Mark Calvey, Senior Reporter, San Francisco Business Times

May 17, 2017

A shakeout already could be underway in the burgeoning fintech sector, forcing some to close their doors while others look for partners, said Steve Ellis, head of Wells Fargo’s innovation group.

“We’re seeing some people without strong sales going away and other people partnering more,” Ellis told the San Francisco Business Times in discussing fintech industry conditions as part of an interview on new entrepreneurs joining the Wells Fargo Startup Accelerator program.

Ellis, who remains bullish on financial innovation, to put it mildly, said the fintech sector could see a dot-com-style shakeout similar to what occurred in 2000 — a time when many of today’s fintech entrepreneurs were in grade school. Echoing Ellis’ prediction are fintech analysts who say that as many as 90 percent of fintech’s marketplace lenders could be washed out in the next big downturn in the credit cycle, given how many of these young companies depend on cash from hedge funds and other investors likely to pull back as credit losses mount.

Further evidence supporting predictions of a shakeout can be seen in the shuttering of fintechs from investment services to real estate crowdfunding sites. San Francisco-based Loyal3, which aimed to make buying stock as easy as shopping at Amazon, is closing this month.

Other fintechs are quietly closing their doors, with little fanfare and few headlines.

Signs of a shakeout include fintechs looking for partners, fresh cash and in some cases outright sales of the companies.

San Francisco-based Earnest, for instance, is looking for a buyer, Bloomberg News reported. The news service said Earnest is on the sales block for about $100 million, after raising more than $300 million in debt and equity financing.

Marketplace lending has been a hot space in fintech. But those that have gone public have not fared well with investors. Since going public in late 2014, shares of San Francisco-based LendingClub (NYSE: LC) and New York-based On Deck Capital (NYSE: ONDK) have plunged.

At Wells Fargo, (NYSE: WFC) Ellis is turning to the bank’s playbook when it comes to taking advantage of market conditions by stepping up when others step back. He’s eager to expand the Wells Fargo Startup Accelerator that works with promising startups pursuing technology and innovation that could benefit the bank’s operations.

Each startup participating in Wells Fargo’s accelerator works with the bank on a non-exclusive, six-month basis. Participants are eligible to get up to a $500,000 investment, mentoring and guidance on how to refine their technology for the financial services industry.

To date, the Wells Fargo Startup Accelerator has selected 13 participants, which includes the latest additions: San Francisco-based ProxToMe, led by CEO Carlo Capello, and New Jersey-based Uniken.

ProxToMe provides proximity-based authentication for the Internet of Things. The company’s technology, using Bluetooth, can replace traditional card-based authentication with a contactless, secure user experience. The company’s service provides a better user experience than current cardless technologies such as NFC and QR Code.

Uniken is a maker of cybersecurity software designed to protect data moving through digital channels.

“We look forward to evolving our solution as part of the Wells Fargo Startup Accelerator program, as it is designed to explore big ideas that change the industry,” said Uniken CEO Bimal Gandhi.

Ellis said the accelerator has helped transform Wells Fargo to be on the lookout for innovators.

“The accelerator has been helping in getting people across Wells Fargo to look outside at the horizon to see what is going on,” Ellis said.

Since its founding in 2014, the accelerator has received applications from more than 1,100 companies in about 50 countries.

“Fintech companies are gaining a greater appreciation of what Wells Fargo and other big banks bring to the table,” Ellis said.

Ellis seeks startups for the accelerator that “fit what customers want. It’s not about new technology, it’s about finding solid customer value.”

Ellis said financial innovations have the power to help Wells Fargo make an “emotional connection” with customers in much the same way Amazon (NASDAQ: AMZN) does with shoppers by making purchase suggestions based on knowing them from their past purchases.

Ellis sees Wells Fargo using technology to create innovative services to help customers better manage their monthly cash flow, perhaps offering ways to build a rainy day savings account.

“That could relieve a lot of financial stress,” Ellis said.