CREJ - Office Properties Quarterly - March 2016
For a rapidly growing worldwide phenomenon that is bringing about significant change within the financial services community, it is surprising that the term “FinTech” still is relatively unknown. At the confluence of finance and technology, FinTech is defined as “an economic industry composed of companies that use technology to make financial systems more efficient,” according to Wharton FinTech. The term can encompass a wide array of financial services ranging from payments, investments, financing, insurance and more. Companies such as TransFirst, CacheMatrix and P2Binvestor all identify with the FinTech industry in Denver. Much of FinTech’s hype is attributable to the fact that the industry is taking on the established banking, money lending and money management institutions by easing payment processing, reducing fraud, creating cost savings and enhancing financial planning through the use of technology. “The power is being pushed back to the consumer,” said Platform Manager Fletcher Richman with Galvanize Ventures, a seed-stage venture capital fund that invests in startups. “Automated financing, also known as robo-advising, is on the rise.” FinTech is not disrupting the financial services industry per se, rather it is accelerating change by introducing innovation. In this article, we’ll examine three ways these startups are shifting the industry landscape, including changing the demographics, altering the real estate needs and prompting large-scale financial institutions to rethink and invest more in their technological capabilities. First, FinTech companies found a demographic niche in the millennial population. The industry targets “digital-native millennials,” or so-called Henry’s – high earning, not rich yet – who often are passed over by traditional wealth managers, according to an article from Business Insider. “Millennials are often against the idea of using a physical banking facility to conduct their banking activities,” said Richman. Young people prefer financial applications they can access digitally from home, work or on the go, he said. The challenge these firms face in competing with large banks and other traditional financial institutions is that the capital investment from the millennial population is not significant enough to be solely independent. Young people may be attracted to the flashiness of FinTech companies, but compared to the older generation, they lack the financial assets needed to sustain a business. This has prompted the industry to partner with traditional financial institutions to fully maximize their market share and profitability. Today, many FinTech firms and traditional financial services companies are combining their competitive advantages – joining the capital and experience from traditional banks and money managers with the innovation and technology from the FinTech side. Second, FinTech is starting to shift the real estate priorities of the financial services industry. Many companies identify as startups and participate in a culture built around innovation and creativity, which greatly influences what they desire in an office environment. “Startup FinTech firms, in particular, are drawn toward an open, shared office space that offers a flexible short-term solution, such as a Galvanize or a WeWork,” said Richman. After these startup companies become more established, their office needs will evolve. As firms outgrow shared office space, they tend to gravitate toward an open plan with plenty of communal meeting areas to promote collaboration. Given FinTech companies rarely are client interfacing, the majority of the capital is spent on technology rather than expensive office build-outs. As a result, these firms tend to have fewer business costs related to labor and real estate versus large brick-and-mortar financial institutions. Since FinTech companies service their clients online, their real estate priorities often focus on talent attraction rather than obtaining a space to impress clients. With talent in mind, we anticipate these firms to seek out well-amenitized, urban locations like downtown or transit-oriented developments. As more and more consumers adopt digital financial habits, it may shift the real estate priorities of traditional firms and impact the number of retail banks we see on our street corners. Finally, the industry is altering how financial institutions approach technology. As demand grows for these services, traditional financial services companies have to spend more capital on their own technology to maintain a competitive advantage. According to a report by New York-based financial advisory firm Tabb Group, “Traditional wealth management giants are recognizing the potential threat these startups pose and are responding by making their own cheaper versions of the technology.” In other cases, major banks and financial institutions are incubating FinTech startups to gain an advantage in the space. Overall, the industry is accelerating the adoption of technology by the financial services industry across the board. FinTech is an exciting new addition to the financial services industry. Ultimately it triggers choice – instead of being limited to the traditional options for all matters finance, there are many more possibilities for businesses and consumers to turn to for banking, insurance and funding needs. And the industry has only just started. Considering Denver’s strong history in the financial services industry – and the ever-growing local startup scene – our market is particularly well poised to embrace these companies. The opportunity for growth is significant and, with limited barriers to entry, we anticipate seeing many more savvy entrepreneurs entering this space.