Before we jump in, have a fun community event for FTT+ subscribers: a 1 hour off-the-record Q&A with Blend CEO Nima Ghamsari. Blend started out as a software platform to help mortgage lenders improve the origination process. The company has expanded to a suite of digital software solutions for institutions, including auto loans and insurance.
FTT+ subscribers will be able to access the entire Q&A and ask questions in the chat. Just sign up here:
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Below is the beginning of a multi-par series running the rest of the year, “Fintech Bubble or Fintech 3.0.” If you’re interested in the full report running later in December, hit the link below. The full report will feature expert commentary and will be released for free a few weeks early if you sign up now:
Ian here. As you probably already know, I'm an obsessive person by nature and nothing gets me more excited than a big thematic question around fintech.
Ever since this summer, I've been spending even more time wondering where the fintech industry is headed. I've been around the space since 2014—when I was a 21-year-old reporter at an industry publication called Bank Innovation. Definitely not a long time compared to a ton of other people in the industry, but for me, it's been most of my adult life.
I think now might be the most bullish I've been on the fintech industry in a long time, despite concerns over a bubble. Why? My answer is that there seems to be a ton of growth ahead, and even if some valuations seem high now, many will grow into them fairly quickly.
COVID has dramatically accelerated the impact fintech is having on society, culture, and the US financial system. Technology-first financial services firms are working with financial institutions and regulators more closely than ever, and that relationship is still pretty new. Fintech companies are forcing strategic changes at financial institutions (practically every brokerage dropped trading fees because of Robinhood) and the broader technology industry and Silicon Valley too.
COVID related growth has caused a ton of increased interest in the fintech startup ecosystem, which is where a lot of folks have privately been debating if there's a bubble or not. Some ingredients are there—companies are raising more money, earlier, than ever before in this industry. Teams are being formed earlier and getting funded while still at their existing jobs. But fintech is unique, with a lot of dynamics that make these kinds of investments more palatable than in other sectors of tech.
There's probably both a bubble and a new wave of growth happening concurrently. Pretty unusual, but it gives me the opportunity to give a high-level overview.
Before we dive into what's going on now, it's important to break down what's happened in the fintech industry over the past few decades. Otherwise, what does 'Fintech 3.0' mean anyway?
When I first got into fintech, the early history of PayPal and payment rails on the internet digitizing commerce was fascinating to me. But payments are only one small sliver of fintech—I put most of that stuff into a Fintech 0.0 phase—when entrepreneurs needed to just build out the basic financial system for the internet. That process was so much more complex than it sounds—it required building new systems around risk, fraud, onboarding, card validation, identity validation. Absolute nightmare.
But fintech to me is using technology to change financial services, which I think started with marketplace lenders like Prosper and Lending Club in 2006. Fintech 1.0 leveraged cool, tech-first concepts like marketplace technology to make traditional financial services more efficient businesses. For peer-to-peer lending, companies thought that by making a platform to connect borrowers with folks with capital instead of using a bank’s capital, you can make a software business and generate revenue by collecting a fee as the servicer.
The problem is you eventually need a stable and cheap source of capital, otherwise, the loans aren't worthwhile. And at the end of the day, it's a unique way of making the same sort of loan product.
Fintech 2.0 was the beginning of digitally native financial services firms and the infrastructure companies that powered them. Operators and future entrepreneurs were realizing that you can use tech to not just make financial products more efficient, but market and acquire customers through digital channels as well. While companies like Lending Club were known to focus on acquisition channels like direct mail, companies like Chime, Acorns, Robinhood, and other consumer fintech companies acquired customers through digital platforms like Facebook, Instagram, Twitter, and Snapchat. These long term, analytics-driven, customer acquisition strategies have helped these companies grow to millions of customers relatively efficiently.
Not only was it becoming easier and cheaper to acquire customers than before, but creating natively digital customer experiences was getting easier in fintech too. Chime CEO Chris Britt left GreenDot and convinced Galileo to create external API’s for third-parties, which led to a mutually beneficial partnership: Chime’s grown to become one of the most highly-valued fintech companies in the US, and Galileo sold to SoFi in a $1 billion deal.
While consumer fintech companies continued to attract VC dollars in the first 3-5 years of Fintech 2.0, a lot of the capital and entrepreneurial interest has shifted towards the infrastructure space.
The early infra companies that have enabled these consumer fintech brands are seeing tremendous success with proof of strong exit by possibilities—the Plaid and Galileo's of the world have had billion dollar exits in 2020. And some of them are still early—Alloy just raised its Series B round, and is the KYC provider behind many fintech companies.
There's a solid argument that we're still in the midst of Fintech 2.0 while the early stage pre-seed and seed startups are laying the groundwork for the next wave of innovation. While Fintech 1.0 showed entrepreneurs that there were untapped ways to acquire consumers, Fintech 2.0 has shown founders that there is a ton of untapped opportunities in improving the actual US financial system.
Some founders are more around deep infra problems like core banking or money movement; others are focused on more "up-stack" issues, like risk assessment and improving credit building experiences. Others are focused on improving the technological infrastructure around stock trading, 401k's, IRA's, health and other types of insurance, payroll, credit and lending, and a plethora of others sectors.
It’s been harder to identify novel consumer fintech companies, but for a large subset of consumers, banking still isn't solving their needs. Even the innovations around decreasing the costs to bank these customers haven't resulted in an actual increase in wealth for certain demographics. Demo's living paycheck to paycheck or small businesses that are trying to scrape by are largely trying to figure out how to increase their earnings, not figure out how to optimize their paycheck.
More next week…
