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Creating the East Coast Silicon Valley

Financial technology sector offers opportunity for N.J. to stand out in growing industry

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People think of New York City or New Jersey first, not Silicon Valley, when it comes to financial technology, says Chris Sugden, managing partner, in his Lawrenceville office at Edison Ventures.
People think of New York City or New Jersey first, not Silicon Valley, when it comes to financial technology, says Chris Sugden, managing partner, in his Lawrenceville office at Edison Ventures. - (AARON HOUSTON)

Chris Sugden sees New Jersey as part of the East Coast's answer to Silicon Valley, at least when it comes to financial technology.

"For fintech, people don't think of Silicon Valley first," said Sugden, managing partner at Edison Ventures in Lawrenceville. "They think of New York City or New Jersey. The ability to sit in the shadow of the whole financial services industry plays such a huge role."

Financial technology – termed "fintech" in industry parlance – is broadly defined as applying technological innovation to financial services and products.

As transactions become increasingly paperless, both institutions and consumers are rapidly adjusting to a faster-moving financial world. Segments impacted by financial technology range from capital markets trading to wealth management tools and mobile payments systems, such as increasingly popular "smart wallets."

The stakes for fintech's growth are big at Edison Ventures, among the sponsors of the June 5 financial technology conference in Jersey City organized by the New Jersey Tech Council. Edison Ventures identifies financial technology as its largest sector.

Sugden said the fund has made 38 investments, averaging one to two new investments per year amounting to about $10 to $15 million annually in fintech. About 20 to 30 percent of Edison Ventures' annual investment is aimed at New Jersey firms, he said.

Interest in fintech spawned in the early 2000s when paying bills online was still a novelty, Sugden said. Industry development suffered a setback after the events of Sept. 11, 2001, and subsequent meltdown in the technology sector, but investment revived in the mid 2000s.

Tracye McDaniel, CEO of Choose New Jersey, a nonprofit that promotes business growth in New Jersey, says fintech growth has been dizzying when recalling that people were hesitant just to make online payments a decade ago. Today, online commerce is part of the fabric of daily transactions.

"Now we can do online banking on our mobile devices, and we can do that from anywhere in the world," McDaniel said. "This is all about speed, mobility and flexibility."

New Jersey is making small but visible waves in the global industry of financial technology with American Banker listing five New Jersey firms on its list of the world's top 100 fintech firms in 2012.

"If one of the top fintech companies in the world is from New Jersey, I think that's pretty impressive," McDaniel said.

Burdened by its own reputation as an expensive place to do commerce, New Jersey still appeals to businesses and executives who want to live outside of Manhattan for cost reasons but remain close to New York's financial district, Sugden said. McDaniel added that New Jersey's rich fiber optic network adds to the industry's appeal.

Access to an educated work force and plentiful customers are also assets, Sugden said, plus many executives left jobs in Manhattan after the financial meltdown of the late 2000s, instead becoming entrepreneurs seeking new companies to test their ideas.

"Sitting right across the river from Wall Street gives New Jersey an edge," Sugden said. "Our location, our proximity to New York City and players in the industry plays into our competitive edge."

Edison Ventures' portfolio of 12 companies includes New Jersey recipients Sciadvantage, a Jersey City firm involved in wealth management; Softgate Systems, a Fairfield firm focusing on retail payments; and Phx, a health care cost management company based in Bedminster.

The fund's notable exits include Gain Capital, a provider of online foreign exchange that in 2010 ranked among Inc. Magazine's 5,000 fastest growing private companies in the United States. The Bedminster-based company operates offices spanning Manhattan, London, Australia, Tokyo and other parts of Asia. Sugden said Gain capitalized on growing interest in foreign exchange trading, something fewer investors engaged in a decade ago.

Despite rapid advances, followers of fintech say obstacles continue to impede growth.

A sluggish economic recovery has restrained investment in nearly all sectors. Companies are still not spending confidently, a carryover from the recession of the late 2000s, Sugden said. Small companies in particular struggle with access to capital, and many lack balance sheets robust enough to absorb heavy costs, he said.

Sugden cited the complexity of new regulations impacting financial services. As rules from the Dodd-Frank financial reform legislation are still being written, companies are in a state of flux, he said.

"You don't know the rules you're supposed to be playing by," Sudgen said. "That creates uncertainty. People aren't going to invest if they don't know what the rules are."

Sugden remains optimistic long term. He said there is opportunity with the aging population approaching or in retirement, many of whom want to make financial decisions themselves rather than through an adviser, but require the necessary tools. That demand will open opportunities for fintech, he said.

Broadly speaking, people are using hard currency less and electronic payments more. The advance of cloud computing provides an avenue of growth, Sudgen said. New entrepreneurs, seeking to distinguish themselves with business models more nimble than traditional bricks-and-mortar banks, will continue to find attractive opportunities, he said.

McDaniel sees growth ahead as opportunities to gain credit and capital through crowdfunding and peer-to-peer lending increases. McDaniel said New Jersey, with rich human capital, is overall well positioned to draw entrepreneurs but still needs to step up its effort to draw talent to the state, both foreign and domestic. This will require strong collaboration with universities, community colleges and the private sector, she said.

"If we can nurture the ecosystem for startups and existing companies to grow and be innovative, New Jersey will be a game-changer," she said.

E-mail to: tomz@njbiz.com
On Twitter: @biztzanki

Write to the Editorial Department at editorial@njbiz.com

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