Hiperpool recently hosted the second in our series of online discussions with strategy leaders. In this edition, we were joined by Pranav Sood from GoCardless and Gideon Valkin from Entrée Capital to discuss the state of FinTech and their predictions for the future. Read on to hear their insights.
Skip to the following questions:
- What have been the most notable trends of this year?
- What will the impact of COVID-19 be on the FinTech industry?
- Which FinTech companies (outside of your own) do you think are ones to watch?
- How might other companies branch out into the FinTech space?
- What do you imagine the role of banks to be in 2030?
Gideon: On a macro level, coronavirus has caused a natural boost to certain verticals within FinTech. Products like savings, budgeting and personal financial management have benefited as people start to plan for the future and take these issues more seriously than before. Similarly, it’s been a tough time for products on the other side of the balance sheet. Credit cards, loans and mortgages have been negatively affected in this downward economic cycle. Another key trend has been the rise of e-commerce. This has had a huge impact on the ecosystem, primarily in the B2B space where lending, payments and other support services have accompanied the explosion of online retail.
Pranav: An interesting trend at the moment is the level of focus that we’re now able to put on specific customer segments or verticals in the market. As a consequence of the increasing use of financial APIs, it’s becoming easier for FinTechs to develop solutions which are super tailored to a particular need or a particular group of customers in the market. For example, in the last two months, we’ve seen the launch of two challenger banks targeted at LGBT+ people and their particular financial needs (Daylight is an example). A fun example of this is a US-based business offering credit cards targeted specifically at video gamers. It gives them the opportunity to earn credits that they can use in their favourite video games. This is a smart way of bringing together a need, whether real or perceived, with the financial infrastructure that enables that need to be met. This focus on customer needs and use cases is getting tighter and tighter as it becomes easier to build products.
G: There’s definitely a long term trend towards servicing niche segments of the population in a much more bespoke way. It’s opening up a lot of interesting product innovation. Big incumbent financial providers which are relatively good at servicing the population broadly are looking for access to previously untapped pools of customers. Now, we’re seeing FinTechs that are really able to innovate on product for a specific segment of the population and truly own that customer base. They can then become an acquisition channel for incumbents. For example, I’ve recently looked at a company that is a marketplace for social media influencers and creators. The company creates services for them, such as allowing them to take invoice financing against delayed payments from brands. That is really interesting because, in the long run, this could create strategic value for a big financial service provider. If the startup is able to service this segment very well, it could create a whole new market in the invoice factoring business which is one of the oldest financial service businesses in the world.
P: The impact of coronavirus has not yet fully worked its way through the economy, particularly the SMB economy, which has been propped up by lots of government stimuli all around the world. However, FinTech is generally resilient to macro downturns and macro shocks as it tends to solve very key customer needs. Building on our earlier points, if you’re looking after a niche segment and solving a business-critical need for them, it’s unlikely that your product or service will be first at risk when cost savings need to happen. This business criticality is part of the resilience that we’ve seen of FinTech companies throughout the pandemic.
The second point is that the pandemic has accelerated trends rather than create completely new dynamics. Working from home, shops closing and reducing physical contact has accelerated the need to take payments online, for example. FinTechs have been very well positioned to take advantage of this as a consequence of the business criticality of the products and services that it tends to offer, which gives it that resilience to short term spending reductions that you might see impacting other sectors.
G: There is a divide between short term and long term here. Long term, any company which took something physical to digital should experience long term strategic gain. New banks such as Monzo and Revolut are good examples of this as well as a whole category of companies that are making people’s financial lives accessible via mobile or computer. With most people realising that they may never visit a bank branch again, banks should want to be digital going into a post-COVID world. Short term, however, many of these same companies took a big revenue hit. If you were a lender or if you were relying on customers to travel via FX, or move house, for example, your revenues were inevitably lower this year and that’s a hole you have to dig out of. So with this category, it’s likely that they’ll see some short term pain against some longer-term strategic gain against the incumbents.
G: When talking about FinTechs I admire, the most successful ones are a good place to start. Stripe is a good example of having increasing defensibility over time. The idea of building something that becomes more and more powerful as it gets bigger is hugely compelling.
P: I’ve been blown away this year by Square. Their share price performance has been impressive. There are probably a lot of reasons to believe that it's on the top end of the reasonable valuation spectrum at the moment, but the way they’ve executed over the last few years is phenomenal. They have a fantastic POS product, but they’ve also expanded into many adjacent areas. For example, Square Capital for SMEs in the US. They’ve also focused on their Cash App, which has done fantastically well over the last six months to grow penetration in the US. They’re moving beyond this to expand into further adjacent products and services. Even in the last few weeks, we’ve seen them talk about how they’re integrating crypto into their offerings as well. The way they’ve taken the hardware and built the ecosystem around it is impressive.
G: There’s a company based in Israel called Rapyd which has been quickly growing. They’ve essentially built a payment rail along with many other embedded financial services any consumer-facing online business might need. So, if a business has an online presence, it can integrate with elements of the Rapyd platform to take payments, issue cards, do point of sale, offer credit, detect fraud and so on. An enabler like this poses an interesting question about which companies will actually be the ones offering financial services at a broad global scale in 20 years’ time. Some think it’s still going to be Lloyds and Barclays, others think it’ll be Monzo and Revolut, but some think it will be a company that isn’t currently defined as a finance company. For example, it could be Spotify, or Amazon, or any company that already owns the customer in another dimension. So Rapyd is exciting as it opens up access for any online business to become a FinTech business.
P: This point about infrastructure which people can build on top of is very exciting. We’ve seen companies like Plaid and, to a lesser extent, Tink, do this very successfully. One business that is particularly interesting is Griffin who has a ‘Banking as a Service’ model. Thinking about the structural changes that are happening in the banking and financial system more broadly over the next few years, it’s likely that companies such as these are going to become more significant. Griffin in particular has a great chance of achieving success as it seems to have a good product-market fit so far.
G: I think, if you were to reimagine a financial service in its purest, most singular form, you might not need a bank with credit cards, loans and mortgages. You might instead be able to embed the functionality required to make a payment, borrow money, or save money behind other things that people actually choose to think about. The old saying that no one wakes up dying to take out a credit card is true. People have needs in life and financial services should just offer structural support to allow those needs to be fulfilled. So in the future, customers may be able to engage with what they need, e.g. a car, TV, house or even return on capital, without having to go through the steps that one currently has to go through to organise the finance part of it. To make this less conceptual, Amazon is a good example. Imagine going to Amazon to buy something and whatever payment or borrowing needs to happen for you to acquire that item can happen almost automatically through Amazon and without the input of another app or organisation.
P: If there's going to be a likely set of winners it's probably going to be the ones who are more geared towards either social or search as the entry point. Google, for example, has just relaunched Google Pay and is adding many features that make it more compelling than the previous offering. Facebook has also been dabbling with varying levels of success in payments. Highly integrated apps that have achieved success can be found in China with companies such as Ant Financial and Ten Cent. So I fully agree with the point that in the future the user’s life will come first with financial services underpinning it. The most likely entry point for this is going to be something like social media or search, rather than ECommerce or entertainment.
G: With B2C FinTech, the 2030 I see is one where there are digital products with better ways of owning the customer than traditional banks can. We’re already seeing this in some places. For example, TransferWise is generally considered the best place to go if you want to transfer money abroad, Monzo for managing and budgeting, and Revolut for transacting in foreign currency etc. Other examples include people going to PensionBee for pensions and Nutmeg for savings and investments. An argument can be made that in the same way that Google and Apple found a better way to own the customer than traditional companies like Vodafone, FinTechs have found better ways to own the customer (by servicing their real needs) than big banks. The pain point for these FinTechs is that it's difficult for them to run a big balance sheet with a cheap cost of funds, something big banks might always be needed for. Take the example of Google and Apple: they have the App Store and Android to really engage customers whilst Telcos have simply become the infrastructure allowing the phones to operate at a basic level. It’s likely we’ll see something similar in finance, where banks will have their balance sheet commoditized and used for that part of the value chain rather than what they can (or can’t) do for customers.
P: We often overemphasise the speed of change. It was only around 2018 or 2017 in the UK, when debit cards overtook cash as the most popular form of payment. It took a very long time for that transition to happen as debit cards are not a new financial innovation. So, we should expect there to still be meaningful and sizable incumbent banks in 2030 as it's unrealistic that things will change so quickly. The way they choose to monetize their assets may be a little bit different. It may well be that some of the things that banks regard as costs at the moment, so things like KYC and onboarding, will be rethought of as profit centres. Above all else, there are intrinsic structural disadvantages in the way bank architectures are built which means they won’t be able to persist as they are today. In sum, incumbent banks will still be incumbents in 10 years time, but their business models will probably look a little bit different, and the kind of architecture that they're built on will have to look different as well to keep up with the times.
2020 has seen an acceleration of trends not just in FinTech but across all industries. If you’re interested in learning more from strategy leaders, keep an eye on our LinkedIn where we’ll be posting upcoming events.