What Keeps Bankers Up at Night By Andy Gordon on October 10, 2014 Dear Early Investor, I'd hate to see banks disappear. After all, the best jokes around are about bankers and lawyers. My favorite: Bankers are people that help you with problems you would not have had without them. Okay, after what happened in 2007 to 2008, maybe this one hits too close to home. The freewheeling ways of big banks cost millions of people their jobs. And the resulting financial crisis left countless homeowners with plunging home values. I spent yesterday with some of my good friends from The Oxford Club, discussing the economy and what may be in store for us. One of the things that disturbed us the most? Banks have once again loaded up on derivative debt. Just like they did a decade ago. Some things never change. Banks are still taking their cues from the same playbook that nearly blew up the global financial system just a few years ago. Then again, some things do change. Disruption is afoot in the banking sector. And the banks have only themselves to blame. They simply didn't lend enough after the crisis to sustain customer loyalty. And now they're paying the price. Beginning with Lending Club and Prosper, startups have picked up the gauntlet and plugged the lending gap that banks fostered with their inattention to customer needs. The upshot? Startups are reinventing new ways to loan cash, transfer money abroad, settle international commercial transactions and score credit risk. For centuries, banks have monopolized these services. They probably thought it was their birthright, something that would continue without challenge or competition. Boy, were they wrong. THIS COULD BRING $1.71 A GALLON GAS TO THE U.S. This catalyst converts one of the Earth's most abundant energy sources into gasoline. It's not petroleum, solar, hydro, wind, corn, algae or anything else you are probably thinking. And soon it will fuel 10 million U.S. vehicles... For as little as $1.71 a gallon! FROM A SPONSOR Wall of Money Coming The Lending Club was founded in 2007 by Renaud Laplanche. Prosper was founded in 2006 by Chris Larsen and John Witchel. In England, Zopa, founded by Giles Andrews in 2005, was the trailblazer opening up the way for a new generation of "fintech" companies. There are now more than three dozen P2P lenders in the U.K. In the U.S., Lending Club and Prosper have captured 98% of the P2P market. More fintechs are on their way, lured by forecasts that P2P loans in the U.S. and U.K. will surge from the current annual usage of just over $8 billion to over $428 billion in the next decade. Here are three of my favorites. Will they be able to compete with the power and know-how of our big banks? I'll let you be the judge... TransferWise. Founded in London in 2010, it charges 0.5% to transfer money between countries. That's a pittance compared to the 5% banks charge. TransferWise takes a populist pose on its website: "No skyscrapers, no suits. Just like-minded people everywhere, connected by TransferWise." And since it moves other people's money around, it also highlights that it has 8,929 independent reviews. One of its co-founders, Taavet Hinrikus, helped start Skype in 2003. Sir Richard Branson and PayPal founders Max Levchin and Peter Thiel are also early investors. So far, the company has raised over $30 million in four rounds from seven investors. Dwolla. It was founded in 2008 by Shane Reiser and Michael Schonfeld. Dwolla's platform allows users to sidestep steep money transfer and bank payment fees by charging just $0.25 per transaction. You can't do much better than that unless you charge nothing. Actually, Dwolla does just that for transactions of $10 or less. Now the company wants to spread its wings. It's identifying ways to use its "light infrastructure," so Dwolla can extend beyond lending to individual consumers. Dwolla has raised over $30 million in eight rounds from well-known investors such as Union Square Ventures, Andreessen Horowitz and the CME Group in its just completed Series D round. Kabbage. It began in Atlanta in 2009. A year later, the company got its first investment. In 2011 alone, its technology and traction attracted investments of $7 million, $17 million and $12 million in rapid succession. Altogether, it has raised $465 million in 10 rounds. Kabbage has gone from running the first lending platform for small enterprises to being the leading online provider of small business loans. How did it do it? The company took a manual application process that lasted weeks and turned it into a simple, 100% online automated process that takes "as few as 7 minutes." The company isn't sitting on its laurels. It just launched a new service for personal loans. Called Karrot, it will provide an immediate answer and access to funds as soon as the next day. Don't Count the Powerful Banks Out Yet So, what do you think? Can these fintech startups compete with the banks? Perhaps the better question is, can the banks compete with these startups, which are figuring out how to do things much faster and cheaper than they can? The young fintechs have made the jump from serving consumer needs to the bigger money needs of small businesses. The next step - serving big corporations - will require an even bigger leap... Deploying capital amounting to trillions, not millions. It's still a ways off. You shouldn't expect these new companies to run over their bigger brethren. The big banks will start off as their customers. Eventually, the better fintech startups will be chosen to partner up with such global banks as Goldman Sachs and Bank of America. Others will seek a spot on our public stock exchanges. Lending Club will probably be the first fintech to IPO. It may go public by the end of the year. Its valuation? Just under $4 billion. Takeovers will be just as financially rewarding. These are early days. But investors are already lining up to take advantage of a sector ripe for disruption. Fintech startup investments are expected to hit $4 billion this year. That's double what it was in 2012. Dozens of startups will be reinventing how financial transactions are done. The payoffs for founders and early investors of those that find traction will be enormous. I'm keeping a close eye on this sector, and will let you know of other startups that look promising. Good investing, Andrew Gordon Founder, Early Investing Recent Articles From Early Investing Cracks in the New Sharing Economy? By Andrew Gordon on October 8, 2014 I'm thinking of renting out my backyard for wedding events, my car on the weekends, my kitchen appliances (when my wife and I go out for dinner), my lawn and garden equipment during the week and my tuxedo anytime. Why not? I keep hearing that the sharing economy is a $26 billion market and growing. How This Hedgehog Became a Billionaire By Andrew Gordon on October 3, 2014 I once had a boss who hated stock experts, economists, investment advisors, talking heads and academics, all with equal disdain. What he liked were self-made millionaires. Didn't matter if they were unkempt, lousy with words or didn't know their wines. He trusted their knowledge and their insights. But only in the one thing they had figured out. Why Google Wants to Put a Chip in Your Brain By Andrew Gordon on October 1, 2014 I was going to tell you about how you won't recognize the cars of tomorrow... how they will anticipate your every need... like knowing which songs to play. Or what temperature you like. Then I wondered... Who's going to get smarter quicker, cars via sensors or us via brain implants? © 2014 Early Investing, LLC All Rights Reserved North America: 1 800 514 5876; Fax: 1 410 329 1923 International: +1 443 353 4335; Fax: +1 410 329 1923 Email: news@earlyinvestinginfo.com Privacy Policy | Click here to unsubscribe Nothing published by Early Investing, LLC should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in their own securities recommendations to readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publications prior to following an initial recommendation. 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