When financial services meet technology it’s a beautiful thing. Financial technology’s (“Fintech”) applications power innovations across all industries and increase economic empowerment for society. Fintech is the backbone of our future and we’ve only scratched the surface. Right now, less than 1% of revenues in financial services is allocated to “fintech” companies (Source and Source).
Fintechs will not replace banks but they will enable them to better serve the evolving needs of every demographic. Doubling down on fintech innovations will be key to a more inclusive future and higher quality of life. The technologies being built in 2022 are what will drive society in 2032. Throughout 2022 and beyond, expect to see new technologies budding in banking, insurance, payments, infrastructure, wealth management, accounting, blockchain, real estate, and much more.
Infrastructure
Arguably the most important sector of innovation within financial services is infrastructure. For decades the financial sector was hindered by poor infrastructure on top of stringent regulatory requirements. The upheaval started with API-driven tools like Plaid, which allows third-party platforms to connect with your bank for personal finance, lending, wealth management, etc. The next wave is platforms like Solid (launched 2021), which offer fintech as a service or banking as a service (“BaaS”). Solid has a “sponsor” bank that they build an interface on top of. Solid becomes the mediary between the digital bank and the brick and mortar bank. Solid allows fintech customers to create bank accounts, offer crypto wallets, send payments, and issue cards by streamlining compliance. Solid grew 10x in 6 months from $1M in ARR in Q4 of 2021 to $10M in Q2 2022. A second driver for infrastructure will be artificial intelligence. There has been over$200B invested in artificial intelligence over the last decade with almost 40% of that coming in 2021 and still, only37% of organizations have adopted some level of AI. It is projected that AI will replace 85 million jobs but create 95 million by 2025. As computing power continues to advance so does the ability to train AI and embed it into banking applications like underwriting and diligence. PitaTech (founded Q4 2021) is automating the archaic asset financing diligence process for commercial banks. PitaTech is leveraging machine learning to extract key data points from UCC documentation to be searchable by any data point type and then build insights around financing trends. This data can further be monetized to intelligently connect lenders to borrowers.
Banking
Neobanks have been a trend for the last five years and this will only be accelerated as new technologies for banking infrastructure are introduced. Neobanks have substantially lower operating and capital expenses by not needing a physical office and can run with a lean overhead. Neobanks start as checking and savings accounts and offer the basic banking services but everything is run online. They are simply a sleek UI/UX overlay for their banking partner or a marketing platform to acquire bank accounts at a low cost. Neobanks do this by segmenting customer demographics; e.g. banking for LGBTQ+, veterans, startups, and landlords. Digital banks also cut out the need for paper checks as ACH and wires become cheaper. Still, in 2019,41% of B2B payments were executed via paper check. For the majority of banks, it still costs $15-$40 to send ACH and wire payments and up to 10 days to open additional bank accounts. A good example of a bank simplifying the banking experience isMercury. Mercury has created a no-fee business for startups, the ability to open additional on-demand bank accounts, issue unlimited digital cards, send free ACH & wire transfers, and monitor your cash position through a sleek dashboard. Mercury has grown Evolve Bank & Trust’s (their partner bank) balance sheet by nearly 3x and almost 10x net income in four years. Another example isClearing (founded in April 2022) which is offering a digital bank for the real estate industry. Clearing gives property managers and real estate investors the ability to create on-demand accounts per unit that enables them to track profitability on a unit level. In addition, Clearing offers tagging tools to streamline bookkeeping at the banking level, free banking services, and a dashboard to link all external bank accounts. The long-term play for neobanks is after growing a strong user base they can then offer liquidity to their users and streamline the underwriting process.
Payments
In 2020, only 2.1% of global eCommerce transactions were paid with a buy now pay later (“BNPL”) platform, which is expected to double to 4% by 2024. Over the next 10 years, this will continue to be a high-growth sector of fintech as eCommerce is projected to account for 95% of all purchases by 2040. Shopify recently launched “Shop Pay” BNPL solution through its partnership with Affirm. Many companies will start entering the BNPL market as a new banking infrastructure allows anyone to become a “finance” company. For example, Apple just launched its new BNPL solution in the Apple wallet. By the end of 2022, BaaS will be the norm and it will open liquidity solutions for thousands of companies to launch BNPL. This is especially important as we enter a bear market. Consumers will be able to tap into liquidity pools to continue bull market buying habits. Critics say that the market is saturated but in reality, we are just getting started. Blockchain will also make its wave in payments in 2022. There is already a list of companies that are trying to unlock the $1 trillion in cryptocurrencies to be used in everyday purchases. Nearly 75% of retailers are planning to implement crypto payments within the next 24 months. There are companies like Fusepay (founded April 2022) that are building the infrastructure for crypto payments to be used internationally by leveraging stable coins. It will most likely be a war in the BNPL sector over the next few years but the aftermath will be scalable infrastructure for merchants and consumers to access liquidity at an affordable cost of capital.
Ending Remarks
Fintechs are empowering everyday Americans to buy and build. Fintechs are the foundation for what society will be in 10 years by driving current industries and influencing new markets. The future starts with fintech.
