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Silicon Valley tried to upend Wall Street; now it works with the financial industry

Silicon Valley has upended a growing number of industries, and it had seemed not too long ago that Wall Street would soon be next. But technology entrepreneurs were blocked by enormous moats that surround and protect the existing financial industry.

SAN FRANCISCO — In 2011, Brett King was promoting his book “Breaking Banks” and creating a startup that he hoped would do to the banks what Amazon did to the retail industry and Facebook did to media.

“We had grand ideas of being the Facebook of banking, and being a new form of bank account,” King said recently.

Six years later, his company, Moven, has opened only 60,000 of those new bank accounts. King has now transitioned to selling his software to the banks he once scorned, who use it as a component of their mobile apps.

“We realized that if you want millions of users as a bank, it is a very different proposition than building a social-media network,” he said.

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Silicon Valley has upended a growing number of industries, and it had seemed not too long ago that Wall Street would soon be next. A flurry of financial startups rose quickly and grabbed billions of dollars in investments.

King is just one of the many technology entrepreneurs who have since recently run into the enormous moats that surround and protect the existing financial industry.

The venture capitalists who have invested billions of dollars in this wave of new financial technology — think Venmo and bitcoin — have been left waiting for a breakout star that actually looks like a threat to even a part of the big banks’ business.

“A lot of people set out saying, ‘We are going to displace the banks,’” said Sheel Mohnot, a venture capitalist at 500 Startups who focuses on financial technology. “We realized along the way that you really have no choice but to work with the banks.”

And the difficulty of denting the influence and power of the big banks is only likely to get harder under the Trump administration.

President Donald Trump has said he wants to encourage innovation and new business by cutting back on regulations of all sorts, including financial regulations.

Yet it was the regulations passed after the financial crisis that forced the big banks to reduce their risks in many areas and provided an opening for startups like Moven, which were willing to take more risks.

Trump’s plan to dismantle those post-crisis regulations is widely expected to give the big banks more free rein and close the window of opportunity for newcomers.

“The degree to which banks have been caught under the yoke of regulatory obligations is very likely to lighten up under Trump,” said Arjan Schutte, the founder of the venture-capital firm Core Innovation Capital, which focuses on financial technology.

Schutte has been moving his firm’s investments away from bank disrupters and toward startups that are set up to partner with existing financial institutions.

Even if there has not been a disruption of the big banks, basic financial services available to consumers are changing rapidly, nonetheless.

Americans are now able to send each other money instantly from their phones, thanks to Venmo, and can get approved for a loan in minutes, also from their phone.

The consulting firm McKinsey estimated in a report last month that digital disruption could put $90 billion, or 25 percent of bank profits, at risk over the next three years as services become more automated and more tellers are replaced by chatbots.

Much of this change, however, is now expected to come from the banks themselves as they absorb new ideas from the technology world and shrink their own operations, without necessarily losing significant numbers of customers to startups.

Venmo, for, instance, has captured the wallets of many young Americans, but the largest banks have all begun their own versions of the service and some of them say that they already process, as single banks, more instant personal payments than Venmo.

The large banks are also teaming up to start a cross-industry mobile phone application, Zelle, that will take Venmo head-on in 2017.

PayPal, which bought Venmo in 2009, is still trying to find a way to make money from the business, which is currently offered primarily as a free service.

The obvious reason that financial startups have not achieved the same level of growth in the United States is that most Americans already have access to a relatively functional set of financial products, unlike in places like Africa and China.

Some startups looked at becoming banks, so they could offer deposit insurance — among other things — but they generally found that getting a bank charter required more time and money than is available to even the most successful startups. This left most startups reliant on banks to hold and move any money they collected from customers.

“Operating in America, you needed to get a gatekeeper to approve your access to the networks,” said Josh Reich, who sold his banking startup, Simple, to the Spanish banking giant BBVA. “If we wanted to touch their money, we needed to be part of the banking system.”

Online lenders were particularly ambitious in trying to take on the banks from outside the system. Lending Club, which makes personal loans, and OnDeck, which focuses on small business loans, initially grew swiftly and went public, but both companies have run up against the limits of how fast a lending business can grow without being a bank.

The online lenders have struggled with the high cost of acquiring new customers through marketing, which is not as necessary in other industries that have been disrupted by technology.

At a more fundamental level, online lenders realized how hard it was to fund the new loans they wanted to give out without having access to cheap deposits, as the banks do.

The shares of both Lending Club and OnDeck are now trading far below where they were on the day they went public.

One notable success among the new lenders has been SoFi, or Social Finance, but even it has captured only about 250,000 customers, as compared with the 160 million users of Snapchat, the social network that was founded the same year.

Startups focused on improving payments have had more success — the most valuable recent American technology startup is Stripe, which helps new companies accept online payments.

But Stripe and other payment startups like Square are all built on top of the existing credit card and banking infrastructure and have not posed any type of fundamental threat or challenge to the existing giants.

“We are explicitly not a threat to the banks,” Tim Drinan, a spokesman for Stripe, said. “From our perspective the banks and card networks have built something pretty good and pretty hard to replicate.”

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