Reflecting on the past year brings up mixed emotions. As Dickens accurately sums up- it was the best of times, it was the worst of times. We have definitely gained perspective as we sat back and caught a glimpse of what the “end of the world” feels like, while witnessing how certain sectors, like Fintech, have become the backbone of our society and economy.
During one of my Zoom catchups, I was discussing with a friend and a fellow investor the horizontal characteristic of Fintech, which had been pronounced in 2020 more aggressively than ever. Financial technology became the nervous system of all our economies, far beyond the “classic” financial economies. Fintech adjacencies with markets became seamless and today fintech solutions are embedded in fields like commerce, logistics, healthcare, education, insurance, real estate, and more.
As we move into the Christmas and Hannukah holiday festivities and ring in the new year, I decided to develop the idea of how Fintech will mold 2021, and asked some of the best Fintech investors in the game to share their insight. Through our discussions, two main themes unfolded as most pressing and relevant for the near future.
Fintech as a Service
The world of Embedded Finance and Banking as a Service (Baas) is a complex ecosystem of multiple layers, players, winners, and everything in between. Whether directly or by partnerships, Embedded Finance provides the necessary licensing, regulatory envelope, rails, and user interface to make technology an enabler for a company looking to provide a financial service.
Nicholas Sando, Fintech Investor at Octopus Ventures, believes we are witnessing the rise of fintech middleware and the next stage in the development of integration between fintech startups and legacy providers.
“We are starting to see some businesses gaining real traction integrating to legacy financial service providers to create workable APIs that next-gen fintech origination platforms can build on. We’ve seen this in verticals such as mortgages, insurance and accountancy platforms. This is great for the consumer as they should stand to get the easy to use front end of a fintech paired with the (hopefully) lower scale pricing that an incumbent financial service provider can offer.”
Stephanie Choo, Partner at Portag3, sees the seamless integration of fintech as being a major win for the consumer. Stephanie is focused on solutions for the consumer that are in-context and convenient for the end user.
“Much like other areas of financial services, we are strong believers that insurance will be sold in context (e.g., a buyer is more likely to buy home insurance in their mortgage flow; flight insurance is likely to be sold at the end of a ticket purchase experience). There’s a strong convenience value proposition for the end customer — and much lower cost of acquisition for the insurtech. We’ve seen a number of B2C insurtechs actually pivot to this B2B2C model – and it will be interesting to see if incumbent carriers will be able to improve their API capability to compete in this market.”
Yusuf Ozdalga, Partner at QED Investors, also brought up the growing prominence of APIs, which he believes will promote the spread of financial services.
“With the APIfication of data, cloud computing, and all other innovations taking place in the info tech and data tech space, financial products can now be integrated with operational processes so seamlessly that much like the invisible man of H.G. Wells’ famous book of the same name, they are very much there but one cannot notice them.”
Yusuf believes that this integration, along with other key factors such as a realignment of business relationships and lower losses with embedded fintech, will lead to a more robust – yet less visible – embedded fintech experience.
We find the beauty of Fintech as a Service in the ability to commoditize the secret sauce layer- an essential element for companies to which finance is their main business line or to companies that want an add-on to other core business lines. We see companies like Dish, Yelp, Uber, Shopify and others who obtain a large client base are embracing providing financial products, whether it is to increase profit per client, reduce churn, or to increase clients’ and employees’ satisfaction.
Financial Inclusion & Literacy
2021 will be the next stage in the evolution of financial inclusion, granting every-day investors, and anyone who wants to be active in the financial markets access to information and non-traditional asset classes. The seeds of innovation around financial liberation that were planted over recent years will take off as economic behaviors shift in the post-pandemic era.
Stephanie Choo of Portag3 discussed why she believes the window for investment will continue to open, not just to new markets, but to new asset classes as well.
“Alternative investments may end up becoming 50% of an investor’s portfolio going forward. For retail investors, the democratization of alternatives is being led by technology which has enabled the fractionalization and securitization of asset classes that have been traditionally out of the reach of most consumers (e.g., prime real estate, collectibles, and art). We believe the winning platforms in the alts revolution will create an emotional or experiential connection between the user and the asset class.”
The increased penetration of digital investment will in turn lead to a growing infrastructure of technology that will support this process. Kanishk Walia, Investor at MiddleGame Ventures, believes that this will lead to the tokenization of alternative investments and financial assets.
“As digital assets generate interest from both retail and institutional investors and become more and more mainstream, we expect to see a greater number of start-ups targeting existing pain points and obstacles to adoption and promoting growth within the digital assets ecosystem. Stronger and more secure infrastructure will also engender trust and pave the way for regulated digital assets and we expect to see interesting developments in 2021 with regards to the tokenization of other asset classes including not just illiquid assets such as real estate or art but also financial assets such as securities and commodities.”
One of the most pressing matters we see evolving in the year to come is financial literacy and self-driven long-term financial freedom. As the barrier of access to financial tools, diverse asset classes, and knowledge are lowered, people have the ability to gain control of their financial future. The tools already exist – the question is how to get them into the hands of the everyday consumer.
Nicholas Sando of Octopus Ventures believes that the issue of distribution of wealth and financial literacy will take center stage as we move into 2021. An area ripe for innovation is the integration of financial literacy into different pre-existing social structures, such as employment.
“Employers are constantly looking to improve the quality of life of their employees and have been very receptive to perks and benefits platforms in the past. I expect to see a few new wealth tech platforms leverage the employer distribution model to help solve the financial vulnerability problem most countries are facing!”
If people can become confident in their ability to be economically self-sufficient and properly served with tools to make financial shaping decisions, this will help solve many social implications of inequality. If there were reasonable roadmaps that people could learn, monitor, and execute, we would be surprised at how many people would be able to compound capital, no matter how big or small their starting point. 2021 will be a big year for the democratization of wealthtech.
In my view, one of the most important aspects of our work as investors is developing our theses, distilling all the information we absorbed, and double clicking on decisions we act on. Making predictions is always a difficult task, especially during this unique year. Nevertheless, I believe it is a fundamental thought process for myself and my fellow Fintech Investors who are continuously building their own edge and making intelligent investment decisions. To end on a high note, this was one of the big perks of 2020 which we should all be thankful for- an opportunity to finetune our thoughts, and redirect our energy based on the experiences and lessons we have all undergone in the past year.
I am beyond excited to see what 2021 holds for us Fintech junkies, and for people all around- happy holidays everyone!