Forget Silicon Valley: Why Boston Is the Ideal Home for FinTech Startups

If you’re thinking of starting a financial technology startup, you might ask yourself where to hub the company? You’ve probably read through the exhaustive rankings from Forbes to U.S. News on which city has the best startup environment. Now you’re suffering from information overload. We’re here to urge you to look no further, and seriously consider Boston. Boston is and will remain the perfect home for FinTech startups today and for years to come. Read on to learn why we’re so confident.

The financial industry was born here: Boston has been the home for innovation since 1630, the year it was founded. As a port city, it attracted trade and other entrepreneurship. It’s not surprising that the city’s founding flavor set the tone for the innovative city Boston would become. To support the wealth of individuals who’d made it big through trade, and the industry as a whole, Massachusetts Bank was opened in 1784. This was the second bank in the entire U.S., and the first in Boston. Since then, the city experienced rapid growth in banking, suburbanization after WWII, the rise of corporate finance, and job growth in the city led by the Prudential’s establishment in the 60s. Modern-day Boston has one of the most diverse financial industries including VCs, mutual funds and private equity companies.

Boston brains gave rise to modern computer: In parallel to evolution in the finance industry, unprecedented technological innovation was taking place in Boston. The government donated land to Massachusetts through the Morrill Land Grant in 1862, and *voila!* MIT was born. The university became an important research hub for defense during WWII. Their quest to build a flight simulator turned into the development of a high-speed digital computer led by the genius Jay W. Forrester. This was one of many cutting edge projects led by MIT in a public-private-academic partnership. MIT’s research contributions didn’t stop there. The Artificial Intelligence project established in 1959 led to innovations that are embedded in our society today – image-guided surgery, natural-language based web access and robots used for planetary exploration.  And in 1963, Project Mac was founded leading to the inspiration for the Unix operating system. The people of Boston were disrupting before disruption was a buzzword.

Universities such as Harvard, Boston University and MIT were not the only ones pushing the boundaries of technology. Companies such as Digital Equipment Corp. and Data General began to spring up along the famous Route 128. The minicomputer revolution of the 70s happened here, and quickly transitioned Boston away from a manufacturing economy. Land was cheap and conditions were ripe. Locals began calling the area the “Massachusetts Miracle” because of the positive impact these companies had on the economy.

However, the lack of response of computer manufacturers to the demand for personal computers, and the lack of investment in early-stage startups led Boston to lose it’s prominence as the epicenter of technological innovation. Several high tech companies found their way to Silicon Valley.

Despite these dark days, Boston is now back in the game in several industries including the life sciences, mobile + SaaS, and intelligent systems. Industries driven by intelligent systems, such as FinTech are currently small, growing and have long term potential for growth.

 

Why modern-day Boston is THE place for FinTech innovation:

Now that you have a historical rundown of finance and technology in Boston, let’s talk about Boston today.

Research Universities Yield Talent and Innovation: What happens when you have a city with 60+ research universities? You benefit from a city whose universities spend $4 billion on research annually compared to the Bay Area, which spends $1.3 billion. You live in a city with some of the smartest people. You’re handed a springboard for innovation.

Public-Private Partnerships for Quality Human Capital: Since WWII, innovators in Boston have taken advantage of strong public-private partnerships. Startups now have the opportunity to do the same, and to make sure that universities are producing the quality human capital they need for the future of FinTech. One important aspect of FinTech human capital includes data scientists. The demand for data scientists in Boston is high, and the Boston Financial Services Leadership Council predicts that there will be 120,000 additional ‘big data’ jobs by 2018.

Keep the Old, and Bring in the New: Innovation in Boston is based on looking to history, discerning patterns in the gaps, and filling them. Innovation in SF is often disrupting the system completely, and starting anew. FinTechs have been more successful when they partner with and collaborate with traditional financial institutions lending to the idea that Boston is a better environment for these startups. As FinTech’s mature, the need for these partnerships have become more evident. Now companies like Fidelity even fund accelerators such as FinTech Sandbox, that support early-stage FinTech companies to ensure continued growth in the industry.

Increase in VCs funding FinTech: There’s been an increase in the number of FinTech VCs in Boston including Vestigo Ventures, Hyperplane VC, and Good Growth Capital, and corporations with venture capital groups such as MassMutual and Liberty Mutual funding several impressive FinTechs. This is just the beginning, and we predict continued growth both for early and late stage startup funding.

Merging of FinTech and Behavioral Economics: Two of the hottest fields are beginning to merge in Boston – FinTech and behavioral economics, a method of economic analysis that applies psychological insights into economic decision-making. Behavioral economics also has roots in Boston. A course that was led by Howard Raffia for Harvard students to teach them statistics to business students, was later termed as decision analysis by Ronald Howard at MIT. A decade later Daniel Kahneman and Amos Tversky put out research that was later coined behavioral economics. The practice has been used to customize financial services based on behavioral data.

 

Other cities with FinTech potential:

There are certainly other cities that have long-term potential for FinTechs outside of Boston. These cities share a few key traits. Experts have noted that cities that have friendly regulation for FinTech startups are more likely to invite growth. That seems logical enough, and we’re seeing exactly this. Palo Alto, Berlin and Hong Kong are not meeting this criteria. On the other hand, London and New York are. The Financial Conduct Authority’s Project Innovate in London has even created a ‘regulatory sandbox’ to allow businesses to test out innovative financial products without fear of legal consequences. Entrepreneurs in Boston say there is a lack of early-stage investment in FinTechs, which can be found in NYC, the largest hub of FinTechs and with a booming finance industry.

 

Cinch Financial believes Boston still takes the prize:

In the end, Cinch Financial speaks from experience when we say there’s no better home for FinTech innovation than Boston. Cinch was created to serve as a fiduciary to the end user, leveling the playing field by bringing the same transparency and information available to the big financial companies directly to you, in the simplest, most efficient way. This means evaluating the entire product universe to make sure we double check every possible option for you. And as a fiduciary, we cannot accept any revenue from product providers, as that would be in direct conflict with our purpose.

As CEO Sean Collins (a guy originally from the Bay Area, mind you!) says,

”At Cinch, our focus is on solving the real problems people have, not using fake help as a front for lead generation for ads or a crappy financial product you probably don’t need.  It seems like nearly every CA-based company in consumer fintech has a revenue model dependent on lead gen or account-opening arbitrage.  I think that’s because it’s easy to build and monetize even though their user is actually what they’re selling for money.  The ghosts around Boston’s financial history would haunt us if we ever did that, and those are pretty scary spirits.”

 

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