(13 min read)
Executive Summary
Fintech is only just getting started. Some of the largest tech companies of the last decade emerged in the downturn of the 2007-2010 great recession, providing incredible returns to investors who didn’t shy away from backing visionary founders.
Today’s market shares a similar sentiment with both founders and investors focusing on building sustainable businesses with a focus on profitability from day zero. Instead of chasing vanity metrics, teams are building lasting products that solve very real problems.
The financial services space is ripe with problems and inefficiencies. There’s a slew of founders who are tackling these challenges and building the next wave of innovation across financial technology through embedded, enterprise and platform led solutions.
Fintech is no longer just siloed in the financial space. It is at the core of every industry under the sun, and at intersections with adjacent verticals like healthcare, climate/mobility, future of work and other budding spaces.
At Fiat we believe that financial services, especially fintech, is still in its infancy. We see the adoption of disruptive technologies fueling a better customer experience as well as reducing systemic inefficiencies. This will only continue to accelerate the rate at which financial services, especially fintech, grabs a share of the economic pie.
Financial technology is also one of the greatest enablers of financial mobility and inclusion. Founders continue to prove that it’s possible to both do good and perform well as new customer segments are reached. We remain committed to backing these founders.
These are just samples of themes that we believe will set the pace for the next wave of financial innovation. Our view of the market isn’t limited to just us, as others also share that:
Annual fintech revenues are projected to grow more than sixfold from 2021 to 2030 to reach $1.5 trillion globally
Even after such rapid growth, fintech would only represent a fraction of the global financial services revenue pool, which stands at an gigantic $12.5 trillion, with $2.3 trillion in net profits
The global embedded finance segment alone was valued at $65.46 billion in 2022 and is expected to grow at a compound annual growth rate (CAGR) of 32.2% from 2023 to 2030
Introduction
It is believed that the origin of fintech can be traced to the laying of the first transatlantic cable in 1866 and the Fedwire in 1918. The next turning point was the introduction of the Diners Club card in 1950, then ATMs in 1967 and global SWIFT transactions in 1973. The introduction of smartphones, putting super computers into each of our pockets, catapulted fintechs in the 2010s as new startups unbundled traditional financial services.
During each of these eras, there were instances (inflation of the 1970s, the dot-com bubble of the late 1990s, the global financial crisis of 2008) when many believed that financial services would never recover from the shock or correction that the system was going through. In each instance we saw a rebound which brought with it a better and more robust financial services ecosystem that had more defined regulatory guard rails around it.
Looking at events that have transpired up to September 2023 - a time when 3 large US banks have failed, the Fed rate is at a 22-year high, and risk capital in fintech is hard to come by; we are witnessing a similar turning point or correction in the history of financial services. Though the sentiment might be muted right now, all fundamentals and historical patterns point in the same direction of a healthier financial system.
Today the market, and in particular fintech, sits at another inflection point.
Zooming in a bit more, a less optimistic sentiment is understandable. This pessimism for the future of fintech is largely driven by venture capital (VC) investment into fintech startups hitting their lowest level since 2017. This is matched with a sharp decline in valuation of marquee fintech startups like Stripe, Klarna, Chipper, and Revolut along with increased public distrust in financial services after the failure of Silicon Valley, Signature, and First Republic banks.
Looking at these events in isolation is myopic.
Capital deployment by VCs has slowed down significantly given reduced availability of capital from Limited Partners (LPs), institutional investors who back venture funds. These allocators are being impacted by a trend known as the “denominator effect”, or the rebalancing of investment portfolios toward less risky assets as public market portfolios shrink in value. Persistent inflation, higher cost of capital due to rate hikes by the Fed, supply chain disruptions in light of the Ukraine-Russia conflict, and the recently resolved debt ceiling debate are all impacting the venture market as a whole.
Despite some of the doom and gloom articles you’ll read on the fintech space, these stark downturns aren’t exclusive to the fintech space. For example, sectors such as climate-tech and health-tech witnessed a 40% and 41% drop in venture funding raised respectively. The broader market correction has impacted venture investing across most categories.
Financial Technology is a Key Component in the Monetization of Every Industry
The first wave of innovation in the early 2010s resulted in the great “unbundling” of financial services and the emergence of several direct-to-consumer businesses. While these businesses are relevant today, the market is evolving to support a new wave of innovation where fintechs remain a core part of every product and service across all industries. Whether it’s associated with finance or not, it’s important for every service offering to more naturally embed financial offerings into their own platforms (e.g. insurance, lending, payments, risk/compliance, credit building).
While some may think that fintech is a mature market, we believe it’s still in its infancy.
As per a BCG and QED Investors report, “annual fintech revenues are projected to grow more than sixfold from 2021 to 2030 to reach $1.5 trillion”. Even after such rapid growth, fintech would only represent a fraction of the gigantic $12.5 trillion global financial services revenue pool (with $2.3 trillion in net profits) - an ample ocean for fintech to thrive in.
Below are some of the main avenues that fintech is continuing to push the boundaries of traditional financial systems and maturing into the next wave of financial innovation.
Evolution of Existing Fintech Business Models
A key observation of fintech is that the rapid evolution of segments that drove fintech’s initial growth are not the ones that will drive its growth into the future. For instance, Payments. Payments accounted for 40% of all fintech revenue in 2021 and is expected to remain the largest fintech segment in 2030.
Source: BCG Investors Report
While “buy now, pay later” (BNPL) solutions accounted for a significant chunk of capital raised within Payments from 2021 to 2022, the focus is now shifting behind the scenes to enterprise and embedded fintechs with a business-to-business (B2B) model. These companies are focusing on core payments processing capabilities, robust business models and sub-segments like cross-border and real time payments.
For example, three new payment startups were added the to Forbes fintech 50 2023 - GlossGenius, MudFlap, and VizyPay. All three are building B2B solutions that target niche customers and offer value beyond just processing payments, thereby allowing their customers (usually non-financial businesses) to do more at Point of Sale. Other emerging players, like Lunch Payments, are focusing on digitizing payment processes in legacy verticals that largely remain dependent on paper checks and 120 invoice cycles.
Many of these businesses found success domestically and in developing markets. Of the 20 neobanks that were profitable in 2022, 11 were in Asia Pacific including Bank Jago in Indonesia and Kakao Bank in South Korea; similarly, NUBank, the largest neobank in the world, is HQ'ed in Brazil.
Neobanks in the US and Europe have had to adapt and explore new strategies such as partnering with or acquiring regional banks to navigate regulations, focus on business customers rather than retail accounts, and increase product offerings. The ones that have done so successfully have been rewarded with increased traction; for example Mercury added $2 billion in deposits after the SVB crash or Monzo’s launch of its Plus and Premium subscription services lead to an additional £11 million in revenues from 2021 to 2022.
Source: BCG Investors Report
Additionally, banking services such as Copper Banking, have focussed on the teen and parent banking relationship. They facilitate common behaviors like receiving from parents, saving for the future, sending P2P payments and investing. There are over 100M+ teens and parents in this market who have yet to be reached and they already have 2M+ users on their platform. By going deep with a full suite of products for a closely understood community, the path to profitability has been much more achievable.
This is also why Fiat looks closely at how fintech can help serve underrepresented communities in these markets. For example, affinity focussed fintechs such as Sigo Seguros are providing insurance solutions for LatinX Americans that typically aren’t able to secure insurance through traditional models. Understanding these communities creates a wedge to offer additional financial services that are specific to these loyal demographics. This isn’t just the right thing to do, but provides access to a large and quickly growing audience. A perfect example of how doing good and performing well aren’t mutually exclusive.
Increasing Focus on Embedded Solutions
As adaptation and product diversification grow in importance, it’s created a wake for new segments that are becoming increasingly important to the future of fintech. This evolution has led to the rise of Embedded Finance, or B2B focused businesses building Enterprise grade solutions.
Grand View Research, a business consulting firm, states the global embedded finance segment was valued at $65.46 billion in 2022 and is expected to grow at a CAGR of 32.2% (and 31.4% in the US alone) from 2023 to 2030, dwarfing the 6% CAGR that global banking and insurance are expected to grow at. Embedded finance has already permeated payments, lending, insurance, and created category leaders such as Plaid, Codat, Resolve, and Zeta.
Source: Grandview Research
Embedded finance has also removed friction from the sales process to the extent where consumers can now access almost all financial services without interacting with a financial institution. And if credit cards have shown us anything it is that once customers get a frictionless experience, they stick with it.
As we foreshadowed in our 2023 fintech Market Trends Report, the rise of embedded finance is inevitable and it is better for all stakeholders involved - customers do not have to worry about paperwork, businesses have quicker access to the sales proceeds, and financial institutions can focus on core capabilities and product development rather than chasing customer acquisition.
Fiat Ventures is a proponent of how integral embedded finance will be to the future of not only financial services but multiple other industries, especially in the enterprise segment. Here, companies are looking to offer their customers best-in-class financial services products as well as automate or replace functions that are highly manual.
Consequently Fiat has supported startups across a spectrum of embedded finance, like embedded banking where Sunlight is offering a card-on-file API allowing any company to make their own card top of wallet more seamlessly - you can read why we think Sunlight is a winner in the making here.
Similarly in embedded insurance, Trellis is providing an embedded solution that allows fintechs, financial institutions and insurers to better pre-fill insurance data via an easy to implement API, so consumers can view insurance in their native, trusted financial context (e.g their Chime app).
A final example is Simplist who offers a fully white label solution to offer mortgage and mortgage refinancing solutions through an easy to integrate API. This allows financial service firms and startups alike to help consumers bind offers at a reduced cost and with a much better experience.
Fintech+: Expansion into Adjacent Verticals
A fascinating aspect of the evolution of fintech has been its entering in and blending with other sectors such as healthcare, climate/mobility, future of work and other adjacent verticals. These segments have continued to undergo their own digitization across platforms, opening up opportunities to more seamlessly plug in financial solutions as well.
As we outlined in Fiat Ventures’ 2023 fintech Market Trends Report, fintech is addressing critical challenges in each of these sectors and democratizing access as well as improving user experience through smoother transactions and increased transparency.
The opportunities at these intersections are a trend that we refer to as “fintech+”.
Starting with healthcare, there is potential for fintech to dramatically lower costs and increase accessibility. As per the Center for American Progress, health care payers and providers in the US spend about $496 billion on billing and insurance-related (BIR) costs annually, which is about twice the necessary amount. This can be proactively tackled by incorporating fintech solutions that automate revenue cycle management.
Similarly as per a survey by Gallup, 38% of people surveyed, the highest in 22 years said that they or a family member postponed medical treatment in 2022 due to prohibitive cost. This represents an opportunity for fintech to make financing for healthcare needs accessible and affordable for Americans.
Source: The Commonwealth Fund
Fiat Ventures firmly believes that the intersection of healthcare and fintech is a uniquely-positioned opportunity that will rapidly grow as an increasing number of carriers and healthcare providers update their systems, introducing new forms of underwriting and embedded financial solutions.
For example, Sunfish is a startup focused on providing better lending solutions and guidance for families seeking fertility treatments. Their recent adoption of AI technology to vastly increase underwriting capabilities to provide consumers with a “warranty” product when undergoing costly IVF programs. This isn’t just a market first, but has a potential positive impact on thousands of aspiring parents.
Another portfolio startup, Dani, is allowing its users free access to Dental coverage in exchange for watching content while brushing teeth. Dani is an example of a new-age solution that is mission driven while providing healthcare for millions of Americans who traditionally don’t have access to insurance through their employers.
Finally, Sheer Health is inserting themselves between insurers and patients to provide necessary transparency to what often feels incredibly confusing and opaque. They act as a personal benefit concierge, helping to better understand benefit plans, recommend a plan that’s right and understand upcoming medical costs. They will also review past denied and rejected claims to overturn errors (which are frequent) - saving consumers time and money.
Advent of Artificial Intelligence in Fintech
Artificial intelligence (AI) has been a hot topic of discussion ever since OpenAI released ChatGPT exposing the incredible power of to millions of new users. Whether you love or fear AI is a personal choice, but there is no denying that it is going to (and already has) disrupted a number of global industries.
AI is going to be a major part of every industry, fintech is no exception.
From Marqeta testing the use of OpenAI’s Large Language Models to allow its customers to navigate through offerings via interactive Q&As, thereby drastically reducing time spent on coding and testing to Stripe using OpenAI to ease the process of searching through developer documentation - AI is going to dramatically improve fintech where automation and agility play a big role.
The rise of AI has deeply impacted another vertical, compliance tech or “regtech”, which is slated to be a $53.37 Billion market by 2030, growing at a CAGR of 23.92% from 2023. We can see immediate potential applications of AI such as automating data collection and verification, assessing possible fraud, and quicker adherence to changes in regulations. This presents the opportunity for fintech startups that are using AI to build solutions for financial institutions, to expand their offerings to customers in other sectors and even governments. Some regtech companies using AI to deliver high performance services include ComplyAdvantage, MindBridge, and Sift.
Source: Research and markets
While we are of the opinion that AI is not a moat, the possibilities these tools create are endless and our portfolio companies have quickly adopted this technology to try to unlock competitive advantages.
For instance, Lunch, a B2B finance solution that enables businesses to get paid faster for their invoices, has equipped team members with GPT-4 to support daily task completion such as revising marketing material and building unit tests for segments of code; thereby, using AI to expand efficiency of independent team members. Similarly, Conduiit, a platform designed to offer a one-stop shop for payroll, insurance, accounting, and communications in film and TV productions has the team working to create AI tools to help users find public information on its website and reduce errors in wire transfers.
A Slow but Momentous Entry of Big Tech
When we think of fintech generally the image of an up and coming startup comes to mind. However as recent events have shown us, the newest entrants in fintech are some of the biggest companies in the world, who not only have unparalleled brand recognition but also deep pockets capable of bringing a massive shift in how fintech operates.
Apple, for example, has effectively become a neobank by partnering with Marcus by Goldman Sachs to offer a high yield savings account to retail customers and this is on top of the already massive push Apple has been providing its credit card offering, Apple Card. Tesla is also offering insurance on its cars that personalizes monthly premiums based on driver’s driving behavior, marking a change in the current insurance model that will push legacy insurance companies to incorporate alternate data in deciding policy offerings.
Finally, the biggest entry of them all - National governments are betting big on fintech either through deep investments in infrastructure or via committed capital for supporting fintech companies.
For instance, the US government recently announced the launch of FedNow, which is an infrastructure level intervention enabling instantaneous settlement amongst businesses as well as individuals. Marcos Fernandez, Managing Partner at Fiat Ventures, recently joined NASDAQ Trade Talks to discuss the potential implications of FedNow and believe that this development has the potential to bring new ideas to the US payments space like what we saw with the introduction of Pix in Brazil or UPI in India.
Similarly the UK government launched a £1.27 Billion fintech Growth Fund focused on propelling the fintech ecosystem across the UK by investing £10 million- £100 million into fintech companies. This fund is backed by heavy-hitters like Mastercard, Barclays and the London Stock Exchange Group, indicating the faith that these organizations have in the future of fintech.
These big capital investments from leading corporations and governments are a strong indicator of the long-term opportunities in fintech and how there is an upcoming turf war where there will be more than one winner. These large government and Fortune 100 companies can’t all build solutions themselves, instead they will rely on fintechs to help them launch products into the market.
Closing Remarks
Over the past decade fintech has been on the rise, changing the very way consumers and businesses interact with financial institutions and each other. Innovation over the next decade, while shifting to a more embedded and integrated focus, will continue to propel fintech solutions into the forefront. And even though we are in a market undergoing correction, it does not dampen the promise and opportunity that fintech holds.
There are a number of inefficiencies across financial services, and fintech is on a collision course with every industry under the sun. These problems aren’t limited to just large companies or the top 10% of the population either.
At Fiat Ventures, we believe that fintech is supposed to be an inclusive financial system that empowers people. One where business models that serve people’s interests succeed over models that exploit them. However if data is any indication, this is yet to be achieved; 63% of Americans are still living paycheck to paycheck. Housing affordability is also at an all time low with an average American household required to spend 42.9% of its income to afford a median-priced home.
We believe that fintech will play a key role in addressing these gaps and as investors, we use our best judgment to support only those ventures who share our view of a fair financial future. And, as individuals who care deeply about these communities we’ve grown up in, we aim to positively influence its evolution.
We want to close by reiterating that the best tech companies of the last decade emerged in the downturn of 2007-2010 providing incredible returns to investors who didn’t shy away from backing visionary founders.
Today we remain committed to backing these great founders with a clear vision for the future.
We believe that fintech will emerge stronger than before with newer business models as well as an increasing focus on transparency and impact to end consumers. It’ll be the founders who are able to focus on a key problem today, with a vision for the future, who will emerge as the next great companies of the next decade. It’ll take focus, hustle, grit and a bit of luck, but if history has taught us anything, it’s that today is the best time to build and back these great teams.
If you’re a founder with a strong vision for what comes next, we’d love to chat.
Appendix
BCG + QED Investors Report - Reimagining the Future of Finance
Grand View Research - Embedded Finance Market Size, Share & Growth Report
Bloomberg - Venture Capital Funding for Climate Tech Dips 40% in First Half of 2023
Forbes - Silicon Valley Bank Collapse Produces An Early Winner: Digital Banks
Bain & Company - As Funding Dries Up, Can Neobanks Diversify Their Revenue Streams?
Center for American Progress - Excess Administrative Costs Burden the U.S. Health Care System
Gallup - Record High in U.S. Put Off Medical Care Due to Cost in 2022
Reuters - fintech startup Stripe integrating OpenAI's new GPT-4 AI
Entrepreneur - Housing Is Less Affordable Now Than at the Peak of the 2008 Housing Bubble