tallest treeIn the last quarter-century or so that has made up the digital revolution, one universal axiom has held true: evolve or die. Record labels were too busy suing pirates in the 1990s to adapt their business model to the digital world, newspapers were consigned to the recycle bin of history after failing to convert the economics of print to the Web, and shells of old Blockbuster Video locations morphed into seasonal Halloween shops. In each case, the losers in these battles clung to old models, rather than embracing the technology and digital distribution strategies new disruptors employed to drastically lower costs, increase scalability, and improve the customer experience.

A new challenge has emerged on the digitally disrupted frontier: personal banking and payments. The digital revolution has been so absolute, escalated by the ubiquity of mobile devices, that it is changing our entire financial and transactional experience in ways both great and small, perceptible and imperceptible. You can now hold up your phone to a scanner and pay for a cup of Starbucks. How long until the concept of carrying “emergency cash” becomes as outdated as carrying a beeper? Depositing a check to your bank account can be done anywhere with a few clicks on your mobile.

Is the Halloween costume industry big enough to fill all those empty bank branches?

While financial institutions are undoubtedly slow-moving and deliberate creatures, they’re not dying (at least not collectively), partly because they’re hard-wired into our lives and businesses in ways that music labels, print newspapers and video stores never were. Let’s put it this way: Bitcoins aren’t replacing dollars, pounds, euros, yen, or any other fiat currency anytime soon, as streaming data and cloud storage replaced CDs and DVDs. However, even in this heavily regulated industry, whose participants include some of the oldest and largest corporations in the world, small startups are still leading the way in innovation. It’s rather incredible if you think about it.

In many other big industries, a five-person, product-ready startup is somewhat rare. There aren’t many telco, auto, or energy startups taking on the incumbents with a $5 million Series A. To be sure, there are some exciting new companies in those sectors, but most started bigger and with much more capital – they wouldn’t exactly resemble your typical TechStars alumnus.  But in the world of finance, banking, and payments, five people and a few hundred grand is more than enough to take on JPMorgan Chase, its 5,000 branches, 250,000 employees, and $2 trillion balance sheet.

I, for one, think that’s pretty awesome.

Moreover, when you look at these startups, it’s obvious that they are truly the innovators in the industry and are influencing its direction in a significant way. Dwolla is taking on Visa, MasterCard, and Discover in building an alternative payment network. Simple, Moven, Akimbo, and others are teaching our 6,000+ financial institutions just how the checking account of the future will work. Betterment and Wealthfront are truly reinventing online investing and creating their platforms not to maximize their profit, but rather to encourage responsible consumer investing. Not to mention the numerous new companies, large and small, changing the way we make and accept payments.

Perhaps part of the success of these “little guys” can be attributed to the same thing that enabled the disruption in the world of media – the scalability of Web and mobile-based services and the digital distribution model. But most big companies have figured out how to take advantage of the Internet at this stage. Is it a startup’s nimbleness, or maybe the entrepreneurs’ “outside the box” thinking and unique perspective that ends up driving disruption and changing the world? Certainly those are strengths, but I think it’s a different characteristic of the startup culture that is particularly empowering in the world of banking and finance: the “nothing to lose” mentality and relative lack of fear of the possibility of failure.

Of course, before we assume that today’s financial startups will be tomorrow’s masters of the finance universe, realize that the relationship between the finance startup (or the “disruptor”) and finance stalwart (or the “disrupted”) is very different from other industries. For the most part, it is an established financial institution or similar entity that enables a startup to provide any of its new, cutting-edge services. The relationship between the “disruptors” and the “disrupted” is symbiotic.

Dwolla? Guess what – they aren’t really moving your money – a regional Iowa credit union is. Simple, Moven, and (my favorite) Akimbo? They aren’t the ones issuing you a Visa debit card or holding your deposits; a federally insured financial institution sponsors the Visa program and controls every penny held in those accounts. Even the big payment startups like Square, ISIS, and Google Wallet, require not only financial institution partnerships but also partnerships with big processors like Fiserv. Regardless of the product, the financial startup likely requires a partnership with an established company in the same sector the startup is likely trying to shake up.

On the flip side, the disrupted can’t possibly take the risks that the disruptor is taking. It’s hard for established financials to invoke Mark Zuckerberg’s “move fast and break things” maxim when failure within an industry often described as a “house of cards,” can lead to a trillion dollar government bailout. Remember, in the finance industry, a giant can crumble in days simply because it lost the market’s confidence – the proverbial run on the bank. But, the smaller company, operating under a different name and leveraging the resources, scale and stability the larger institutions can provide, can take the risks and experience the necessary and inevitable failures in creating new, disruptive services. In finance, the two work together, and are both essential participants in the industry. There’s no Napster or Pirate Bay for management of financial assets, and it wouldn’t make sense for the industry even if someone wanted to build something like that.

Now, I can say from personal experience that bankers don’t necessarily always respect the non-bank startup, though. I once spoke with a senior executive in retail banking at JPMorgan Chase, who likely only took my phone call because someone even more senior made the introduction. He told me that non-banks like Akimbo didn’t belong in the space, and we shouldn’t be powering a service like a prepaid card. Currently, there is actually a growing consensus in the prepaid industry that the banks will take over the prepaid product entirely, and that there is little need for the non-bank prepaid provider. I can also speak from personal experience that many venture investors have expressed concerns about the fintech space being too crowded.

So, are there still opportunities for a fintech startup? Absolutely, and those opportunities, along with the definition of what a fintech startup even is, are growing and changing. If non-bank startups didn’t belong banks wouldn’t target them for acquisition, but they do all the time. If fintech is “too crowded,” why does almost every large financial institution currently operate some type of venture fund, focused exclusively on investing in early-stage companies developing new financial technology. Well, you can believe the flippant response of a venture investor basing his comments on “gut” and not research, or you can actually consider the numbers: there are more than 14,000 independent banks and credit unions in the US, all of which are potential partners, customers, or acquirers of innovation, especially if that innovation is pitched at consumer demand, solving real problems, and attacking the sometimes seemingly impossible goal of simplifying our financial lives.

The need for new startups entering fintech won’t end unless the need and desire for innovation ends, and we’ve already come too far. Consumers and merchants are already well down the path to killing paper money and even the analog wallet. Despite the oft-repeated “too big to fail” comment, banks very much fear the potential of failure (as does our federal government) which is why they need us fintech startups. We’re “too small to fail”: born and built to take the risks necessary to innovate and push financial services into the future.

[Illustration by Hallie Bateman]