Automotive Industry Exploration (Part III)

March 23, 2015 by Larry Sukernik in Strategy, Industry Analysis

In Parts I and II of our Automotive Industry Exploration, we took a look at the revenues and costs of some of the largest players in the automotive world. We found that industry profits are quite low compared to those Apple is used to, mainly due to the intense costs of manufacturing a vehicle (materials, labor, equipment, etc). We also noted that if Apple were to enter the business of manufacturing cars, they would need to introduce some new technology into the equation. That new technology could come in the form of production efficiencies, new use cases, or something we cannot currently surmise. If not for this missing piece, Apple would be just like every other car manufacturer - high revenues, high costs, and average margins. If that doesn’t sound enticing to you, you might be right. It probably isn’t (for you and Apple).

For Part III of our exploration, we will be delving into the unit sales of the car manufacturers we visited previously. If you are like me, your best educated guess about which car brand is the most popular came from what you saw on the streets of your city, which may not be the most accurate data. After comparing the unit sales of the car manufacturers, we will dive into the unit sales of only one company: BMW. This choice was made for a few academically valid reasons. First, BMW is my favorite car manufacturer. Second, they gave the clearest breakdown of unit sales by car model (1 Series, 2 Series…). Third (and perhaps most arguable), out of all the car companies, BMW is most like Apple. They value design, they make premium products that are still affordable by most of the middle-class, and finally, they sweat the details. Part III will be the final post in this three-part series on the automotive industry as a whole. In future posts, we may explore some car companies independently (Tesla, Daimler, Volkswagen) and in greater detail, as well as keep a tab on what is happening with the Apple Car.

Big Picture: Automotive Industry

The companies in this chart sell roughly 60% of all the cars sold in the world. Estimates of global car unit sales range from 72M - 84M in 2014, and this chart covers 48M of those sales, hence 60%. If we assume the world population is 7 billion, then we can say that around 1 out of every 100 people buy a new car every year. In reality, that statistic is lower, but the thought is nonetheless intriguing. Some other points:

Toyota simply dominates the other car manufacturers: it sold 1.2x the cars of Volkswagen, 1.4x Ford, 2.1x Honda, and 4.3x BMW.
The German luxury brands (BMW & Daimler) together sold 3.7M vehicles in 2014. In terms of unit sales, they are positively paltry compared to the Japanese (Toyota, Honda, Nissan) and American (Ford, GM, Chrysler) titans. If we add Audi unit sales to 3.7M (since Audi is also a German luxury brand part of the Volkswagen Group), that number will equal roughly 5M. German luxury cars thus account for approximately 6% of global car sales.
For such an old industry, there is surprisingly lots of competition in the manufacture of cars. Although it is true that many car companies have over time consolidated (i.e. GM produces Buick, Cadillac, Chevrolet, and GMC), no one brand controls over 20% of the global market share. For consumers, this is great news. But if you’re thinking of getting into the car business, you better step up your game, because there’s plenty of competition.

Small Picture: BMW

In total, BMW sold 1.8M cars in 2014. The above chart gives us a breakdown of those unit sales, model by model (BMW uses the word “Series” in substitute of model). A few things stand out in particular:

The 1, 3, and 5 Series alone account for 33% of BMW’s unit sales. They are by far the most popular cars BMW produces.
70% of BMW’s unit sales are from compact cars (Series 1 - 7). 29% of the unit sales are from SUV’s (X1 - X6, no X2 exists yet). 1% is from the BMW i, which is their electric model.
If you wanted to compete with BMW, you could strike from one of three places (or all three, if you’re feeling audacious). You could attempt to steal from their most lucrative business, luxury compact cars, since there’s a huge market for them. Alternatively, you could make luxury SUV’s. Finally, and probably the best choice, you could make electric cars. BMW only sold 18K i cars in 2014. Perhaps there is no demand for them, or, most likely, BMW is underserving the market for electric vehicles. If Apple were to enter the car business, I’d wager they would produce electric vehicles (you will recall I am not a betting man though, so rest assured that your money is safe).

This chart is the same as the last, but it adds one additional detail - the base MSRP of each BMW model.

With few exceptions, it would be fair to say that the cheapest models sell in the largest quantities. Meanwhile, the most expensive models sell in predictably lower quantities. If you asked me, I would venture to say that the supply for low-end luxury cars matches demand. The supply of high-end luxury cars also seems to match the demand for them.
BMW covers a wide area of the pricing spectrum: the lowest MSRP is $32,100, while the highest is $76,100 on the opposite side of the spectrum. Of course, these prices are not at all indicative of what you will actually pay for a souped-up BMW - that price will be much higher. Still, I find it interesting how diverse the pricing is for a luxury car. It is much less surprising now to see that Apple Watch pricing is similarly spread out over a large area ($350 - $17,000).

Coda

Overall, the car market is a competitive and somewhat unfriendly place to do business. If you had billions of dollars lying around and were interested in starting a new business, it is doubtful the automotive industry would be it. The profits are decent, but the costs and barriers to entry are huge (but not insurmountable, as Tesla has proven). Moreover, not that many cars actually get sold every year (around 78M). If you want to compete in this business, you’re not going to make much money using economies of scale, since margins aren’t good. The best way to make money in this industry is to be extremely efficient (Toyota, Honda), or to charge premium prices (BMW, Daimler). Even the efficient brands manufacture premium versions of their vehicles: Toyota makes Lexus, and Honda makes Acura. What you don’t want to be is Ford, GM, or Chrysler, which are neither efficient nor have successful premium brands (Lincoln and Cadillac barely qualify as such). As our previous analysis has shown, the American car companies are some of the least profitable car companies around, so replicating them is a fool’s errand. You can, however, make a healthy profit selling premium cars, as BMW has shown us.

So let’s return to our original question: what would Apple gain from entering the car market? In short, not much. Our three part analysis has shown that the automotive industry isn’t nearly as profitable as consumer technology. Of course, profits aren’t everything, and Apple’s goal when entering into the automotive industry could be a nobler one. But you would be hesitant to spend dozens of billions of dollars on a business that won’t return them to you. For this reason, I have come to the conclusion that Apple will not enter the car business as it exists today. If they do enter, it will have to be with something totally different. We’ve touched on what that difference could be in Part II, so I won’t go into that here, but it cannot simply be a superior version of a gas-powered car. Success might come from a place Apple has been before: Think different.

For next week, we will explore some strategies Spotify can take to combat the impending Beats (by Apple) release.

If you have anything to add, or just want to share your meandering thoughts about what we covered, please comment below! I’m also very active on Twitter, so don’t hesitate to @lsukernik me!

Automotive Industry Exploration (Part II)

March 09, 2015 by Larry Sukernik in Technology, Industry Analysis

The automotive industry is a huge place, so it is best we tackle it one step at a time. For our first stride, we took a look at the revenues, expenses, and incomes of only a few car manufacturers: GM, Ford, BMW, and Volkswagen. For this next step forward, I have added Daimler, Honda, Toyota, and Nissan to our repertoire of car companies. Let’s take another look at the cost structures of these companies (as compared to each other and Apple), this time with additional companies and a better understanding of the automotive industry. Again, please excuse the slight variations in years, which are due to the different fiscal year end each company uses, and the delay in reporting annual figures.

Now that we’ve introduced additional companies to the mix, we can see that Apple’s impressive annual revenues of $182B in 2014 are actually dwarfed by the revenues of Toyota ($249B in 2014) and Volkswagen ($241B in 2013). The higher revenues of auto manufacturers have very a simple explanation: a car costs a lot more than a consumer technology device. Therefore, I wouldn’t place too much importance on the revenue figures - they are best suited for comparing the car manufactures to each other, rather than to compare them to the revenues of Apple.

I should also point out that the revenues used for our purposes are consolidated revenues. They include revenues from all of the segments each car manufacturer operates in (cars, trucks, motorcycles, financial services, etc). The revenues we used for our selected car manufacturers also include the income from companies they hold an equity interest in (which is usually other car companies). Unlike the relatively simple financials of Apple, the auto companies are full of incestuous relationships that heavily cloud their financial metrics.

Though we now know that revenues are not the end-all-be-all, the same cannot be said about gross profit (which is calculated as revenues - cost of sales). Software companies, for example, tend to command the highest gross profit because the cost of producing an intangible good is tiny compared to what you can charge to sell it (think Windows, or Mac OS X before it went free). On the other hand, a car is as tangible as a good can be, and requires copious amounts of materials and labor to manufacture. As a result, the cost of sales for car companies is proportionately higher to that of software, which results in a lower gross profit. Apple is somewhere in the middle of software and cars. Most of Apple’s revenue and cost of sales comes from the hardware products it sells (iPhone’s, iPad’s, Macs) but Apple also makes some money from intangible services like iCloud and iTunes. That is all to say that if Apple entered the car business, its gross profit would look more like what it is for car manufacturers than what it is for Apple now.

It comes as now surprise then that Apple has the highest gross profit out of all the companies we profiled for this analysis. It costs less to make an iPhone/iPad/Mac than it is to manufacture a car.

Restating gross profit as a percentage gives us even more valuable insights into the manufacturing intensity of Apple vs. the auto companies. To calculate how much each company keeps for every $100 of revenues, just multiply $100 by the percentage in the above chart. For Apple, that would be $100 x 39% = $39. For Honda it would be $100 x 26% = $26. -

You can see that the luxury auto brands have higher gross profit percentages, while the American car companies have the lowest (no wonder many went into bankruptcy!). Tesla has a gross profit percentage of 28%, Daimler (Mercedes) of 22%, BMW of 20%, and Honda of 26% (Honda does have a luxury brand (Acura), but the disproportionally higher gross profit is probably attributable its to operational efficiency).

Apple is well known for its operational efficiency (it has the highest gross profit percentage out of all smartphone manufacturers). But how well would this efficiency transfer to the manufacture of cars? I would venture to say that if Apple made a car, the margins would be slightly higher than those of Tesla, or around 30 - 35%. This would translate to much higher margins than what traditional car manufacturers are used to, but lower than what Apple is used to.

Non-finance people usually despise discussing margins since they have nothing to do with the product itself. Despite my rather traditional accounting background, I also tend to favor looking at the product instead of its profitability. But margins are helpful to understand because no reasonable company would enter an unprofitable business. If Apple’s research labs find that their is little money to be made in cars, it is doubtful we would see any Apple Car released at all. Before billions of dollars are spent on R&D, someone at Apple Finance needs to give the go ahead, which will only happen if there are profit margins to be made. Of course it is possible that Apple will develop a car with shockingly high margins (>40%), but I think it would have to be assembled from thinly cut paper for that to be true.

The mother of all financial metrics is net income, which lets us know how much a company has left over after all expenses, interest charges, taxes, and “extraordinary” items. Net income is the holy grail of business; it is why investors invest, and what a company wants to attain in order to be successful. It can be used to pay dividends to investors, it can be reinvested into the company, or it can simply be stashed into retained earnings. As you can see from the chart above, Apple made around $39B of clean, unadulterated income.

Just to put things in perspective for you, here’s something to ponder about: Apple had a higher net income in 2014 than the combined net income of GM, Ford, BMW, Volkswagen, Daimler, and Honda (I would include Tesla too, but it posted a net loss of -$294M in 2014).

Now, you might ask - why would Apple get into the car industry if there is little profit (by Apple’s standards) to be made? After all, it’s doubtful that Apple would be able to sell as many cars as all of those automakers combined, and even if it could, Apple’s net income from car sales would be lower than its income from technology products. To play devils advocate, you can argue that if Apple were to assemble cars, its operational efficiency would keep margins high and thus allow for a higher net income. This is certainly a plausible scenario, but how many cars would Apple have to sell to reach even $1B in net income? The answer to that question remains a mystery, but hopefully for not much longer, as we will dive into automotive unit sales soon.

Takeaways

Just as with the first automotive industry exploration, we are left with more questions than answers. That doesn’t mean this post wasn’t worth writing, however. We learned that car makers have ballooned income statements; exceptionally high revenues, and exceptionally high costs. We also learned that automotive margins are fairly low, especially for U.S. carmakers. As a result of their cost structures and the nature of the industry, the net income’s of car companies are paltry compared to that of Apple. In order to make money in this industry, you have to be extremely efficient, which, fortunately for Apple, it is known to do.

Undoubtedly, there is a sizable team of finance/accounting/operations employees at Apple that are doing the very same market research as we are here. Their data is likely to be much more comprehensive and detailed, but I can’t imagine the results to be far different from ours. As we continue our exploration, we will learn more about the business of making cars, but for now, it doesn’t look like a great business for Apple to be in. Revenues are high, but profits are low (we should note again, low by Apple’s standards). It is still way to early to have any conclusive thoughts, but who says we can’t have opinions!

What If

You can probably tell from all of the data we have analyzed thus far that the traditional car market isn’t the most appealing business to be in. But what if Apple totally changed the game? The current production system for cars is arduous and expensive - but does it have to be that way forever? What if the margins on cars were dramatically higher? Or what if the use-case for cars were expanded or altered? At the moment, the driving age in most jurisdictions in the United States is 18. But cars are expensive, and most teenagers are forced to use their parents’ car rather than to purchase their own. Suppose, however, that Apple is able to cheaply manufacture tiny cars (work with me here) that cost under $5,000 and take no gas. All you need is a battery charger. How many parents would buy their teens a car now?

To stretch things even further, let’s make these cheap Apple cars self-driving. Instead of having to drop your kids off at school or have them take the bus every morning, you could just pack your child into these small autonomous self-driving vehicles. And if you’re thinking this sounds very sci-fi, you’re on the right track. If we are to believe Apple is making a car, and that automotive profitability is quite low, something else should be going on, and spreadsheets alone won’t help us find it.

In future posts, we will be taking a look at automotive unit sales, break-downs of revenues by brand (Volkswagen vs. Audi, Toyota vs. Lexus), and a much deeper look into the electrically charged darling, Tesla.

If you have anything to add about the automotive industry, or just want to share your meandering thoughts about what we covered, please comment below! I’m also very active on Twitter, so don’t hesitate to @lsukernik me!

Slide Gallery

Automotive Industry Exploration (Part I)

March 02, 2015 by Larry Sukernik in Technology, Industry Analysis

It is no secret that I am fascinated by Apple and the technology industry as a whole. I have written amply about Apple and the neighboring technology industry for the past few years (and have read about them for almost nine years now). When news broke that Apple was working on a car, my Twitter timeline was evidence of my not knowing of what to think. Although I don’t follow the automotive industry as closely as tech, I am a fan of cars and car design. I know when the new car models are released, what they look like, and what features have improved over the previous models. What I don’t know, however, is how the automotive industry operates (who are the suppliers, what materials are used, and so on), who the key players are, what the market share of each key player is, competition in the industry, and how profitable the automotive industry is in general. When I began following the technology industry, I didn’t know any of the above questions either, but through time I developed a thorough understanding. It is now time for me to develop an understanding of the automotive industry, which seems ripe for disruption.

If you’re reading this, I imagine you are in a similar boat to mine; you follow the tech industry closely, and have a newfound interest in cars after the recent Apple Car rumors. In the next few months, I will starting delving into the auto industry (in addition to the usual tech posts I publish) to gain a better understanding of it. Some questions I want to answer early-on are: what would Apple gain from entering the car market, how much profit is in selling cars, and what are the unexpected consequences of entering a wholly new market (in addition to many other questions). So sit down, buckle up, and enjoy the ride.

Global Car Sales

Scotiabank published a great report on global auto sales, and it is as good of a place to start as any. In 2014, a total of 71M cars (includes light trucks) were estimated to be sold around the world. For comparisons sake, Apple sold 74M iPhone’s during the last quarter. Obviously a car is a much more expensive and thoughtful purchase, but hopefully you notice the great disparity in scale between the tech and the automotive industry on a unit basis.
Most car sales occurred in Asia (32M), North America (19M), and Western Europe (12M), followed distantly by South America (4M) and Eastern Europe (3.8M).
2015 forecasts have global car sales increasing by 3M to 74M, which implies a 4% growth rate. It appears the automotive industry is not a growth market by any means (feel free to prove me wrong).

Automotive Industry Profitability

I chose some of the better known car manufacturers for this next chart, just to compare them to Apple. Academically, it is wrong to compare a company in one industry (tech) to another (auto), since two the industries are different in almost every regard. That said, doing so establishes a nice sense of scale which can help us understand the relative sizes of the companies. It may also help to answer why Apple may be interested in making cars in the first place.

In terms of yearly revenues, Apple is second only to the Volkswagen Group, which is a holding company that owns brands such as Volkswagen, Audi, Bentley, Bugatti, Lamborghini, and Porsche. It is also worth mentioning that the revenues included in the above chart are comprehensive, meaning that they include the revenues not only from vehicle sales but also from the financial arms of the automotive companies. I did this deliberately because if Apple got into the car business, they would presumably get into the leasing business as well. Also note that I used the 2014 figures for Apple, GM, and Ford, and 2013 figures for BMW and Volkswagen. This is because the annual reports for the German car companies weren’t released yet. I doubt the 2013 figures would differ materially from the 2014 ones, though.

Apple had by far the highest gross profit out of the companies in this comparison. You would assume that automakers make boatloads of profit on each car they sell, but the data says otherwise. The costs in selling a car are not much higher than the costs involved in making one.

In terms of a gross profit percentage, Apple is the victor once again. For every $100 in revenues, Apple keeps $39. For every $100 the car companies make, GM keeps $11, Ford $14, BMW $20, and Volkswagen $17 (this is before any operating expenses, taxes, and interest charges). Although I did not include Tesla in this analysis (it deserves its own analysis, which will come later), you might wonder what its gross profit percentage is. By my calculations, it’s 28%, meaning that Tesla gets to keep $28 per $100 of revenues, which is the highest gross profit percentage out of all the other car companies compared in this analysis.
It doesn’t take a genius to see that manufacturing cars is an expensive business. If Apple entered the auto industry, they would either have to get used to lower margins, charge higher prices to offset the cost of sales, or lower manufacturing costs. That is a difficult problem to solve - no wonder Apple is on an automotive hiring spree.

The culmination of all the above information leaves us with the net income of each company. As you would expect based on what we learned previously, Apple had the highest net income out of all of the car companies. Not only is it higher, but Apple’s net income in 2014 is 1.5x higher than the net incomes of GM, Ford, BMW, and Volkswagen combined. Apple’s calendar year ends in September, mind you, and the data from BMW and Volkswagen is for 2013, but the size of Apple’s profits is still mind-boggling.

Early Thoughts

While the above analysis was rudimentary and not enough to paint an accurate picture of the automotive industry, it is a good start at understanding the size and profits of the automotive industry. In a nutshell, here’s what we can takeaway:

Even if Apple made a successful vehicle, it is highly unlikely the car business would be as large as the iPhone business. Apple sells more iPhone’s in one quarter than all car companies combined sell cars in a year.
Making cars is extremely expensive. The price you pay for a car isn’t far from what it costs a car manufacturer to make one. We will delve into the profit margins of luxury vs. base cars in a later analysis, but as a whole, cars don’t have the best gross margins. They definitely don’t come near the gross margin percentages Apple is used to.
The key element in the manufacture of cars is suppliers. Essentially all car manufacturers purchase parts from hundreds of different suppliers. Apple would presumably have to do the same (they so for their current products).

Slide Gallery

Industry Analysis of Fintech Startups

January 19, 2015 by Larry Sukernik in Technology, Industry Analysis

Financial technology (fintech) startups are trending topic in recent years. The financial industry can be a sloth-like creature, with banks just recently adding support for decent mobile apps and more advanced capabilities such as spending trackers and remote deposit support. There are still many gaps left between what consumers want and what banks provide. This gap is currently being filled by fintech startups.

As I see it, there are currently three major categories of fintech: Payments & Money Transfer, Spending Trackers, and Investments. The order in which these categories are listed is not random: each category becomes easier to enter, in terms of the capital (human and financial) and barriers to entry. To be abundantly clear, let me further define the first category. The Payments & Money Transfer encompasses companies that allow you to pay for goods and services through them, or transfer money to anyone you wish. I lumped payments and money transfer together because the distinction between the two is not always clear (are you transferring money to pay someone?). This category includes companies like Venmo, Square, TransferWise, Stripe, and PayPal. It also includes Apple Pay and Google Wallet, but these services are provided by established companies and do not fit the bill for this analysis, which focuses on smaller companies. To be comprehensive, however, I have added them to the graphics below. You may even argue that Square and PayPal are too large to include here, but I feel they are not large enough to eschew.

1) Payments & Money Transfer

As I briefly mentioned earlier, the Payments & Money Transfer category is most difficult to enter. It is extremely expensive to process payments due to the risks involved for each transaction, fraud, required security measures, governmental requirements, and a slew of other difficult problems that need solving. It’s not impossible, and we’ve seen some startups attempt to solve these problems, but on the whole, these startups are much larger in size and rarer in quantity. While I think a few may thrive on their own and even become public (Square, Stripe), the most likely scenario is for them to be purchased by the tech giants (Apple, Google, or Microsoft). For this scenario to be avoided, this category of services must find new ways and markets to monetize - an extremely hard proposition (Square is currently paying users $1 - $5 to use their Square Cash app!).

2) Spending Trackers

The Spending Tracker category is exactly what it sounds like. It is a service provided by startups that allows you to monitor your income, expenses, bills, and everything else that measures your cash flows. This category includes startups like Mint, Mint Bills (formerly Check and Pageonce before that), Level Money (as if to prove my point, acquired by Capital One at the time of this writing), and a few others. Unlike Payments & Money Transfer, the barriers to entry here are lower. However, it is costly to partner with banks to allow for a historical list of your transactions. The very same risks are present here as for Payments & Money Transfer, but they aren’t as demanding. The reason we see relatively few companies compete in this category is because there is very little money to be made. Spending tracking apps and services provide a value-add, but most consumers are not willing to pay additionally for it. Consequently, these types of apps are best when used as gateways to other products, or when they are bundled with an existing product.

To illustrate, let’s look at Mint, which is the largest and most popular Spending Tracker. The company began as a startup, and was soon purchased by Inuit, which sells personal finance and small business software. Although Intuit could have certainly charged users to use Mint, they smartly did not, because Mint is a gateway product to other Intuit software, most of which is not free.

Just this week, Capital One purchased Level Money, a spending and budget tracking app. The reasoning behind this purchase is likely to acquire Level’s infrastructure, team, and technology. I expect to see Capital One’s apps to improve in the next year as a result of this acquisition, either by incorporating Level into its existing apps or keeping it standalone and adding features.

It’s becoming increasingly difficult for banks to compete solely on savings and checking accounts, so they began to compete in mobile and online services. If Capital One’s mobile app are superior, for example, to Chase’s mobile app, it is more likely that a consumer will open an account with Capital One. Spending Tracking startups, of which not many remain private, will not survive on their own. They will either close shop or be acquired by larger financial companies.

3) Investments

Investment startups (aka Robo Advisors) are the final major category of fintech companies which I have identified. They are also the most common. This includes huge startups like Wealthfront and Betterment, in addition to smaller companies like Acorns and Robinhood. They are all companies which aim to help you invest (long or short term). These startups compete with the established financial advisory and investment firms (Vangaurd, Schwab, TD Ameritrade). I listed this category last because I believe the barriers to entry are lower than for the above two categories, but I’m not against rearranging this category with Spending Trackers either. They have very different barriers to entry, and it is difficult to say which is harder to break into. Do not get too preoccupied with the order of the categories, as the order is more for academic than hierarchical purposes.

This category of startups may actually succeed on its own, because they take a percentage fee or a flat cut of your investment. As I have written previously, these Robo Advisors face the majority of their challenges from huge traditional institutions, which have a lot more capital and consumer trust. The startups, however, have vastly better apps and sometimes provide more features than the traditional firms.

I see this category playing out in one of three ways. First, the less disruptive startups will simply flounder, since they won’t be able to get consumers to invest with then.

The second scenario concerns the innovative, but smaller startups like Acorns and Robinhood. They do not have the resources to compete effectively on their own, since investing is a capital intensive business. Consequently, most of these startups will go the way of Spending Trackers, and will be acquired by larger financial institutions for the same reasons: infrastructure, team, and technology.

The last scenario involves the larger Investing startups, such as Wealthfront and Betterment. They have much more capital to work with, and can hire the best people. Additionally, the more assets under management (AUM) they have, the more consumer confidence they will get, which will result in even more signups. It will become a virtuous cycle, to the point where these companies become large enough to stand on their own or otherwise go public. Not all of the larger firms will succeed, however, since there is a limited market for such services. The unsuccessful ones (success is measured by profitability) will either close shop or also be purchased, at a bargain, by the larger institutions.

In summary, due to the current unprofitability of fintech startups and the psychological aversion to risk that most consumers hold, most fintech startups will not succeed on their own. I see two emerging trends that effect the three fintech categories.

The first is for larger, established and traditional financial institutions to purchase fintech startups (i.e. Simple was acquired by BBVA, Mint by Intuit, Level Money by Capital One). This is a win for both parties; the startup gets the capital to create disrupting technologies, and the banks get the best technology, infrastructure, and human capital. Finally, consumers trust their money to the banks, and are more likely to make use of new technologies.

Second, fintech companies can go public to raise capital. We’ve seen this most recently with LendingClub, but this will become a trend in the future. For example, Square and Stripe seem ripe for an IPO (unless they get acquired). If Wealthfront continues to grow and steal market share from Vanguard, it too can look into an IPO. Again, this will provide them with the additional capital needed to succeed in the financial industry, and it will reinforce consumer beliefs in the long-term health of the company.

Not a trend but a reality of business, the unsuccessful startups will fail. This is a sad, but true reality of any business. Most businesses fail, and startups are businesses. Not all fintech startups will be able to become profitable businesses, and some will inevitably lose funding and exit the market.

Postface: This analysis did not include every startup in the fintech industry - there are simply too many to include. For this reason, I have chose to include only the largest and most well-known fintech startups.