Fintech venturing now for future gains

The Fintech industry has been one that has opened upopportunities to new markets, created efficiencies in cross border flow ofcapital, and overall been transformative to the financial services industry andbeyond over the past decade as several startups reshape how consumers interactwith money and financial services by establishing new categories of productsand services. And not even a pandemic can put a stop to this drive, if anythingit has accelerated the need for seamless fintech solutions.

In spite of the initial drop in funding in Q1 of 2020 tolevels seen in 2017,the fintech industry recently experienced a bounce back in deal funding,increasing 17% quarter over quarter to reach $9.3Bn(albeit with a continued declinein deal activity that started before the COVID crisis).  And this rebound in funding is reflective ofthe increased demand for fintech resources globally. The rise in demand forvarious fintech use cases can be especially seen in payments services, digitalwallets, and more recently, banking services that provide accessto capital and financial management resources for SMBs as increased sales,marketing, and distribution channels provide opportunities for SMBs to scale intodays economy.

Furthermore, as communities and economies increasingly digitize,growing use-cases for fintech offerings are presenting opportunities forfunding startups across borders. The increased need for more efficient paymentinfrastructure, eCommerce, and cashless transactions have driven stronginvestment opportunities in countries like Japanand across LatinAmerica. The technologies provided by fintech’s globally are enablingcapabilities among B2B and B2C economies during the pandemic, which presentsopportunities for financial services incumbents and new entrants to partnerwith and/or absorb startups to grow and diversify revenue streams, and thereare corporations out there (big and small) that have been engaging the startupcommunity to position themselves for future growth.  

Investing for Market Reach

As fintech has breached market share from incumbent bankingsystems, many have worried about that continued trajectory for incumbents,however the ones that thrive have proven there is room for all through embracingtraditional banking and fintech partnerships. Visa has been a traditionalleader in the financial services and continues to set the example of how it canposition itself for future growth during and beyond the Covid era by embracingfintech. While the $5.3Bn paid for Visa’s acquisition of Plaid may have been inquestion by many, its estimated $3.1bn addressable market was not the onlyvalue in the deal. Noting the data aggregation capabilities of the company,there is opportunity for this 2020 acquisition to lay the groundwork for supportingcustomizable solutions in various markets that Visa strategically invests insuch as developments in the Bankingas a Service (BaaS) space, and openbanking.

In addition to investing in enhanced capabilities to supportits core business (and some of the aforementioned services it aims to grow),Visa is a great example of constantly embracing investments in fintech startupsand the innovation they bring, whether through partnership investments orthrough its fasttrack program for startups. Square, as a fintech company, is also leveraginginvestments during the COVID era to position itself for future growth. From internationaland product offering expansion to machinelearning capabilities, Square is incessant in thriving in a saturatedfintech market where new entrants can potentially provide competitive valuepropositions to the merchants it serves. Those thriving in the industry areshowing increased urgency to scale infrastructure through acquisition (look toSofi’s acquisition of Galileo or Mastercard’s acquisition of Finicity), andother fintech’s should take note that you don’t have to slow down just becausethe economy is. Thinking 2-3 chess moves ahead as Visa has done, about acompanies acquisition targets during this pandemic can drive strategiccompetitive growth for many players in fintech and beyond. And thus, financialservices firms are not the only ones positioning themselves for the futurethrough fintech venture investments.

Investing for Product Offering Diversification andIntegration

Big tech has shown the value it can bring to served andunderserved markets through fintech product integration into non-financialproducts, which has been seen especially in payments.Big tech’s diversified user data and scale give it a unique advantage tounderwrite more effective loans while managing risk when they engage infintech. Apple is one that has been engaging the fintech space since itspartnership with Goldman Sachs to issue the apple card and it is leveraginginvestment opportunities in 2020 to provide lendingcapabilities to SMBs (potential competition for Square’s merchant lendingofferings?) and enhance credit underwriting innovation to address 23 millionAmericans with little to no credit history through its creditinclusion solution.

I bring this up to point out that you don’t have to be infinancial services to look for growth opportunities during a period of economicslowdown. A lack of funding (or any resource) in particular industries presentsopportunity for others to fill that gap. And big tech has modeled a way tothink about a companies’ unique assets in the present and how it can partner itwith investments in fintech ventures to drive new revenue streams or synch withyour current offerings to provide greater offerings to your current users. Youdon’t have to be in fintech to enjoy the benefits that come from the fintechmarket during the pandemic.

Closing:

We may be experiencing a global recession but within thatrecession, we are seeing accelerated needs for consumer liquidity andtransferring funds. With funding in early stage companies still down to roughly2017 levels, companies that play or want to play in the financial servicesspace should take the opportunity to buy or partner at times when there aren’tas many funds investing in the fintech market. Buy low and position yourselffor future growth. There are gap markets that investors can look to findreturns, especially in early stage fintechs, primarily dominated by paymentsand lending. For financial services incumbents, they can build out infrastructuralcapabilities for future scale but keep in mind that fintechs are not just forfinancial service providers, non-financial institutions can play in theseopportunities too for new market penetration through interoperability ofcurrent data assets and now is a good time to buy when there’s not too muchcapacity to build. To continue to provide connectivity across user accounts, itis expected that corporate venture investments in fintech startups will bemajor drivers of future growth for the future.

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