Krishna Dixit

Fintech

KRISHNA DIXIT | January 27, 2022

In 2021, financial services had another moment: fintech fundraising eclipsed all previous years. It was a breakthrough year for fintech IPOs and fintech mega M&A activity was at an all-time high. Just before the end of the year, we saw one of the largest fintech IPOs, with Nubank raising $2.6 billion (as the largest digital bank), one of the largest fintech M&As with Square acquiring Afterpay for $29 billion. It was the first ever direct listing in the UK with Wise and the first fintech/crypto direct listing with Coinbase, and multiple fintech SPACs. 1. The arms race between fintech and bank consolidation continues More fintech mergers and acquisitions occurred in 2021 than ever before, and this trend is expected to continue. According to a report, by the third quarter of 2021, 42 fintech startups will have been unicorns. Through M&A, we anticipate that more cash-rich fintech firms will seek new methods to expand and drive growth. We may also see more of a seismic shift when banks partner with fintechs to provide new services to their consumers that they are unable to provide on their own. 2. The battle for the customer is heating up Financial services and products do not come in a one-size-fits-all format. What works for one person may not work for another, and the good news is that financial institutions are now getting the message. As the internet continues to lower the barrier between consumers and retail banking, similarly as it has in many other industries, there will be a greater emphasis on digital banking solutions that are specifically customized for specific customer segments. 3. Enhanced regulatory monitoring in various areas of fintech With the growing relevance of fintech in the lives of ordinary Americans, there will be increasing regulatory scrutiny. This, we believe, is a positive development for the sector. Many of the authorities that examine financial services firms will have new representatives in the coming months. We anticipate that this will lead to further regulation of fintechs, particularly in the emerging sectors of BNPL and crypto. 4. Every business will become a fintech This next prediction has been in the works for several years and will only pick up steam in 2022. More financial services will be integrated into non-financial organizations, such as Uber, allowing us to pay directly through the app or tipping for your pizza delivery on the app. Financial institutions will strive to reduce the banking and payment barriers in order to provide a more seamless experience for customers. As a result, my prediction for 2022 is that there will be a significant shift away from things people don't know and comprehend and toward things they do know and understand. It's known as the "Great Regression.” Back to banking and away from technology. One factor stands in the way of this viewpoint. Cryptocurrencies. I don't see people abandoning bitcoin and ETH. Why? Perhaps they are becoming more trustworthy than the dollar and the euro. As a result, the crypto ball will keep rolling while the FinTech ball will slow.  That would be my forecast for 2022. I could be incorrect, but the bottom line is that cryptocurrencies continue to climb while FinTech ventures fall. The next few years will see a significant decline. It all started in China, with the cancellation of Ant Group's $300 billion IPO. It is certainly happening in Europe and America right now. What exactly is the Great Regression? It's a reversal of technological development. People are not going to reject technology. Governments and regulations are to blame. Indeed, the fallout from Big Tech is likely to have an impact on FinTech. As governments crack down on FATBAGs, they will also be scrutinizing FinTech unicorns and their ilk. They may enjoy parts of it, but the Big Regression will occur, particularly in FinTech, as authorities demolish some of the unregulated industries that they now wish to regulate. We've already seen P2P lending stall and, in some areas, fail. For example, Zopa has recently discontinued peer-to-peer lending. Then we see it in crowdfunding, when Kickstarter is having difficulty kicking off or starting. And we may see governments tightening their grip on everything from BNPL to cryptocurrency exchanges and bitcoin mining. Part of this is due to the actions of governments and regulators, while part is due to the perspective of customers and users. Consider the level of confidence in Facebook. It's no surprise they've changed their name to Meta. What key ideas do you think fintech will tackle in 2022? Cryptocurrency is permeating all financial services. "Is it an internet company?" was a common question twenty years ago. Nowadays, (nearly) every business is an internet business. "Is it a mobile company?" was a typical but now archaic inquiry ten years ago. Similarly, we will soon stop asking, "Is it a crypto company?" because most organizations, beginning with the financial services industry as a whole, will include a crypto component. As cryptocurrency gains traction in users' thoughts, banking apps are including crypto items in order to increase wallet share. For example, Robinhood began with stock trading and now offers some crypto trading; certain neobanks allow consumers to earn better rates through DeFi (decentralized finance); and larger banks are still experimenting with crypto products. In 2022, new crypto infrastructure will be constructed for transfers, wallets and yield as a service, custody, and other purposes, allowing users to continue to integrate and manage their digital assets in both their fiat and crypto financial lives. We'll also see a new wave of fintech firms powered by crypto infrastructure on the back end, as well as what some refer to as “DeFi mullets” (fintech in the front, DeFi in the back). Every healthcare organization is a fintech organization. As previously said, fintech products enable vertical SaaS organizations to diversify into other revenue streams. We see three areas where fintech capabilities can accelerate the sector in 2022 in healthcare — a system that accounts for 20% of our nation's GDP. These include consumer payments and loans, provider practice enablement, and insurance. Healthcare payments are particularly complicated because of our country's third-party payor structure, in which providers charge for services, payors compensate, and consumers receive the service. As a result, a generalist solution, such as Stripe, is unlikely to deliver the full set of features required to comprehensively support a medical practice, such as regulatory compliance and health plan integration. This opens the door for vertical-specific payment gateways and financing products, such as "buy now, pay later" (BNPL), to assist consumers in financing their healthcare bills and reduce the risk of bankruptcy due to unanticipated medical expenses. On the provider side, BNPL has the ability to increase collection rates, which can be as low as 20% in some places. Emerging fintech technologies are also being developed to assist provider practices in normalizing existing business models into "per member per month" (PMPM) agreements by bearing risk, as well as adding billing capabilities for additional service lines to diversify revenue and margin streams. Finally, the unbundling and rebundling of traditional health insurance has resulted in the development of new fintech platforms that enable the emergence of unique insurance coverage products aimed at individuals and enterprises. These firms modularize the underwriting, claims processing, provider network management, and usage management technologies that enable enterprises to manage risk across their covered populations in more agile, cost-effective, and transparent ways. We see the potential for fintech to rewire incentives and eliminate inefficiencies in healthcare services and software, paving the way for a more value-oriented healthcare system. Fintech strives for carbon neutrality. Have you noticed that Google Maps' default option now steers you to the most fuel-efficient routes? Or how do billers open your account with the "paperless statements" box checked? This form of environmentally conscious configurability is on its way to fintech. Consider a checkout experience in which switching between debit, credit, ACH, PayPal, BNPL, and all the other payment methods accessible in 2021 reveals which is the least destructive to the environment for that specific merchant. Or, even better, which includes the option for you to add $x to your purchase in order to offset the emissions of whichever route you choose. Improvements in emissions data infrastructure and technology are making this increasingly achievable. With companies like Patch, Capture, and Wren making it easier for businesses and individuals to not just understand but also act on their carbon footprint, payment providers, neobanks, logistics organizations, and others will almost certainly embed and more will likely embed carbon offsetting optionality into their products. However, it is yet to be seen what will inspire consumers to choose greener products or delivery systems over ones that may be more convenient. Today, green alternatives in commerce tend to be the most expensive, just as the eco-friendly route on Google Maps may be the slowest. Startups at the crossroads of climate and finance will need to devise unique incentive structures that make eco-friendly solutions not only more responsible, but also more accessible and rewarding than their legacy rivals. Consider greater APYs, lower APRs, higher returns, or fewer fees. One of our favorite case studies in this field is Powerledger, a blockchain platform for peer-to-peer energy trading, and Carlton United Brewery, an Australian beer firm. When Carlton declared a goal of being completely powered by renewable energy by 2025, they collaborated with Powerledger to create an eco-friendly beer drinker's dream loyalty program: excess energy for kegs. Customers of Carlton's might sign up to exchange excess energy generated by their solar panels for beer delivered directly to their houses. We've observed significant inflation in digital client acquisition channels (FB & GOOG) in recent years as competition has increased and modifications like Apple Ad Tracking have made attribution more difficult. To increase competition, the great majority of fintech firms have concentrated their efforts. To increase competition, the great majority of fintech companies have concentrated on the same client profile (subprime), with the same product offering (e.g., banking, investing, lending), and a set of ever-increasing consumer subsidies to join (free money on the internet!). In the face of increasingly competitive and restrictive digital acquisition channels in 2022, how will a corporation differentiate itself? We believe there are two options: the greatest companies will accomplish growth through products that lend themselves to product-led growth, or partnerships will represent non-inflationary distribution opportunities. On the product side, today's products are becoming tomorrow's primitives; merely providing a bank or brokerage account is no longer enough to differentiate, as new APIs make it exceedingly simple to integrate the fundamental services of banking (e.g., saving, spending, lending, investing) into almost any app experience. Instead, the products that grab the imagination of consumers will remix these primitives in new and creative ways that harness communities, crypto, and commerce. We anticipate seeing more multiplayer products driving product-led development in particular — money is inherently multi-player (means of exchange!), but financial products have primarily been single-player to date. On the collaboration front, Credit Karma has already partnered with the Houston Rockets and Chime has partnered with the Dallas Mavericks, as well as the guideline distribution deal with Gusto and the Melio distribution deal with Intuit. Though these channels have price leverage and may raise costs over time, they represent the kind of stability and volume in both acquisition costs and acquisition supply that has been generally lacking in digital marketing channels as of late. Companies that have historically been the best in class at direct-to-consumer marketing are increasingly looking to business development and partnerships for continuing growth, and we predict this trend to continue far into 2022. Fintech will become more prevalent in emerging markets. This year has seen a surge in startup activity, record funding, and notable exits in emerging markets. The Nubank IPO, in particular, was a watershed moment for Latin America and fintech globally, signifying a huge exit in Latin America and spawning a new generation of founders. The year 2022 will see increased investment and innovation in financial services throughout emerging nations. Historically, there has been a lot of B2C fintech in emerging economies, but now we will see more B2B aiding small businesses and enterprise customers with digitizing and optimizing payments, more efficiently paying personnel, sourcing supplies, handling accounting, insuring themselves, and more. Moreover, new modern APIs will enable businesses to make payments, access bank account information, issue cards, bridge crypto, and authenticate identification, among other things. Companies will be able to tap into contemporary infrastructure rather than manually building one-off integrations with existing banking systems, allowing them to launch new fintech products at a lower initial cost. There must be sufficient demand to warrant new infrastructure, and we are approaching the point in the ecosystem where this makes sense. Nevertheless,  rather than looking to the United States and Europe for inspiration, developing business models will increasingly look to other emerging markets. There are a variety of business models and feature sets that are more suited to emerging markets based on existing user behavior, regulation, and level of digitization. For example, India and Latin America have seen a number of homegrown B2B marketplaces (with embedded fintech) that do not exist in the United States or Europe, in part because these marketplaces provide small businesses with access to things like credit and logistics, which are often prohibitively expensive and time-consuming to find elsewhere in emerging markets. We've seen business models such as superapps (both consumer and enterprise-focused) and community buying platforms grow, as well as feature sets for investment apps, such as starting with funds rather than stock trading. Entrepreneurs in these places are already interconnected, as we can see. We’ve encountered founders in Sao Paulo who are establishing small business accounting infrastructure and getting regular advise from peers in Jakarta over WhatsApp. Entrepreneurs in Lagos are looking for business model ideas for their B2B marketplaces in Karachi. COVID hastened numerous technological developments, but it has also significantly shrunk the world. The first wave of insurance startups concentrated on bringing previously offline operations online, leaving the majority of the underwriting process intact. With a prolonged low interest rate environment, carriers have been more willing to test new markets and strategies to find yield. That, combined with a lack of scale in the insurance start-up ecosystem compared to the rest of the market, had many capacity partners treating new entrants as test partners to learn and try to find new profitable strategies. As interest rates rise and markets harden, a renewed focus on underwriting differentiation and profitability will become a priority, potentially driving acquisitions in the gen1 insurtech world as well as new entrants focused on monetizing underwriting advantages.