Matt Harris has spent more than 20 years in New York City fintech, from investing at Bain Capital private equity to starting his own firm, Village Ventures, to building conviction in his fintech niche and finally returning to Bain Capital Ventures to run its fintech practice.
Over this time, he’s seen a huge amount of revenue, profit, and market cap shifting from regulated financial institutions to entrepreneur-led insurgents. His consistent—and colorful—eye on the space made him a go-to for gathering context on how fintech startups have grown from serving sex workers and flea market vendors to embedding with just about every titan of financial services. This is his oral history of New York City fintech, as told to Katheryn Thayer.
Big institutions; little room for risk
So if we go back to the start of it, there wasn't much going on. Financial services dominated New York City, alongside maybe media and publishing and a few other big industries. They were quite conservative—for good reason, because they entailed a fair amount of risks and lots of ways to lose customers’ or their own money. They were antithetical to Silicon Valley’s technology-driven, crazy ideas. Crazy ideas didn’t fly in heavily-regulated fields like lending or banking or investment management back then.
There were always software vendor companies that thought of financial services as an attractive end market. But even in that category, if you go back 20 years, it was the sort of era of “You don't get fired for buying IBM.” Goldman Sachs built everything in-house or would go to Accenture for technology. They had their own email client. And so all of that spend ended up in the pockets of really big vendors who knew how to sell to those folks and who managed the career risk of the buyer.
Early days: crazy ideas for flea markets, sex workers, and some failures
The first thing that happened was founders started to find the courage to compete with incumbents on payments, kind of the obvious first place. It's the least regulated, and it's the most technology driven, at least compared to lending, investing, and insurance.
So payments drew in entrepreneurs, starting—I would say most prominently—with Jack Dorsey and Square, then companies like Braintree, Stripe, and others in '07, '08, '09. These were not oriented toward serving the incumbents. It wasn’t, “How can I make First Data a better business?” It was, “How can I kill First Data? How can I insert myself with the customer, the merchant, and delight them in a way that the incumbents are not doing?”
And if you went at the time to First Data and said, "Hey, how are you thinking about micro merchants? What about all those people at the flea market who have no way to take credit cards?" They would be like, "Not a problem we're interested in." Those are fly-by-night merchants. Literally the Square use case was garage sales, flea markets, and sex workers who wanted a way to accept cards. Next thing you know, it’s in coffee shops, and this little iPhone dongle is looking a lot more appealing than expensive credit card bricks.
The next crazy idea was lending. Unfortunately, it's more actually crazy in the sense that there are really, really good reasons why specialty lending companies have historically had valuations and success rates that are less attractive than tech companies’ or payments companies’. But in the same timeframe—'07, '08—OnDeck, which is a New York company, and LendingClub and Prosper Marketplace, in California, started with these alternative lending propositions, again targeting underserved populations. If you just wanted to borrow $12,000 to refinance your credit card debt or to go on a vacation or whatever, that was really not something banks were excited about.
In the case of OnDeck, truly small, small business loans, like $30,000 loans to pizza stores, basically that was a consumer loan. OnDeck was really a payments-related innovation: You didn't need to look at the spreadsheets, you could just download the data from the pizza store’s payment machine and see if it was a good business. But again, it’s not that the banks wanted to do these things and were prevented by their lack of tech, it was, “We don’t fucking want to do that because it’s not smart.”
Great Recession disdain for banks was great for fintech
The prevailing, at least implicit, belief in '07 was that the financial services industry was pretty well solved. We may not have loved the banks, but we assumed they were competent. Then they broke the world. I mean their credibility plummeted. So I think that was permission for founders to say, “Well conceivably this could be done better.”
And they were right. The model for most financial services companies was pretty adversarial to their customers. The Wells Fargo series of unending scandals is a good example. Basically they sit there and say, “How can we create opaque models to extract rent from our customers without them really feeling the pinch?” And I do think founders see that and are like, "Well, there may be a better way to have a win-win scenario vis-a-vis customers, if we have just fundamentally lower cost structures due to tech and innovations around underwriting et cetera, we could probably still make money but without being adversarial and without being opaque." So yeah, the financial crisis was big.
And also frankly, our industry functions a lot on legitimacy. Jack Dorsey and Noah Breslow and some of these folks who are just very appealing doing fintech legitimized it, and then society I think magnified that legitimacy meaningfully by saying basically all of the incumbents are guilty until proven innocent.
Then there was a company called Simple that was founded in Brooklyn initially known as Bank Simple. And they were the first neobank. Technology was not as conducive 15 years ago to creating banking value propositions, but they really tapped a vein with a debit card and mobile app that people didn’t need a bank branch or lots of fees to use. And that has reached full flower in Chime, Revolut, Current, Step, Acorns, et cetera. The fire-your-bank mentality was clearly driven by the financial crisis.
Great Recession regulations hamstrung incumbents; innovators got building
The other thing that was interesting about the financial crisis was that from late ’08 to around 2011, they did nothing. They really just burrowed down internally dealing with the regulators, compliance, risk, and TARP.
That created just a wide open playing field. For founders, it was a brilliant time to be building without regulators or banks paying much attention. And then Jamie Dimon obviously really kicked this off when he wrote his letter saying Silicon Valley is coming.
"There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking," Dimon wrote. "The ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and — these entities believe — effectively by using Big Data to enhance credit underwriting."
What that did was make room for the vendor space. All of a sudden, starting seven or eight years ago in earnest, banks realized continuing to work with the people who got them in trouble might keep them in trouble. That has led to Q2, nCino, Alkami, MNTL, Alloy, and all of these companies that sell stuff to banks, which historically had been a death sentence for companies trying to grow quickly. And now it's a pretty interesting space.
New York fintech is friendly, but tough—especially when it comes to regulations
I'm proud of how well New York has organized itself. The companies selling into incumbents have great power structures, like the FinTech Innovation Lab and just the city itself. Basically all the titans of industry have come together under Partnership for New York to be helpful. New York wants to be the center of this. All the headquarters here don’t naturally guarantee a friendly local ecosystem. It's impressive to me that they have been. The patriotism in New York City is gratifyingly strong. So I think it's been a very promising place to start as one of those vendors. If you're looking to serve incumbent insurance companies or broker dealers or banks, I think New York's made a lot of sense.
From a regulatory perspective, if you're in that other category of trying to be disruptive, I think New York's been tough. It famously had the first crypto license, but that meant mainly that they were requiring licenses. It's not as friendly as it seems. And as it relates to things like payments, God forbid you are in New York. Being a lender, New York licenses take two years. Everyone else is six months.
So I would say New York has done an A+ plus job for vendors and systems to connect with incumbents and a C- job at actual innovation: Disruptors who need to engage with regulators. I think the regulators in New York candidly are power mad. But my hope is not that we reform New York regulators, it’s that we obviate the need for them. All this stuff should just be federal.
The trends driving today
Of the four categories I’ve talked about—payments, lending, investing and insurance—I'd say insurance has been the least disrupted so far. And insurance is complex. There's been more startup activity in the past two or three years, but relative to payments, lending, and wealth management, it’s still very, very fertile ground for startups.
Asset management, too. You've seen Wealthfront, Betterment, Robinhood, and legions of similar companies, they're all taking on what I would call wealth management. But for me as a consumer, who’s going to manage my money? I don’t want to be passive, but I sure as hell don't want to be day trading all my money. So could I find somebody who could manage my money and smartly position it and maybe give me good advice? That really hasn't been disrupted at all. And that's like $350 billion of highly profitable revenue. I understand why it's hard to disrupt, but I'm intrigued with that.
And then I would say decentralized finance. It's a complex area because from day one, you're publicly traded in crypto, and for better or for worse you have a lot of volatility and a lot of public stuff and people trading your token and a lot of regulatory risk as a result. But the fact is I think over the next two decades, we will have a lot of volatility, and many things in financial services will be reinvented in a decentralized way. And I think that's really interesting for vendors to be working on.