 |
Welcome everyone! Fun announcement for the second half of 2020: we’re going to be publishing more issues of Fintech Today 🥳
On Tuesday’s twice a month, we’re going to publish essays on fintech—on things like analyzing new sectors within fintech, or explaining business and product strategy, or outlining problems in financial services space that need fixing. These are topics I’m thinking and talking about constantly, and it helps me synthesize my ideas when I put them down on paper too. Hopefully these essays serve as a jumping off point for entrepreneurs and almost-founders who are thinking about ideas to build, but also as a way to have more discussions as a community.
If you every want to talk about the ideas in these essays, feel free to send me a note at ian@fintechtoday.co.
8 Fintech Questions For 2020
by Ian Kar
 |
When thinking about the world so far in 2020, it's hard to think about anything besides coronavirus. And the pandemic and shelter-in-place orders were so abrupt that we haven’t been able to appreciate how much has happened in fintech, both pre and post-COVID. Pre-COVID, we saw massive acquisitions in the space. Post-COVID we’ve seen tremendous strides in the legitimization of fintech companies—advancing underbanked Americans their stimulus payments, helping small businesses apply for PPP loans, and a stronger relationship between startups and the federal government, with more on the way with PPP loan forgiveness work on the horizon.
With so much uncertainty, the only thing we can be sure about is that everyone in the fintech ecosystems has questions right now, so I jotted down my thoughts and questions in fintech for the rest of 2020 and beyond.
Please definitely reach out to talk about any of these questions, and stuff you’re thinking about too. Hopefully they’ll be the groundwork for future essays.
Do Consumer Fintech Businesses Grow In A Down Economy?
One of the issues around fintech startups over the past few years has been whether or not they can survive a down economy. Because these companies and their underlying business models were so new, would they be resilient enough to withstand an economic downturn?
Some companies have been preparing for the inevitable economic slowdown—just look at lenders. Square secured a $1 billion convertible note on March 3rd, right before the Coronavirus locked everyone in their homes. Lending Club opted to expand into a new product line—buying Radius Bank for $185 million to add a banking-as-a-service revenue line.
But the downturn turned out to be a complete half to the economy. It’s a scenario that not many have prepared for in general, much less fintech. During COVID, while other industries have been struggling, consumer fintech has been surging.
Current, the neobank which recently raised an undisclosed amount from Angus Davis at Foundation Capital last month, shared some stats with CNBC that shows strong growth so far this year:
“more than 100,000 users a month in April and May
Exceeded 1m active accounts, expects to double this year
Fully 50% of the bank’s user base are Black, Sopp said, citing an internal estimate based on user photos and commercial data. The average age of Current customers is 27, and they are clustered in cities including Atlanta, Dallas, Chicago, Los Angeles and New York’s Brooklyn, he said. Users spend about $1,100 per month, almost entirely on necessities like groceries…”
Propel, which runs an app focused on food stamps called FreshEBT, is also showing similar growth. FrestEBT started the year at 2 million users, and added 1 million in only a “few weeks” because of COVID, according to an interview with Propel CEO Jimmy Chen last month.
In chatting with VC’s, some have wondered whether this implies that some consumer fintech businesses can be countercyclical in a down economy. My guess is yes, but it’s not a blanket answer: there’s something unique about these particular companies. As Current CEO Stuart Sopp pointed out, a lot of the growth has been fueled by essential workers. But within that group, I think a lot of the growth is fueled by the financially savvy underbanked demo. They’re not only earning money now through the need of essential workers, but they’re also budget conscious and may have previously suffered from financial hardships during the 2008 crisis, so are preparing in advance now.
Will We See More Fintech Acquisitions This Year?
Pre-COVID, 2020 was all about massive fintech acquisitions. Visa bought Plaid for $5.2 billion, Intuit bought Credit Karma for around $7 billion, Lending Club bought Radius Bank for $185 million...the list is long.
And it didn’t stop with COVID either. SoFi bought Galileo for $1.2 billion and Hong Kong-based 8 Securities for an undisclosed amount. In June, MasterCard bought Finicity, a Plaid competitor, for around $1 billion.
We should expect to see more acquisitions over the rest of 2020. Why? Cash rich companies are still biding their time and waiting for valuations to drop—the public markets have been wild, so things are still really expensive. On top of that, the macro economy has been propped up by trillions in PPP loans, which have helped companies pay employees and their bills, and consumer stimulus packages, among other initiatives. Eventually, that’ll dry up, which means more companies will be looking to sell. The ingredients are ripe for an eventual acquisition boom.
Back in January, I broke down a bunch of acquisition scenarios. Now, things are so crazy I have no idea what to expect. Will we see other consumer companies buy infrastructure startups? Will we see tech companies buy consumer companies? Will private equity firms get more involved in fintech? No idea, but definitely expect some more shakeups in 2020.
If you’re reading this and not an FTT+ subscriber yet, why not? Sign up today and get locked in at our $25/month rate for the first year. Or pay annually and get 15% off.
Join 300+ other in the FTT+ community today!
What’s The Next Evolution In Consumer Fintech?
I feel like so many VC’s I speak with are complaining about the lack of compelling consumer fintech products. Much of this argument revolves around neobanks and how “everyone can make a neobank now” and “how easy it is nowadays to make a debit card.”
And there’s some truth in that: infrastructure improvements have made it cheaper and easier, and the glut of consumer fintech companies has made the sector overhyped.
But in the first half of 2020, overhyped neobanks went from a contrarian opinion to a major industry talking point.
It might be contrarian now, but I think there’s still a lot of growth in consumer fintech. COVID’s a clear catalyst: neobank adoption is accelerating and the need for digital financial products that help people with money management, earn more, and save wisely are increasing dramatically. The next wave of consumer fintech startups will focus on getting more money in people’s wallets: helping people earn more and increase their spending power.
But there are other areas as well—financial literacy for Gen Z seems relatively untapped, r/wallstreetbets and the gamblification of stock trading is becoming a community ripe for its own set of products, a new era of creators are generating massive amounts of income and are being left behind by traditional banking systems.
What’s The Next Wave Of Banking-as-a-Service?
The banking-as-a-service sector saw a massive shift in 2020—Galileo, which powers Chime, Revolut, etc, was bought by SoFi for $1.2 billion, and it remains to be seen how that’ll play out. In the short term, it seems like a big plus—SoFi adds a new revenue stream, and can now partner with massive consumer players like Samsung.
But that wasn’t the only big acquisition in the space—Radius Bank was snapped up by Lending Club for $1 billion in February. So already in 2020, we’ve seen some big exits in the financial infrastructure space.
My guess is that the interest in the banking-as-a-service industry isn’t dying down any time soon—from investors and acquirers. There’s still a lot of innovation to be unlocked:
Open source banking, where a company offers a banking infrastructure product to users for free, like Moov.io.
Other areas of banking, like DriveWealth & factional investing, and Alpaca and wealth management.
Other regions, like ArcusFi and Latin America (disclosure: I’m an advisor to ArcusFi.)
What’s remote work’s impact on fintech and financial services?
COVID’s going to have some massive macro shifts in the economy and everyday life, both of which will have an impact on the fintech industry.
Remote work’s a great example. Most fintech companies can handle the work from home shift—remote work hasn’t been that prevalent in fintech, but companies are flexible to an extent. Banks, however, have been struggling, especially areas that have resisted digitization historically, like mortgages. The average age of people who work in real estate is 48.3, and the pre-COVID process for buying a home was manual and paper-heavy. Now, with COVID forcing people to work remotely, the entire home purchasing process has changed.
My hypothesis is that banks are going to be forced, finally, to digitize their systems. This is going to lead to a unique selling opportunity for B2B fintech companies, as financial institutions are going to find it more necessary than ever to improve their processes and streamline operations.
This could result in two things: banks using tech that replaces entire areas of operations, or banks using tech that makes it easier for an employee to do their job. I think there’s a huge area around improving workflows and digitizing paper-heavy operations at a bank first, then using that wedge to your customers on a new product that actually executes the task. I’m sure we’ll see a ton of different business models and go-to-market strategies around banks over the next few years.
What’s Embedded Fintech’s Impact On Fintech Startups?
Embedded fintech, a concept of upselling an existing user base—customer or merchants—on financial products developed in-house or through partnerships, has invigorated the fintech industry over the past year. Apple, Samsung, Uber, Airbnb, Shopify, and a dozen of other companies have either explored, announced, or launched fintech products over that time.
I think embedded fintech will have a lot of repercussions on the fintech ecosystem. I’ve been worried about the issues this trend will cause for non-infra fintech startups and you can slowly see playing out in the business banking space. If I’m a Shopify merchant, why would I use Mercury or Novo over Shopify Balance, the e-commerce company’s new business banking product? A number of undisclosed B2B tech companies are thinking about adding financial products around banking and deposits to better serve their users.
Competition in fintech has always been fierce; startups have always had well capitalized incumbents to go against. But this trend is enabling companies that can create high quality digital experiences that financial institutions can’t and startups don’t have the data to execute. I do think startups survive alongside non-fintech companies selling financial products, but I do wonder about the split between the two groups, and whether embedded fintech could cause fallout concerns in other areas of fintech too.
How Will Data Aggregation Issues Evolve with Visa’s Plaid Acquisition?
Consumer data issues are such an underlying issue in fintech. It’s something that you won’t see a lot of talk about on Twitter, but its a topic that has tremendous implications for the industry.
Essentially, the banks and Plaid have been arguing about consumer data for years now, debating things like access, portability, etc. Things seemed to be coming to a resolution—the banks and Plaid came to an agreement—but things got more complicated in 2020.
The card networks, which have been sitting on the sidelines, jumped in by buying Plaid (Visa, $5.2 billion) and Finicity, another data aggregator (MasterCard, $1 billion.)
There’s a lot to dive into about the future of financial data and the relationship between banks and credit card networks. At a high level, it looks like networks are worried about being left out. In payment networks, credit card companies are essentially middlemen. With data, they can be brokers—making bank data more accessible to developers.
I do think banks will look aggressively into figuring out a way to cut out the middleman—work with developers directly themselves. Still TBD if they’ll be able to pull off a way to attract developers though.
How deep is COVID’s impact on banking?
This is a similar question to the remote banking one, but way more complicated. It’s going to take a lot of work and time to figure out COVID’s impact on banking. I’m not sure if we’ve ever had just a prolonged, abrupt, stop to the economy ever. Or as much money poured into the financial system as we have over the past few months. What’s the long term effect of that look like?
It’s a complicated question but fintech will undoubtedly play a role in the solution. Tech driven financial services products have shown that they’re resilient, stable, and useful enough to keep around. The value they added to underbanked Americans and small business owners was profound and COVID would have had a much worse impact for those demographics without fintech’s involvement.
COVID could lead to a lot of new startups too. As more problems and holes in the financial system become more obvious post-COVID, entrepreneurs have a whole new crop of issues to solve.
