The deal was part of a $125 million secondary transaction where existing investors sold portions of their shares to new investor Google and previous investor Foundation Capital. No new money is going into the company, rather it is a reshuffling of equity to allow room for Google on the board.

Lending Club is an online community that connects people who need to borrow money with people to lend it to them. Borrowers apply for a personal loan and receive a rate quote. Interested investors fund these loans and automatically receive monthly payments on these loans in their bank account.

“Google was excited about the possibility that Lending Club could transform the banking system,” said CEO Renaud Laplanche in an interview with VentureBeat. “We are using technology and innovation to lower costs, provide more value to our customers, and increase transparency. These are all things Google has done with other sectors, and they are interested in our ability to do that in financial services, which is one of the few last large industries that has not been transformed.”

Lending Club grew by leaps and bounds over the past year and with volume almost tripling. It originated 780 million in loans in 2012 and is on track to do $2 billion this year. As of May 1st, Lending Club had funded $1.67 billion in loans. The company charges an origination fee to borrowers and a servicing free to investors and is on track to generate $90 million in revenue this year. Laplanche said that this impressive traction caught Google’s eye and it approached Lending Club about getting in on the action.

“We talked to our investors and said we wanted Google on the board, but did not want to raise additional capital and wanted them to sell some of their shares,” he said. “There was an increase in share price from last year, which made the transition easier. Our valuation is now at $1.55 billion, up from 550 million, which is a 3 times increase in just twelve months.”

The national average interest rate for unsecured personal loans in the U.S. is just over nine percent, while Lending Club offers between six and seven percent. By circumventing banks, Lending Club is able to offer lower rates. Laplanche had the idea for Lending Club in 2006 after paying 18 percent interest rate on his credit card. He realized that money was helping to fuel an inefficient system and that by allowing people to directly invest in people, it would benefit everybody involved. Now seven years later, the idea has taken off.

With this latest transaction, Laplanche said that things won’t change much initially. Over time, however, there is potential for partnerships. Right now, he is focused on providing the best possible product for consumers. Lending Club primarily deals with unsecured personal loans, but is exploring adding in student loans, auto loans and mortgage loans down the road.

Lending Club has raised $102 million to date and as mentioned above, existing investor Foundation Capital gained a greater stake as part of this deal. This marks the firm’s largest investment ever made over the course of its 18-year existence, with more than $50 million invested.

“We’ve never seen a market opportunity of this size and magnitude,” said general partner Charles Moldow. “In the financial services industry, we are seeing a shift toward the transparency of information and Lending Club is leading the charge. There is a massive restructuring taking place. We believe that Lending Club’s growth has signified that the uses of technology in the financial industry are limitless, extending to a shift in the flow of information, transparency and decision making at all levels. This is disrupting the traditional banking model as we know it.”

Moldow also said that Foundation Capital sees Lending Club as an iconic company akin to Amazon, eBay, Salesforce, or LinkedIn. The financial services industry is massive and ripe for disruption, with large returns to boot. Lending Club has generated 22 consecutive quarters of positive returns for investors and it seems that pattern will only continue. Google will join the board along with such luminaries as Mary Meeker, John Mack, and Larry Summers.

Photo Credit: Rockbadger/Flickr

This online investment manager announced today that it raised $20 million from top tier investors. Mike Volpi of Index Ventures led the round, joined by Chamath Palihapitiya of The Social + Capital Partnership and Reid Hoffman of Greylock Partners.

Wealthfront’s platform helps clients build and manage a diverse investment portfolio, rather than paying for an investment bank or private wealth manager. You put in the account type, amount to invest, and age, and this SEC-registered, software-based financial advisor will provide professional financial advise at a lower cost. The service also manages the personalized online investment account for you.

Wealthfront is unique among financial services companies in that we derive our value from our underlying software,” said COO Adam Nash in a blog post.  Our core is our engineering-centric culture, which means we will leverage our new financing to significantly grow our product and engineering team.”

The company is built on the idea that ‘everyone deserves sophisticated investment advice.’ It launched in 2011 and has since added features like automatic rebalancing, continuous tax-loss harvesting, differentiated asset location and broadened the set of diversified assets classes. Within a year, Wealthfront brought in over $170 million under management and those assets have grown by more than seventy percent.

This second round of funding will help Wealthfront continue to grow and disrupt “an industry that manages trillions of dollars.” In addition to the investors listed above, lead investor of the first round DAG Ventures participated along with notable individuals. It will go towards product development and enhancing to add features without adding to client fees, as well as to expand the team.

Right now, Wealthfront does not charge on advisory fee on the first $10,000 invested, a charges a monthly advisory fee based on an annual fee rate of .25 percent after that. Wealthfront is based in Palo Alto, California. This brings its total funding to $30.5 million.

Photo Credit: Willem van Bergen/Flickr

Ribbit Capital has closed a new $100 million investment fund, the venture firm announced today.

Ribbit will focus its investments on startups that are building financial services related to lending, payments, insurance, accounting, tax preparation, personal financial management, and more.

The fund will invest about $2 million to $15 million into early-stage, disruptive financial services. Ribbit plans to invest in 15 services over the lifetime of the new fund, according to the firm.

“Banks have proven to be difficult environments for innovation to flourish, resulting in an antiquated financial services industry that remains relatively untouched by the technology-driven evolution transforming other markets ranging from social media sharing to professional enterprise services,” said Ribbit Capital founder Meyer “Micky” Malka in a statement. “The technology to unlock this innovation is in place, and there are entrepreneurs around the world with groundbreaking ideas that have the potential to turn this industry on its head. What’s lacking is the investment, will and expertise to develop and make them reality.”

The firm has already invested in four financial startups, including personal assets lender Borro, U.S.-based payments company Fuze Networks, Brazil-based SaaS accounting and invoicing service ContaAzul, and U.S.-based non-bank lender service Capital Access Networks (CAN).

Founded in 2012, the Palo Alto, Calif.-based venture capital firm’s founder is the sole general partner of the new fund. Ribbit Capital’s investors include multinational Spanish banking group Banco Bilbao Vizcaya Argentaria SA, Silicon Valley Bank, and others.

Money photo via adirekjob/Shutterstock

Los Angeles’s rise as an incubator for media-driven technology startups is well-documented, but it’s also becoming a hotbed for innovation in an unexpected vertical: financial services.

In L.A.’s’ “Silicon Beach” community, fintech — technology that targets financial services customers — is booming, from high-end financial-transaction management systems to friendly banking tools for ordinary consumers.

L.A. fintech startups are offering a variety of different services, like hosting complex financial transactions in the cloud, establishing social networks for professional investors, extending credit lines to smaller web publishers, and granting microloans to low-income families and individuals .

VentureBeat spoke with the chief executives of four rising fintech startups in L.A. to learn more about the multifaceted nature of the financial technology industry. Each of the companies we profiled offers a distinct service, catering to different markets and illustrating the scope of fintech’s disruptive potential.

CapLinked homepage

Mergers & Aquisitions Made Easy: CapLinked

Launched in February 2011 by Eric Jackson and Christopher Grey, CapLinked simplifies complex business transactions, like mergers and acquisitions, by providing clients with a collaborative workspace platform that is intuitive, cloud-hosted, and affordable.

CapLinked allows clients to exchange files securely and complete transactions 50 percent faster, bringing greater efficiency to asset sales, capital raises, mergers and acquisitions, and other business deals, according to its website.

Jackson, CapLinked’s chief executive, estimates that these types of transactions have $5 billion to $6 billion of untapped revenue potential among middle-market and upper-market firms, who can’t afford the high-fixed costs associated with enterprise collaboration leaders (firms that offer document-sharing and transaction-management services) like Intralinks and Merrill DataSite.

Currently, Jackson sees real estate investment “going through the roof” and is excited about client prospects in that sector. He also said there is a lot of pent-up demand for merger-and-acquisition activity.

With investments from superangel investor Peter Thiel, David Sacks, Joe Lonsdale, 500 Startups, Hercules Technology Growth Fund, and Wasabi Ventures, CapLinked has secured $1.7 million in funding, said Jackson.

Jackson also said CapLinked recently closed a lucrative deal with Cornerstone Real Estate Funds in Orange County. CapLinked employs 13 people full-time and should be profitable next year, he added.

Stockr CEO Vinny Jindal

Investing gets social: Stockr

Stockr wants to become the nexus for investors, traders, and public companies to share financial information online. In short, it’s a social network for people interested in the stock market. Founded by Vinny Jindal, Tim Symington, Brendon Crawford, and Bryce Knight, the financial-social network launched in September into an open beta, said Jindal.

By incorporating a Facebook-inspired social infrastructure into his investor network, Stockr can help members discover other companies and users who might match their interests, said Jindal. Additionally, he believes he can generate sufficient revenue through targeted advertising campaigns that serve members ads “based on who they are as investors, not consumers.”

Jindal, Stockr’s chief executive, aspires to dethrone Bloomberg’s Terminal and Yahoo Finance to become the primary source for financial information online. He is critical of both platforms, arguing that Terminal’s high cost ($1,500 per month per user) disenfranchises the average investor, and that Yahoo’s reliance on sponsored content compromises the accuracy of the information exchanged.

Jindal has launched a startup in a growing field, facing competition from financial-social network startups like SumZero (cofounded by the Winkelvoss twins, who famously battled Mark Zuckerberg over the ownership of Facebook), StockTwits, and Kapitall. But Jindal believes that Stockr will prevail over the competition because his network “can leverage existing Internet revenue models, like subscription platforms, so members can access the expertise of premium Stockr users.”  In other words, at some point premium Stockr members will be able to set their own subscription fees for other users to access their content.

Stockr has raised $1.5 million in seed funding from Personal Capital (an investment firm helmed by former PayPal chief executive Bill Harris), CBS investor relations honcho Adam Townsend, and Atlantic Media Group President M. Scott Havens, said Jindal.

Also, on November 29th, Jindal will host the first Los Angeles FinTech Meetup.  Former Wall Street Journal Los Angeles Bureau Chief Rob Guth is scheduled to interview former PayPal Chief Executive Bill Harris at the event.

FastPay CEO Jed Simon

Dodging digital debt: FastPay

Independent web publishers have a cash-flow problem, maintains FastPay Chief Executive Jed Simon. It can take the big brands and media agencies up to six months to pay their publishers (the websites who host the advertisements these brands and agencies buy), he said. For smaller publishers, this payment delay is a problem because they often have to pay the creative teams tasked with programming and delivering the ads much sooner than that (30 days in some cases).

With the recent advent of FastPay, a loan company catering to the digital ecosystem, smaller digital players can function more effectively with improved liquidity. Launched in 2010, FastPay grants credit lines (ranging from $100 thousand to $10 million) to lower- and-middle market digital publishers, which accelerate payments and allow firms to do more business.

Simon said the average FastPay loan is $500,000 and that in some cases, his company is fulfilling the role played by venture capital firms. Two of these cases include Giant Media and Moguldom Media. Both chose FastPay over traditional venture funding because, unlike venture capital firms, FastPay demands no equity stake in the companies they bankroll, said Simon.

Simon said his company charges an annualized fee ranging from 12 percent to 24 percent, which seems high, but is mitigated by the fact that his credit lines are supported by his clients’ account receivables.  In other words, the high interest rates are offset by the certainty that brands will pay his clients within a reasonable timeframe.

Simon also said he doesn’t like to do deals under $1 million or $2 million and that for every deal he does, he turns two down. FastPay has provided roughly 100 digital media clients with $100 million in financing and employs twenty people full-time, he said.

FastPay has received $27 million in funding from Hudson Pacific Chief Executive Victor Coleman, JMG Capital Management founder Jonathan Glaser, private equity firm SF Capital Group, and the Dallas branch of Wells Fargo Capital, the latter of which boasts a $6 billion credit line, according to Simon.

ZestFinance CEO Douglas Merrill.

A.I.-vetted microloans: Zest Finance

ZestFinance chief executive Douglas Merrill isn’t like most financial CEOs: He has a Ph.D in artificial intelligence from Princeton. (He’s also got Tetris blocks tattooed on his forearm.) Fortunately for people who don’t have access to credit — known in the industry as the “underbanked” — Merrill decided to use the expertise he gained as a graduate student to help guide them out of financial hardship.

Merrill’s company uses A.I.-based technology to grant microloans, averaging $450 per transaction, to people who lack access to traditional credit, he said. His typical client profile is a 35-year-old single mother who makes between $30,000 to $40,000 a year, said Merrill.

Merrill told VentureBeat that there are 60 million Americans who have bank accounts but are ineligible for traditional credit (the FDIC says 52 million adults are underbanked). He believes that financial institutions have designated his target market as “credit risks because they’re missing data.”

A ZestFinance loan application requires clients to answer 100 questions, and these responses produce 2,500 variables (most banks rely on six to 15 variables) that run through 10 different machine-learning algorithms. Then, it combines the 10 models into one superalgorithm, which determines a prospect’s creditworthiness. Within 30 minutes of starting their application, ZestFinance clients know if they have been approved.

“It’s like talking to your 10 smartest friends and using their group opinion to make a decision,” said Merrill.

Merrill’s primary competitors are payday loan services, which charged 30 million Americans $8 billion in fees last year, he said. Merrill said ZestFinance can cut those payday-loan customers’ fees in half.  VentureBeat asked Merrill what he charges his customers and he said his rates vary on a case-by-case basis.

ZestFinace has raised $92 million in venture funding from GRP Partners, Lighthouse Capital Partners, Lightspeed Venture Partners, Flybridge Capital Partners, and Matrix Partners, said Merrill. Merrill also said his company employs 100 people, 65 of which are in L.A.

Image credits: Shark fin image courtesy Sharkdiver.com.  Image courtesy CapLinked. Image courtesy Stockr.  Image courtesy FastPay.  Image courtesy ZestFinance.

The venture-backed financial services industry continues to evolve and grow at a rapid pace as investors continue to fuel industry change. There are several recent VC investment trends in financial services, including trying to capitalize on the social media phenomenon, as well as online services that help later-stage start-ups gain liquidity outside the sometimes difficult IPO process and market.

Recent History

Payment Cards: Though mobile payment technology is up and coming, VC investors continue to show interest in smart card payments. Alpharetta, Georgia-based Paymetric, for example, raised $12 million in venture capital in 2009 and 2011. Paymetric employs SAP to integrate smart card and token e-payments in enterprise systems.

Presque, Maine-based MiCash raised $1.7 million in capital in an undisclosed 2008 round of funding for its smart cards, which can be used to make bank ATM withdrawals, as well as make electronic cash purchases across a growing network of retailers.

Personal Finance: Washington, D.C.-based HelloWallet raised $3.6 million in a 2010 Series A funding round. The company provides an online financial advisory service that includes money and investment management, as well as a financial products and services comparison shopping engine.

Chicago’s YCharts combines financial markets data and proprietary, high-end company and stock market analytics with graphical data visualization that aims to provide online investors and traders with sophisticated, in-depth investing tools that are intuitively easy to use. The company followed up a 2010 Series A round of funding with a Series B round in 2011.

Business Finance: New Orleans-based The Receivables Exchange has raised more than $40 million for an online system and service that provides small and medium-sized businesses access to competitively priced working capital by bringing factoring services traditionally provided by banks online.

Trends

Financial services startups are rapidly incorporating social media and networking into online financial services, as well as continuing to try to enhance the quantity, quality, presentation and ease of use of company and financial market data, research and analytics.

On the infrastructure side, efforts to expand smart card e-payments systems and networks and integrate them with enterprise systems are ongoing. VCs are showing interest in start-ups that have developed online comparison shopping systems for financial products and services, while mobile banking systems are continuing to emerge.

Most recently, with the passage of the JOBS Act, the crowdfunding potential of early-stage startups received a significant boost. While there is significant disagreement among knowledgeable observers about the potential effects on the technology startup ecosystem from this legislation, it is likely that startups requiring smaller amounts of money (less than $1 million), with easily understandable business plans and shorter time frames to achieve market traction, will benefit most from these new sources of capital.

Charts

After a dip in activity during 2009 as a result of the severe recession, the number of financial services companies receiving venture capital funding has increased dramatically.

California and the mid-Atlantic regions have accounted for the lion’s share (54.9%) of companies funded. Surprisingly, the Northeast, despite its concentration of large financial firms, only accounted for 10.9%.

Aggregate funding amounts dropped in 2011, even as the number of companies funded rose significantly.

VC investments in an increasingly broad and diverse online financial services industry held up well even in the midst of the 2008-2009 recession and near collapse of the U.S. financial system. Deal numbers hit a five-year peak in 2011. The total dollar amount invested however, even though it has averaged well over $400 million over the past two years, has yet to reach the levels seen in 2007 and 2008.

VentureTrends is a research service of VentureDeal, a national venture capital database based in Menlo Park, Calif.

Top photo credit: Darwin Bell/Flickr

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The money will help Brammo solidify its position in the market against electric bike rivals such as Zero Motorcylces, and to reach new customers. Brammo also produces and distributes the Brammo Digital Drivetrain, and the Brammo Power battery back, which can be used by manufacturers in their vehicles.

“We are excited to add Polaris Industries as a valued strategic partner. Brammo and its partners are combining forces to gain dominance in the EV powersports market,”said Brammo founder and chief executive officer Craig Bramscher, in a statement. Alpine Energy also participated in the round.

Polaris makes a wide variety of vehicles for outdoor recreation, such as golf carts, off-road vehicles and snowmobiles. Polaris also makes light-duty electric vehicles, such as the Gem, which is like golf cart designed for grounds teams.

Based in Ashland, Ore., Brammo is the maker of all-electric motorcycles, such as Encite, the Empulse, Engage and  the Enertia (pictured).

Brammo previously raised $10 million Chrysalix Energy Venture Capital and  Best Buy Venture Capital

Sept. 9 - 10, 2013
San Francisco, CA

Early Bird Tickets on Sale

Xignite is out to democratize access to financial data, which has exploded in the past decade with the onset of real-time, 24-hour trading. It is doing so by making that data more accessible via cloud computing and has just raised $10 million in a second round of funding, it announced today.

Financial experts once accessed the data exclusively from terminals such as Bloomberg machines or trading computers. But now wider swaths of people want to access data in real-time from the web and mobile apps.

The problem is that financial data has exploded in volume. The financial markets generate 100 times more data than they did just five years ago.

Converting that data so that it can be delivered to the right places is an expensive mess. The data are more plentiful because of high-frequency trading, the rise of regional exchanges all around the globe, and an ever-expanding pool of financial instruments.

The result is huge infrastructure costs for companies that need to receive, reformat, or filter the firehose of data coming from various stock markets.

Xignite’s offering will make financial markets more transparent, as more consumers and businesses will be able to access market data and understand it immediately.

“This is the democratization of data,” said Joel York (pictured below), chief marketing officer and general manager of direct sales for Xignite, in an interview.

The San Mateo, Calif., company will use the new funding to grow its sales and marketing operations and extend its Xignite platform.

StarVest Partners led the round. Also participating were John Steffens of Spring Mountain Capital and former vice chairman of Merrill Lynch; Altos Ventures; Startup Ventures; and Peter Caswell.

Xignite hopes to transform the way that financial services firms, buy, sell, and consume the core market data required to run their businesses, said Deborah Farrington, general partner at StarVest Partners.

Xignite directly accesses data in the exchanges and filters it as needed for a wide variety of clients, who can then access it from the web or mobile devices. Apps that access financial data are multiplying like weeds, but there’s no easy way to feed the data directly from the stock markets to the apps themselves.

“There’s a change in the way people get their information,” York said. “The question is, how you get the data to the devices?”

The Xignite market data cloud platform makes the data available via the cloud, or web-connected data centers, as if it were a utility selling electricity. Businesses can buy the data online in an automated process and plug applications into the cloud within minutes. They simply plug into Xignite’s applications programming interfaces (APIs) and access data in a variety of forms. Xignite sells subscriptions to the data for as low as $600 a year and as high as $100,000 a year, depending on the data. The data are delivered in 5 milliseconds to 50 milliseconds.

The alternative to this kind of platform costs a lot of money. Businesses have to invest in custom computing infrastructure to take the firehose of data that is sold by the exchanges, then they have to do the programming necessary to access the data and present it to users in an understandable format. Rivals include Thomson Reuters, Bloomberg, and custom financial houses. Xignite believes it can cut costs 90 percent compared to custom coding options, and it can produce results in two days, compared to six months for custom coding.

Xignite can also lower costs for big banks and other financial companies. Businesses can put their market data onto the XigniteOnDemand private label platform. That way, they can get their data in the hands of almost anyone around the globe. Participants include CME Group, BGCantor, Pearson and Nasdaq OMX.

Stephane Dubois, chief executive of Xignite, worked on an idea for a business for a while and then switched to the current manifestation of Xignite in 2005. The company previously raised a $5 million round. Demand really took off around 2008, York said.

Now it has 900 clients in 47 countries. Those clients access a piece of data more than 5 billion times per month. Customers include Citi, GE, Wells Fargo, ING, BNY Mellon, Natixis, Forbes.com, SeekingAlpha, ExxonMobil, Starbucks, Netsuite, and Barrick Gold.

Xignite has 30 employees and hopes to double that number in the next year or two.

July 9-10, 2013
San Francisco, CA

Early Bird Tickets on Sale

Omar Khan, the Samsung exec who often introduced the world to Samsung’s latest Galaxy phones and tablets at events, has been hired to lead mobile initiatives for Citigroup.

“Omar Khan was a valued member of the Samsung Mobile US team but has decided to leave Samsung Mobile to pursue another opportunity,” Samsung said in a statement. “Omar is not leaving to join a competitor to Samsung, and we anticipate having a continued relationship with him once he settles into his new role.”

Khan left his VP position at Motorola in 2008 to join the Samsung Mobile team as Senior VP of strategy. Many of Khan’s duties will shift Tim Rowden, VP for product development at Samsung Mobile.

Khan isn’t the first mobile executive to leave for a financial services company, as Dan Schulman, who used to head Virgin Mobile, joined American Express to lead its mobile business operations.

Citi indicated in a press release that it was excited to create the new position for Khan in order to help the company deliver its products and services to new mobile devices that are shaping world commerce.

And it doesn’t look like Yodlee’s growth is going to slow down anytime soon, especially with the “FinApps,” or financial apps it launched last year, which give third-party developers the power to develop apps that can securely access financial data.

The 12-year-old company has been a leading force for online financial services for some time. It’s the PFM of choice for eight of the top 10 financial institutions, including Fidelity and Bank of America. Yodlee is also notable for powering the data behind personal finance site Mint.com in its early days (which was eventually snapped up by Intuit, and now relies on Intuit’s financial data).

With FinApps, Yodlee is hoping to be a pioneering force once again. More than 250 developers are currently working on FinApps. Those apps can be deployed just about anywhere, from bank websites to social networks. The company tells me that it has about a dozen Facebook FinApps on the horizon, and that it has developers working on FinApps in “core categories” over the next two years.

Savings site BillShrink was on board with Yodlee for one of the first FinApps, which takes advantage of BillShrink’s savings and comparison engine to point out ways for consumers can to save money. The app also uses BillShrink’s targeted marketing engine, something Yodlee says it will be eying more closely as there is plenty of potential for targeted marketing data from FinApps.

Yodlee tells me that it takes less than a month for banks using its current system to make their sites FinApps-enabled. For new customers, it takes about 10 to 12 weeks.

Redwood City, Calif., based Yodlee has raised over $100 million in funding from Accel Partners, Warburg Pincus, and others.

Rod Ebrahimi is co-founder at ReadyForZero.com, an online financial program that helps Americans tackle debt. You can follow him at @innovatebig.

Even though financial services is among the most profitable industries in the world, the existing regulatory systems, technical infrastructure and deep-rooted incumbents make it difficult for new entrants to innovate.

Whether you are moving money in new ways like mobile payments company OboPay or disrupting long-standing business models like peer-to-peer lender Lending Club, there are technical and regulatory roadblocks. Unlike the open APIs supporting consumer Internet products like Facebook, financial services infrastructure isn’t easy to build upon or extend.

Fortunately, though, there is a lot of excitement surrounding new opportunities within financial services.

So what does the “future of money” look like and what is driving innovation?

Customers are more trusting and demanding (both good things).
Traditionally, large financial services companies had to spend millions to acquire and serve their customers directly. Call centers and expensive media buys were the only way to stay competitive. Now customers use online and mobile tools to do a lot of their important financial work, including but not limited to signing up for new financial products with little or no human interaction. They demand simple ways to access their finances and expect real-time information all hours of the day. As a consequence, people have become even more comfortable inputting and accessing sensitive personal data online — a good thing for startups.

Companies like Pageonce, for example, prove how a good user experience – created by a great UX design and graphic design — can help set skeptical users at ease and make collecting personal information easier. Power and control is shifting to customers, a growing general trend within financial services. Less consumer skepticism means we will see more opportunities for direct-to-consumer models like credit-score tracking service CreditKarma that are a win for both consumers and financial institutions; we hope to see a lot more of this.

Increased trust leads to significant privacy and security concerns.
Because customers are demanding increased access and control of their financial data, companies need to store and transmit more sensitive information in new ways. This raises unique privacy and security issues that can be challenging, particularly for a nascent financial services startup. Simple things like ensuring that no customer data is accessible to employees while at the same time promptly addressing customer support requests can be extremely challenging. Financial services startup Blippy addressed a similar issue shortly after launch wherein users’ credit card numbers were accidentally exposed publicly online (credit card numbers were essentially search-able using Google). Blippy responded and resolved the issues, but some critics suggested it was “too little, too late”. Trust is difficult to build in the first place and even more and even more difficult to recover from once it has been lost especially for financial services companies.

The changing regulatory environment will continue to be challenging to navigate.
We recently had the opportunity to meet with the new Consumer Financial Protection Bureau to learn more about what’s coming with respect to legal provisions. This government agency will initially focus on predatory marketing tactics that mislead consumers into signing up or paying for services that don’t deliver on their promises. The team is working with the Google Adwords Team, for example, to prevent specific companies from advertising directly to consumers and instead delivering informative news and information. Financial services companies must work hard to protect their companies’ and customers’ interests. Early innovators often incur serious setbacks before making a new model work. Visionary companies, like peer-to-peer lender Lending Club, spend millions to meet the demands of regulators before launching.

Expensive, out-dated and difficult to integrate infrastructure.
Building consumer-friendly products that can access and update financial data in real-time is hard (to say the least). Companies like online banking platform Yodlee! have tried to make account aggregation services accessible, but resource-limited startups still have a difficult time building products that connect to and support a large number of consumer banks. Financial services companies should stay as “laser-focused” as possible by doing one thing very well as opposed to trying to do too much. Our team focused on credit card debt, for example, instead of going all out and supporting all types of debt.

Processing payments is also a challenge, both from a regulatory and from a systems perspective. The systems are difficult to build on and even more difficult to support. New startups like BillFloat use a combination of ACH (Automated Clearing House), MasterCard and PayPal technologies to process payments for consumers who need more time to pay their bills. The infrastructure to make payments exists, but it’s a difficult area to build products around. In almost all cases, for example, “moving money” requires licensing in each state here in the U.S. The hope is that once leaders emerge, their efforts will help new entrants build innovative payment products.

More data = options for customers + profits for companies.
As people continue to do most of their purchasing and money management online, startups have the opportunity to provide them with more personalized financial products. Services like BillMeLater, for example, allow consumers to make purchases without a credit card using just their social security number (last 4 digits) and birthday. Customers benefit and companies can monetize in new ways. The Economist wrote a good piece entitled “Data-driven finance” (March 17, 2011) that discusses companies like Klarna that use consumer data and new risk models to allow people to purchase goods online instantly. This “data” trend suggests that a wave of startups are essentially asking users to “pay” with their personal data for valuable goods and services. We believe this trend will fundamentally drive the “future of money” in the coming years.

We want to see more financial services innovation; particularly in areas that empower consumers with their own data and give them new options. The road is challenging for new upstarts, but there are many important, worthwhile problems to be solved here that will create a number of meaningful and long-lasting companies over the next 5-10 years. What do you think?

Traders can basically use OpenGamma to work with a suped-up version of Excel. The application programming interface (API) uses Excel and taps into multiple on-premise machines to quickly do calculations and access data without slowing down the machine a trader is working on. Instead of relying on the power of individual machines, OpenGamma will tap more powerful servers that are deployed in-house to provide some better computing firepower. That will allow traders to work their magic on Excel sheets that have thousands of cells active at a given time.

OpenGamma is also designed to be open source, said Kirk Wylie, the company’s founder and CEO. It’s not really clear how, as it doesn’t really have some of the traditional hallmarks of open source software. There isn’t any kind of community developing plug-ins or applications for OpenGamma’s software. But any company that decides to deploy the software can modify it in any way they see fit, and OpenGamma will provide them the tools to do so.

There’s also the question of just who will deploy this software. Many hedge funds and banks are running older versions of trading software — but that’s because they are reliable and it’s a very slow-moving field. Wylie said the companies were excited about getting access to some new tech that would speed up the process.

“You can’t rely on black boxes when dealing with trades, you have to understand everything that is going on in those black boxes,” Wylie said. “What OpenGamma does is run its code in a crystal box where traders can see every single step, so there’s no uncertainty or risk because of technical issues.”

This is OpenGamma’s second round of funding, even though the company hasn’t released a product just yet. The initial version of the software should come out sometime at the end of the first quarter or the beginning of the second quarter this year, Wylie said. The company’s CEO has plenty of experience on both ends — he worked with a number of silicon valley startups that secured venture financing and then moved to London to work in the financial services industry. The rest of the team rounding out OpenGamma also has similar experience.

But given the inertia of the financial services industry, it’s hard to imagine that a lot of companies would begin deploying the software in the immediate future — especially an initial release. Wylie said the company has been in contact with tier 1 banks, some of the largest banks in the world, to begin deploying the software bit by bit rather than swapping it out immediately for a brand new system.

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His cofounder, and ZestCash’s chief risk officer, is Shawn Budde, a veteran of Sears, Capital One, and Citibank.

“The payday loan business is fundamentally abusive,” said Merrill. “You pay $60 and you have $300 for 14 days. If you annualize that, it’s a lot of money. The average payday loan borrower rolls that over six times — they’ve gone through six two-week cycles of not being able to pay the principal. They’ve paid $420 to borrow $300 for four months, and they still owe the principal.”

Estimates of the size of the market vary. About 12 million people take out payday loans every year, according to the Center for Responsible Lending, though ZestCash thinks the actual number may be 30 million.

“There are more payday loan storefronts than there are Starbucks and McDonald’s,” said Merrill.

ZestCash’s loans, available in amounts up to $500, are currently only available in Utah, which Merrill argues is an “easier and safer” market for ZestCash to test its product in. Users set their own payment terms in terms of length of loan, though ZestCash charges a set loan-origination fee of $15 per $50 lent and annual interest fees of 120 percent. In the example of a $300 loan, a ZestCash borrower would pay $90 upfront and roughly $60 every two weeks over four months, at which point they’d have actually paid off the loan.

“We’re going to use Google-style data analytics to make sure you don’t take a loan you can’t afford,” said Merrill. “We’re going to apply all the technology we learned at Google to loan underwriting, which no one’s ever done before.”

Many in the Valley have been wondering what Merrill would do next after a high-profile if ill-fated attempt to save the music industry from itself as president of EMI’s digital unit. (He left EMI in 2009, a year after joining the music conglomerate, after it reorganized to eliminate the unit he ran.)

Merrill’s LinkedIn profile says he began work on ZestCash in May 2009, while Budde apparently signed on in April 2010. Several former Googlers, including Kasia Chmielinski and Sonya Boralv Merrill, are also involved. The company, based in Hollywood, Calif., has 7 employees and also uses some contractors.

ZestCash has raised a seed round from GRP Partners, Flybridge Capital Partners, and Merrill. Brian McLoughlin of GRP and Jeff Bussgang of Flybridge are advising ZestCash in conjunction with their firms’ investments.

While mobile banking to date has been stymied by incompatibility between banks, carriers, and handsets, the company’s technology works with most major carriers with in the US and supports development platforms Java and Brew (with an iPhone app set to roll out soon). It also has struck deals with leading financial institutions, including Fidelity National and Citibank.

mFoundry, based in Sausalito and incorporated in 2004, has already seen strategic investing from other big players in the banking and mobile world, including Motorola, PayPal, and electronic payments giant National Cash Registers. The company has also raised venture from GRP Partners, Ignition Partners, and Apax Partners. ‘

Less clear is what exactly mFoundry will be doing with Bank of America, which already has 1 million users signed up for their mobile services. While the strategic investment would seem to indicate the company would be using mFoundry’s tech as their new mobile banking platform, mFoundry’s Diane Hong, VP of Marketing, refused to comment on what the relationship between Bank of American and mFoundry would be beyond the strategic investment, only saying, “Bank of America is clearly one of the most successful in the mobile banking market right now.” She also declined to comment on the amount of the investment, funding to date, or board seat implications. We last wrote about the mFoundry it had closed a $15 million round of funding in November 2007, bringing its total funding up nearly $25 million at the time.

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