-service company for large financial institutions, recently scored a deal with financial information giant Thomson Reuters. As a result of the deal, Reuters is able to use a new software tool that lets investment analysts test their investing models against historical financial data.
The Companies
There are plenty of fintech companies in Boston already. A non-comprehensive roll call includes crowdsourced quantitative investment firm Quantopian, which is on a mission to inspire talented people from around the world to write investment algorithms, and Eastern Bank spinout Numerated, which says its software can process bank loans in under five minutes.
Furthermore, Flywire wants to simplify international payments, while Toast plans on doing the same thing with restaurant POS payments. Last but not least, Boston also has a financial literacy startup under its belt, called LearnLux.
“As an angel and VC investor, I would have loved to have been investing more in fintech,” said Shereen Shermak, angel investor, VC and startup advisor. “Outside of payments, there weren’t a lot of startups going on between 2007 and 2012. But since then, in the last five years, we started to see a resurgence.”
The Money
One of the top 10 U.S. fintech deals in the first quarter of 2017 was the Series B funding of a Cambridge startup. In March, Kensho raised the $50 million round, with participation from Wall Street giants such as Goldman Sachs, JP Morgan Chase and Bank of America. Kensho, which is at the convergence of A.I. and fintech, provides a platform that helps traders make investing decisions.
“While not directly indicative of the health of the Boston fintech scene as a whole, these rounds raise the profile of the city and get other builders and entrepreneurs interested in financial services tech,” Nelson, the former fintech VC, said.
Nelson also mentioned LevelUp’s $50 million round from JP Morgan Chase and other financial institutions, which is helping the company fuel its transformation from an app to a restaurant payments platform.
Boston and Silicon Valley Fintech
The biggest difference between the Boston and the Silicon Valley fintech ecosystem is the size (in terms of funding and number of startups), but that may not necessarily be a bad thing, suggests Nelson. “I think as a result, the Boston scene feels much tighter and more close-knit — there’s more of a helpful and collaborative culture than in other geographies,” Nelson wrote.
But there are a few elements that make the Boston fintech environment different, according to Klinck of Hyperplane. Silicon Valley fintech has a stronger orientation to business-to-consumer, while Boston is more about business-to-business. In other words, “Silicon Valley is more about disruption and Boston more about partnerships,” Klinck said.
The Future of Boston Fintech
“Unlike New York, Chicago and Silicon Valley, Boston hasn’t had a $500 million-plus exit or [initial public offering] in the last few years. As we’ve seen, these events build a ton of excitement, and tend to spawn the cohorts of entrepreneurs who will emerge (with some new-found wealth) and create or fund the next generation of fintech companies,” Nelson wrote. “My sense is that the M&A is going to pick up over the next few years, and one of the more established Boston fintech startups is going to get to that $500 million-plus threshold.”
According to Klinck, the next hot thing in Boston fintech will be the application of artificial intelligence and machine learning techniques: “I think it’s going to dramatically change the banking world, the insurance world, the money management world.”
This is the first story in our Fintech in Boston series, which is running several stories on fintech the week of June 26.
