FTT Q3 Experts Survey: 2020 Surprises & Fintech VC Deal Frenzy
Hi all, Julie here. I headed out to Fire Island this weekend for an intimate wedding. It was SO nice to get out of the city for a bit and hang out by the ocean and actually forget about all the craziness in the world for a little bit. I even got to teach my first yoga class on the beach to the bridal party on Saturday morning as well, which was a great way to relax a bit before the big day.
Anyways, this week is a survey that I sent out to some of my friends in the industry, asking questions like what theme is most overrated and what predictions they have for the rest of the year. They didn’t disappoint! Here are the answers. Catch y’all next week for a Labor Day edition!
What has been the biggest surprise for you in fintech in 2020 so far?
Anonymous 1: How far Robinhood has run. Growth is obviously bananas, but their monetization is at best misaligned with their users, at worst in opposition. How does that play out long term?Also, valuations for fintech infrastructure seem to conclude that either a: startups will dominate financial services or b: old school companies will buy new school tech.
Anonymous 2: How some investors that I truly respect have seemingly lost all sense of valuation discipline when chasing early b2b / infrastructure rounds where the company still has very minimal, if any real traction with customers.
Vanessa Colella, Chief Innovation Officer of Citi: Partnerships between private sector incumbents and fintech startups have accelerated this year as many companies were forced to shift their strategies quickly. For example, Citi Ventures’ portfolio company BlueVine joined the Innovative Lending Platform Association and was able to provide more than 155,000 small business owners with $4.5+ billion in PPP loans as a direct lender as well as through banking partnerships in just a matter of months. There is incredible value incumbents can derive from partnering with cutting-edge startups and I’m optimistic about how future partnerships will improve financial services in the long-run.
Mark Goldberg, Partner at Index Ventures: The compression between Seed and Series A rounds (in some cases a matter of weeks) is a great development for founders.
Aaron Frank, Fintech Yoda (also founder and CEO of Final, which was acquired by Goldman Sachs): Immediate markups on hot deals, and lack of capital for cold ones.
Charley Ma, Plaid’s first business hire: Early stage venture in fintech in the past few months has been crazy - seems like for every new company that's being created, there are 3-4 other early stage companies to also learn about. A lot of pre-empting happening which I did not expect back in April.
Brendan Dickinson, General Partner at Cannan: How quickly fintech VC went from the sky is falling in March and no new deals to pre-empting everything in June.
Jonathan Hsu, Tribe Capital Founder and Partner: Clearly the biggest surprise has been COVID. Given COVID though, we have been surprised at the speed and effectiveness of the fed injecting trillions of dollars into the economy. This has obviously propped up asset markets and, given that many fintech companies are more exposed to capital markets than typical startups by nature of their business models, this has caused a bunch of opportunity and risk at the same time in the fintech space.
Eric Sager, Plaid COO: 2020 has been an unpredictable year, to say the least. The global pandemic created a call to action for fintech to answer. People are increasingly relying on digital finance to better manage their financial lives and these habits formed during COVID-19 will likely carry forward. We’re seeing an acceleration in fintech adoption that we thought would take place over years, happening in mere months. We saw a 44% increase in new users across all of our customers between March and May compared to the same period last year. Investing apps alone experienced a 300% increase in new users over the past few months. And adoption is not just across digital-first generations: PayPal recently shared that people over 50 were the fastest growing segment from Mar-Apr, now adopting digital financial services to pay for things online or send money to friends. We think this represents a new normal and predict a 100% year-over-year increase in fintech adoption in 2020.
Alexa von Tobel, Inspired Capital Founder: Perhaps not a surprise, as the founding partner of a generalist early-stage VC firm, who personally has a deep fintech background, 2020 has brought to light the idea that any company has the potential to be a fintech. Or said differently, nearly every startup has become fintech-adjacent. When I sit down with founders, there tends to be some element of financial services within their roadmap—like a passion economy business that’s empowering creators with better access to traditional financial products. We’re moving full steam ahead toward a fundamentally new definition of “fintech.”
Satya Patel, Homebrew Partner: The dichotomy between the heat of the financing environment for fintechs startups and the economic reality of so many consumers who have lost their jobs, are struggling to pay rent and are unable to provide care for their children, has been startling.
What did you come into the year focusing on and how has that changed?
Anonymous 1: I’ve been pretty sure that applications don't have enterprise value and that middleware between banks and applications would rule. Seems to still be the case.
Vanessa: While 2020 was always going to be a pivotal year due to an impending reckoning for big tech, a growing mistrust of capitalism, and rising social inequality, we could never have predicted just how much our world would change as a result of COVID-19. My focus on spurring innovative solutions to promote economic vitality became an imperative to adapting in our new world order. Projects like the launch of Worthi by Citi, a free skills-based development tool that helps American workers understand their earning potential, prove there is an opportunity for banks to support customers in impactful ways. Based on jobs data and a personalized questionnaire, Worthi shows users the value of the skills they have and the skills they need to achieve their career goals. Especially as millions of people find themselves at home contemplating their career and next steps, there has never been a more important time to drive awareness and provide resources around skills acquisition and employment prospects. Companies of all sizes can and should to bake their societal impact into their corporate strategy and there’s an important role for innovation and technology to play in order to achieve this goal.
Brendan: Hasn’t changed – true platforms, infrastructure, and financial products with truly different margin structures that arise from leveraging technology.
Jonathan: We've been thinking a lot about the dual trends of consumerization and financial products. On the consumerization front, people expect better consumerized interfaces for services whether in their personal or work life. Combine that with the fact that most financial services are some combination of opaque and antique in their delivery and there's lots of room for innovation. COVID hasn't changed those trends much, they've just accelerated everything in some sense. That acceleration has caused the gap between great and merely good early stage performance to widen relative to the pre-pandemic world.
Predictions for the final months of the year?
Anonymous 2: Judging from the deal activity in August, I can't imagine how busy things will get in the fintech market for the remainder of the year. Buckle up.
Vanessa: With the increase in digital interactions, it is more important than ever that companies have the proper technology and operations in place to make sure their data – and the data of their customers – stays safe and secure. I think you’ll see more companies prioritizing identity verification, fraud protection, and cybersecurity software through the end of this year and into next.
Mark: The geographic advantage of San Francisco and New York for fintech founders continues to erode, and some of the most exciting companies emerge from places we never expected heading into 2020.
Aaron: More charter applications as teams have been heads down and finally getting them in.
Eric: Aligned with the trend of embedded finance, we’ll see major tech companies moving further into financial services. This is a relatively safe prediction as we’ve already seen Amazon, Apple, Google, Samsung and others moving in this direction, but I think we’ll see more examples before the end of the year. Their movement into fintech sends a signal that all businesses need to be thinking of their financial services strategies as a way to attract and retain customers and open new revenue streams. The growing fintech ecosystem provides opportunities to partner to accelerate these strategies in many ways.
Alexa: Activity, activity, activity. The venture capital industry has been wildly busy for the past few months, and I expect this rapid pace to continue. That means an increasing number of fintechs being funded in 2020 and many more dollars being added to the balance sheets of those top fintechs already in the market.
Satya: We're going to see the announcements of many more large financings in companies that are enabling the next wave of innovation in financial services, including B2B infrastructure and fintech companies focused on consumers and small businesses. I wouldn't be shocked to see the acquisition of at least one fintech unicorn by a SPAC.
Most overrated theme and why?
Anonymous 1: Millennial trading. I just don't believe people should be actively trading and they just don't have that much liquidity. I also think people overlook a lot of the catalysts for building schwab and others.
Anonymous 2: API for account switching / payroll. There is a need in the market, but there are several companies at very similar stages pursuing the same exact theme right now and it's going to be a mud slinging fight to win over customers and investors as the game of musical chairs plays out.
Vanessa: Blockchain is still a nascent technology and I think there are still a few years before its benefits and applications will pay off.
Aaron: BaaS, lots of space, but too much groupthink.
Charley: Embedded fintech - I still think there's a lot of opportunity and improvement needed for existing infrastructure to be able to continue to support "core" fintech + financial services companies and it's still early days to truly allow for plug and play embedded fintech product offerings.
Brendan: So much of fintech is actually financial products wrapped up in companies. These companies have no meaningful long term defensibility and will see multiples revert to industry averages. We saw this playout in lending and this will play out in other sectors as well. This realization is driving part of the pre-emptive financings for infrastructure companies happening right now.
Jonathan: AI as a cure-all for fintech problems. Much of the legacy finance sector depends on trust, not just trust between people, but also things like the trust that an analyst can feel when they stare at an Excel model. Just because you can make a "better" model with AI doesn't mean you can get people to trust it and that oversight is often the Achilles heel of naive applications of modern technology (AI in particular) to existing trust based industries such as finance.
Maia: Plaid-for-payroll - or frankly, Plaid-for-ANYTHING else. I think that the data Plaid provides is uniquely suited for creating enterprise value. Account verification and linkage is a one-time use case, but Plaid's value comes from the recurring subscription revenue they get from their clients who pay continually access new transactions in their customers' linked accounts. Plaid-for-payroll is just a one time thing, so it's hard to create long-term billion dollar company value there. In addition, the market size is smaller!!! Only neobanks care about payroll — none of the PFMs, stock trading apps, or other consumers of Plaid data would pay for a Plaid-for-payroll. Smaller TAM + smaller ARPU? No thank you.
Which theme in fintech is most exciting to you right now and why?
Vanessa: Especially as we all cope with living and working remotely, a theme we call “banking at the edge” stands to benefit greatly because it capitalizes on the billions of devices that are being connected digitally every year. The rise of application programming interfaces (APIs), digital data, and artificial intelligence has allowed banks to embed corporate and transaction banking services into the day-to-day operations of customers. This “edge” computing allows financial firms and their clients to more efficiently process transactions at the point of source. Already today, you can make payments from your phone, but what if you could pay for gas, tolls, or even food directly from your car while on the road? The Citi Ventures portfolio company Car IQ has taken major steps in that direction, developing proprietary technology that aggregates many data points to create a digital identity for cars and machine-to-machine payments. When you consider the rising importance of contactless payments in the post COVID-19 world, a trend like banking at the edge could have far reaching applications.
Mark: Student lending and education financing more broadly. As college moves to Zoom and students/parents question the value of higher education from childhood bedrooms, we'll see a lot of financial innovation in schooling that should make it more flexible, transparent and affordable.
Aaron: Payment networks.
Jonathan: In fintech we get excited by companies that combine modern product insights with a sophisticated view of how some corner of financial markets operates. On the one hand you have major strides that have occurred in the past 5 years in terms of consumerization of all services (both b2b and b2c) as well as a favorable interest rate environment which has driven a broader array of financial product relevance for different audiences. We believe that the next big players in fintech will stem from the right combination of product plus financial insight.
Maia: I am so excited about real-time payments! I think excitement in this area often comes from consumer experience e.g. "I want payments to happen faster" but I am excited about the underlying data layers that enable more fine-tuned risk assessment instead of a one-sized fits all approach. One of the reasons why payments are slow today is to mitigate risk. If we know more about transactions so we can speed up the less risky ones but keep the risky ones slow, it rewards users who are low-risk, which I am always a fan of. It seems like a ton of companies came out of the woodwork in 2020 to work on this problem and I am pumped to see how they mature.
Eric: One is open finance, which is a broader and more consumer-centric view of digital financial services compared to open banking. It represents an open and accessible financial system where people can easily leverage and control all of their financial information, from investments to retirement accounts to utilities payments, to manage their financial lives.
Another exciting theme is embedded finance, which is about expanding how consumers access financial services and who provides those services. It might surprise people to learn that we are talking to more than 25% of Fortune 100 companies about serious fintech initiatives.
Many of these larger, tech-forward companies have little to no role in financial services today, but will likely help shape our fintech reality for decades to come given their consumer footprint. A recent example is Microsoft’s integration with Plaid, which essentially turns Excel into a fintech app, allowing people to easily import their financial account information into Excel templates for budgeting, tracking expenses and more. We believe that every company will become a fintech company in some way, which is driven by this concept of embedded finance.
Satya: The notion of every company becoming a payments company is to me the most exciting long term trend. While the enabling technologies will be interesting businesses, I'm most eagerly looking for SaaS business serving specific verticals or groups that can use payments to create stickier and higher value customer relationships.
Will the election impact fintech?
Anonymous 1: Most people think if Biden is elected, the market takes a quick tank and then long term recovers more healthily. If that’s true, I think the consumer trading world has a hard time.
Anonymous 2: If the CFPB actually becomes the CFPB again under a new administration there could be a slew of consumer fintech players, such as the overdraft protection players, that have been toeing the line on regulatory questions that will come under much more scrutiny.
Vanessa: For the financial services industry, the shift to digital, virtual, and remote has pushed technology into the forefront— becoming an imperative rather than a “nice to have.” This is true regardless of what happens in November.
Aaron: Nope. Too much other chaos.
Brendan: I think we’d all benefit from new leadership.
Jonathan: The election adds risk in a few areas. It remains unclear how big tech will fare in the election. If the large companies are strongly adversely affected it will affect their ability to partner with and potentially acquire early stage companies which will have downward ripple effects. In the case of fintech this might not necessarily be a negative. Large non-fintech companies have been spying fintech as an avenue for growth (this extends from Facebook/Libra all the way to improvements in the iPhone leasing programs). As tech giants are more hamstrung by regulators it likely delays the day when fintech startups have to face them as direct competitors.
Another angle is around capital markets. Most startups only have exposure to the capital markets indirectly through their investors. However, many fintechs directly interface with capital markets via lending or somehow interacting with investors in some sort of transaction driven relationship and so they face compounded uncertainty from non-fintech startups. Given that there is significant pressure on the fed to stay accommodative from both sides of the aisle, we are optimistic that this broad strokes of this aspect will not vary too much with a variable election outcome.
Eric: It’s hard to say with the range of possible outcomes at the state and federal level, but policymakers from across the political spectrum support consumers having more and better choices in financial services and recognize that fintech is critical in delivering those outcomes. And important policy initiatives like the CFPB’s rulemaking to strengthen consumer financial data access should continue regardless of the election.
Alexa: Absolutely, policies can certainly change. The 2008 Recession led to significant new policies, and this moment of Covid plus the election will no doubt do the same