The New Money Management

Martin Daks | NJBIZ

How fintech services are evolving and expanding

Financial technology companies, or fintechs, are on a roll. The market for their services, which include streamlined ways to pay, receive and invest funds, was valued at about $127.7 billion in 2018, and is expected to grow to about $310 billion by 2022, according to some estimates.

The COVID-19 pandemic could affect the exact numbers, but many observers say fintech will continue to gain market share. Customer relationships are one of the big prizes that they’re chasing, according to a PwC report, “so the ability to deliver a premium experience will probably help determine the winners and losers.”

The shape of things to come

A COVID-19 driven economic shakeup is driving some changes for fintech investors, but experts say that fundamentals still matter.

“The entrepreneurs and teams behind a fintech or other ventures are the key component for investors,” according to Steve Socolof, managing partner of Tech Council Ventures, an early-stage investment organization created by the NJ Tech Council. “We’re working closely with existing investments to weather this crisis, but we also have a pipeline of possibilities and continue to engage in due diligence and take new pitches. We’re also adhering to social distancing guidelines with Zoom and other remote conferencing services.”

Right now, investors are especially excited about startups in the health care and the payment processing sectors, he said. “We’re currently invested in a company that provides remote behavioral health, which is particularly important right now given the stay-at-home orders. Payment processing is also huge, because of the tremendous money flows for mortgage servicing and other fintechs. A company can charge a small fee, but get a huge return because of the large volume they handle.”

Investors and entrepreneurs behind fintech and other startups are attracted to New Jersey in particular because of the state’s fundamentals, according to Bill Noonan, business development director and technology sector lead at Choose New Jersey.

“Almost every kind of company, including life science and fintech ones, have already established operations here and continue to come,” he said. “They like our talented, diverse workforce, and our location near New York City. Also, New Jersey has universities with tech-oriented undergraduate and graduate-level programs that help to create an intellectual pipeline of employees for advanced manufactures and other kinds of tech-based companies across a wide range of sectors.”

RobustWealth, a digital wealth management platform for registered investment advisers and other financial professionals has established close relationships with its clients. But that didn’t keep the fintech from tearing apart its successful advisor program and rewriting the entire computer code in a yearlong project, according to Chief Executive Officer and Founder Mike Kerins.

“You have to be innovative,” he said. “Think of the iPhone, which launched a telecommunications revolution and continues to be successful. Apple constantly adds new features and then rolls out an entirely new iteration about every three years. That’s our model too. We expect to launch our new platform, which will offer even more transparency and efficiency, by the end of July.”

The approach seems to be working. From 2018 to 2019 alone, the company, which is owned by financial services firm Principal Financial Group, increased its headcount from 18 employees to 66 just in its Lambertville headquarters, according to Kerins. Nearly 50 other RobustWealth employees work at other locations across the nation and in Pune, India, he added.

Pivoting from IRL to URL

Despite the COVID-19 pandemic, it’s been business as usual for IFundWomen, a fintech that functions as a startup funding platform for women entrepreneurs. “We have always operated a tech platform and tech-enabled coaching, so we were able to continue our core services without disruption,” said founder and Chief Executive Officer Karen Cahn. “In addition, while we have an office in New York City and one at in New Jersey at Montclair State University, the rest of our staff in Boston and L.A. have worked in distributed offices or at The Wing [a network of coworking spaces for women], so we are all used to working from wherever.”

But it hasn’t been so easy for women entrepreneurs. “In terms of our customers, their worlds were turned upside down,” Cahn said. “So right away, we launched our COVID-19 small business relief fund, where we are collecting funds via Venmo and PayPal, which goes directly to women founders on our platform to help them stay in business.”

Women-led startups also had to adapt in other ways. “The hottest trend in 2019 was building IRL [in real life] spaces where people can come together in community to co-work, get their fitness on, and create art,” she observed. “Now, in 2020, since COVID-19, these companies have been working to pivot to bring themselves online — from IRL to URL. For example, Ethel’s Club, which is a coworking space for people of color in Brooklyn, has created a digital marketplace of black-owned products and virtual communities.”

RobustWealth creates digital solutions that help financial advisors in a variety of ways, he noted. “The integrated Client, Advisor, and Enterprise platforms seamlessly integrate an array of features including automated rebalancing, or reallocating investments due to market changes; billing and reporting; securely storing electronic documents in document vaults and opening accounts online; in addition to using AI to suggest goal-based investment portfolios, and flexible investment options. Each feature neatly fits into a suite of services that can be labeled with the individual wealth advisor’s firm’s own logo and branding.”

The fintech’s capabilities, along with those of its wealth-advisory client firms, is getting tested like never before, thanks to the bear market that was spurred by the COVID-19 pandemic. “This is the first major market shakeup for many wealth tech firms,” Kerins said. “Companies that aren’t able to deal with market volatility will suffer. I’m glad to say that all of our careful planning and R&D has paid off, though.

In mid-March we saw our biggest trading week volume ever, and our system performed flawlessly. We’re happy, our client firms are happy with how the platform performed, and so are their clients.”

Taking center stage

The pandemic is shining a spotlight on fintechs, according to Angelo Mendola, president and chief operating officer at Priority Payments Local. The Red Bank-based payment technology and processing company has about 130 employees and contractors, is affiliated with Priority Technology Holdings, Inc., a publicly held company, and counts businesses like the law firm McCarter & English LLP among its customer base.

The new landscape is driving more people to digital platforms, and that could mean more growth for MX Express, a Priority Payments product that gives brick-and-mortar as well as online retailers the ability to accept digital credit card payments. “It’s like having a virtual cash register,” according to Mendola. “A consumer can pay for a purchase with their digital wallet, their smartphone or their smartwatch without having to swipe a physical credit card through a terminal and press terminal keys that could expose them to COVID-19.”

When Priority Payments Local set up McCarter & English with credit card processing, “There was very little I needed to do on our end to get the ball rolling,” according to a testimonial from the law firm’s accounts receivable finance projects manager. “Priority handled just about everything and the site is very user friendly. With our previous processor, it took two business days for us to receive funds — now we are receiving them the next business day.”

Other fintechs, like Newark-based Credibility Capital, are also finding ways to cope with the economic crisis. The business uses artificial intelligence and other digital tools to match small businesses with institutional investors who fund loans ranging from $50,000 to $350,000, according to Brett Baris, Credibility Capital’s chief executive officer and co-founder.

“We’re continuing to work with borrowers on a case-by-case basis,” he said. “In addition to servicing existing loans, we’re primarily focusing on new business from companies that have been deemed ‘essential.’ In early April we funded a loan to a farm-based company that delivers meat directly to customers’ doors. We’re also working on loans for distribution centers, and for accounting firms and others that can easily adapt to online operations.”

If a company has its documents on hand, like tax returns and financial statements, they can usually be easily uploaded in a matter of minutes on a computer, smartphone or other digital device, said Baris.

“Using artificial intelligence, we can instantaneously give them a preliminary response. Of course the full underwriting process, which involves humans reviewing the documents, takes a bit longer, but we can usually close a loan within a week.”

Fintechs drive supply chain transformations

The rise of fintechs has given more companies the freedom to move away from the standard “2 percent discount in 10 days, net 30 days” payment template, according to Rudi Leuschner, an associate professor in the department of Supply Chain Management at Rutgers Business School. “Since 2008, companies have been taking longer to pay their suppliers,” he said. Benchmarking data from an American Productivity & Quality Center April report backs that up, indicating that a majority of companies have an average 53 days outstanding on their payables accounts.

“But some businesses, like Pfizer, are also paying their suppliers earlier in some cases,” said Leuschner. “They’re using fintech platforms like C2FO, which lets suppliers offer a discount to Pfizer in exchange for early payment. The supplier wins because they get paid sooner, Pfizer wins because it will only agree to an early payment if the supplier-offered dis-count makes sense, and the fintech makes money by taking a small piece of the high volume of transactions.”

Fintechs can assist in streamlining the supply chain, in a variety of ways, said Tan Miller, a Rider University professor and director of its Global Supply Chain Management program. “They leverage math optimization and simulation tools, and artificial intelligence, all of which give organizations the ability to take data and analyze it, transforming the raw information into management information that can be used to improve decision-making.”

Some companies use the information to “reduce the number of suppliers they work with, so they have more pricing and other leverage with each supplier,” he added. “That’s fine as long as everything’s humming along. But there’s an inherent weak point because, in case of a disruption like the current COVID-19 pandemic, your flow from a critical supplier can grind to a sudden halt.”

That happened after Japan was slammed by an earthquake and tsunami in 2011, and “that tragedy disrupted segments of the automobile industry that depended on Japan-based producers,” Miller noted, pointing out that now, the COVID-19 pandemic could disrupt China-based global supply chains. “Post COVID-19 crisis, reducing costs will continue to be important, but flexibility and backup capability may take on a larger role.”

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